1Q19 Highlights – Philippines

I. Dovish newly appointed BSP governor

Benjamin Diokno will now hold the post of BSP governor after President Duterte appointed him to replace the late
Governor Nestor Espenilla, Jr. Having worked for the past three administrations, Diokno will have the perspective
from the fiscal policy to make it in sync with the monetary policy. In his remarks, he expressed his dovish and pro-
growth view for his term as BSP governor. However, he proceeded with caution and noted that the BSP will be data
dependent before implementing any changes to policy rates and to the RRR.

BSP provided guidance of cutting the RRR to 14% (currently 18%) in early 2020 and noted that the cuts are more of
a timing issue. Every 100 bps cut in the RRR will translate to PHP90-100b fresh funds released into the financial
system. They are also targeting 2-4% inflation for 2019 and expecting the peso to range between 52 to 55.

II. Economic data highlights including the actual FY18 GDP and guidance of full year 2019

 FY18 real GDP growth was steady at +6.2% YoY, driven by domestic demand and net external demand shrank.
 Domestic demand remained robust, growing by 8.4% YoY for FY18 (4Q18: up 6.1% YoY). The moderation in consumer
spending was offset by sustained double digit growth in government spending and gross fixed capital formation.
 Import growth of 14.5% YoY, mainly driven by capital and intermediate goods, continued to outpace export growth of
11.5%.
 FY19 and FY20 GDP growth forecasts maintained at +6.5%.

Note: 2Q18 revised

Source: CEIC

Source: CEIC, MKE forecasts

GDP growth of the country driven by exports, domestic consumption or tourism revenue etc. Trade deficits or twin deficits
worsen or improvement, private investment growth or decline etc.

 Resilient domestic demand is supported by steady household consumption growth plus robust public consumption and
investment growth. On the supply – side, real GDP growth was mainly driven by sustained services (9M18: +6.8%) and
rising construction sector (9M18:+13.3%) offsetting easing manufacturing growth (9M18:+5.7%).
  Current account deficit reached USD2.9b in 3Q18, a reversal from the USD 1.1bn surplus posted in 3Q17. This brings YTD
current account deficit to USD6.47b (equivalent to 2.7% of GDP), a turnaround from USD968m surplus (0.4% of GDP) in
2017. Latest trade deficit data in October widened sharply to USD4.2bn from USD2.59b last year as imports grew by 21%
amid a 3% growth in exports. Trade deficit for the first 10 months amounted to USD 33.9bn from USD20.1bn in 2017.

 Budget deficit reached PHP477.2b (Jan to Nov 2018), 91% of the 2018 FY18 government deficit target of PHP523.7bn as
disbursements grew by 19% YoY outpacing revenue growth of 7%.

 Headline inflation rate eased to 6.0% YoY in Nov 2018 (YTD: 5.2%), attributed mainly to easing food and housing & utilities
costs as well as stable transport costs. MKE forecasts inflation to average at 5.3% in 2018 and decelerate to 4.1% in 2019.

 Policy interest rate change or status quo. Any significant currency movement etc.
 Policy rates were raised by 25bps in 4Q, to 4.75% (+175 bps YTD). MKE expects 50bps rate cuts in 2019 to 4.25% and 25bps
cut in 1Q2020 to 4.0%. The PHP rebounded to PHP 52.51/USD (Mar 29, 2019) in 1Q19, from PHP52.58 in end-December,
paring PHP losses vs. USD to 0.1% YTD.

III. Water crisis

East zone residents of Metro Manila, serviced by Manila Water Co, experienced intermittent to zero water supply for
the first week of March. La Mesa Dam, MWC’s emergency reservoir for Metro Manila, has reached its critical mark
and is unable to augment MWC’s water supply requirements.

Metropolitan Waterworks and Sewerage System (MWSS) asked Maynilad to share its water supply allocation to MWC.

As a result of an avoidable water crisis, MWC was penalized in the form of a rebate or refund to customers. President
Duterte also issued an order asking MWSS and water concessionaires to submit a report on the situation by Apr 7.
The report will be used as basis on whether the President will fire officials from MWSS or terminate service agreement
of water concessionaires.

As of March 25th, Manila Water said that the 8 to 12-hour water availability at ground floor level has now reached
97%.
IV. Sustained easing of inflation pressures from 5.1% in end Dec to 3.8% in Feb (MKE forecast 3%);

V. Government regulations – Rice Tarrification Bill signed by President Duterte

 President Duterte signed the rice tariffication law in Feb 2019, which will remove all quantitative restrictions on rice
imports and apply a 35% tariff on grain shipped from Southeast Asia and 180% tariff rate for imported rice from other
countries. Farmgate prices of palay fell 5.5% YTD from PHP20.14 in the fifth week of Dec 2018 to PHP19.03 in the second
week of Mar 2019.

 Senate President Sotto III has signed and sent the FY19 spending plan of PHP3.757t for President Duterte’s
signature. Senator Sotto however cited his reservations (in an attached annotation) related to the PHP75b worth of local
government infrastructure projects included in the budget after the Bicameral Conference Committee Report was
ratified, which he deems are unconstitutional.

VI. News on upcoming general elections / politics – e.g. Thailand Feb 24th 3019, Indonesia April 24th2019 etc.
VII. Mid-term elections for Congressional members and local government officials is scheduled on 13 May 2019.
VIII. In the survey conducted by Pulse Asia, Grace Poe ranked first in voter preference, followed by Cynthia Villar in 2nd,
and Pia Cayetano and Lito Lapid tied at the 3rd spot. Of the top 12, two are from PDPLBN, the same political party
as President Duterte.
IX. The SWS survey, conducted December 16 to 19, 2018, also showed 25% of Filipinos nationwide want a candidate who
is not corrupt.

X. Any other relevant info e.g. Indonesia is now on T+2 settlement

a. NA

Source:

https://psa.gov.ph/sites/default/files/updates%20on%20palay%202nd%20week%20march%202019.pdf

https://psa.gov.ph/sites/default/files/Updates%20on%20Palay%2C%20Rice%20and%20Corn%20Price%2C%20Dece
mber%202018%20%28Week%205%29.pdf

http://www.pulseasia.ph/january-2019-nationwide-survey-on-the-may-2019-senatorial-elections/