Friday, September 9, 2022

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TODAY’S TOPICS
IN FOCUS
Contrary to Gov. Medalla s comment, we believe the peso s weakness is also
_____________
due to issues in the domestic economy.
The number of employed Filipinos for July reached 47.4M, a new pandemic
PH Peso high and might be due to some seasonality for the month. Still, we believe that
this supports our view that consumer spending will remain buoyant despite
US Dollar the rise in inflation.
HSBC forecasts that adult Filipinos with net worth of at least $250,000 will
more than triple to 5.0M by 2030. There are some listed firms that will benefit
to some extent but probably the best positioned would be SSI.
Rice prices may be poised to rally after India imposed a 20% levy on most rice
varieties. Inflation might definitely not have peaked yet last month.

a dollar

best. At worst, it ignores clear issues about the economy. We explain below.

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IN FOCUS Two to tango. As the chart above shows, the dollar has been rallying since May of
_____________ last year. The US dollar index (Bloomberg: DXY) is a broad measure of its strength
against a basket of major currencies. We can see that it has risen from 90 to 110 in
about 16 months. A similar, though slightly faster, move was seen from May 2014 to
PH Peso March 2015. In the chart below, we compared how Asian currencies performed
during both periods. Observe that while the peso has depreciated nearly 16% since
US Dollar May 2021, it actually eked out a 0.5% gain in the 16 months ended March 2015. We
can say, therefore, that even an emerging currency like ours can outperform as long
as the fundamentals are there. Specifically, at that time, the Philippines was posting
the longest streak of above trend economic growth in decades, the current account
was in positive territory, the budget deficit was in check and inflation was benign.
Today, each of these factors are moving in the complete opposite direction.

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IN FOCUS Where to next? In our mid-year briefing, we said that our long term prognosis for
_____________ the exchange rate was to eventually breach Php60:$1 and the last couple of months
have strengthened our case. If not for what we believe to be central bank
intervention to smooth out its decline, the Peso might be materially lower than it is
PH Peso now. The near term outlook, on the other hand, is harder to pin down but the main
driver will be the US Fed. If Chairman Powell wants to do his best impression of
US Dollar Volcker then Php58 is likely to be taken out before yearend and what we thought
would take three years or so (> Php60:$1) might happen next year. This is why
markets will again be on tenterhooks as we approach Fed decision day on
September 21 (morning of the 22nd in Manila which will be the rate setting day for
the BSP). There are also other factors that are simultaneously at play including a
weak Chinese economy and a plunging Japanese yen. But again, fundamentals
matter. So if GDP, the current account, the budget deficit and inflation can turn
around, then the expected depreciation for the Peso should be much milder. As it
stands, we can only see reason to be hopeful in the latter two and we are not sure if
this will be enough.

Winners and losers. The chart above shows the companies with the biggest forex gains and
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losses usually occur when the peso depreciates and firms' US$ debt are restated at the end
of each quarter. When such debts fall due and the exchange rate remains weak, then the
amount to be repaid (in pesos) will be larger. So clients should not dismiss outright such
forex losses.

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IN FOCUS As we can see, a humongous loss for SMC and very large ones for JGS, GLO and CEB
_____________ as well. Globe, however, will soon close deals for half of its towers that will bring in
more than $1.0B and is also conducting an SRO. The proceeds from both can be used
to significantly deleverage its balance sheet. We also want to reiterate that net
PH Peso exporters like miners and electronics manufacturers, but specifically DNL, stand to
gain from a weak peso. Major importers like cement companies, property
US Dollar developers, restaurants and food manufacturers, on the other hand, stand to lose.

Unemployment SIGNIFICANT DIGITS

Rate

or just before the lockdowns. This series tends to be choppy so we would rather look
at the total number of employed Filipinos. The chart below shows the figure is
47.4M which is a new pandemic high and, again, better compared to the level in
January 2020. We suspect that there is some (or a lot of) seasonality in the data for
July, possibly related to increased employment in agriculture which is usually
lumpy especially during planting season. Still, we believe that this supports our view
that consumer spending will remain buoyant despite the rise in inflation.

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IN FOCUS RANDOM THOUGHTS

_____________
1.
something we just noticed. HSBC recently launched a new wealth fund targeting
SSI adult Filipinos with a net worth of at least $250,000. According to management,
P1.58, +1.94% they are forecasting that this group will more than triple from about 1.6M last
year to 5.0 million by 2030 or around 6.2% of the adult population at the time.
Rice Prices We have to do our own estimates but this is consistent with what we have been
saying. That is, slowing population growth and the expanding percentage of
Inflation Filipinos in the working age bracket will fuel a big jump in disposable incomes
over the next decade or two. Obviously, this is good for consumption in general
but if HSBC is correct (they also said adult Filipinos with a net worth of at least
$1 million will quadruple to 400,000 by 2030), then it will be particularly
positive for companies offering high end products and services. There are some
listed firms that will benefit to some extent but probably the best positioned
would be SSI.

2. Rice prices may be poised to rally after India, which accounts for 40% of global
exports, imposed a 20% levy on most rice varieties. This is the third commodity
to have curbs put in place following wheat and sugar. The decision was reached
after the planting area for the staple shrank by 5.6% amid a 25% drop in

exporters association, Thailand and Vietnam (where we get most of our imports)
stand to benefit with prices expected to increase from $350 to $400 per ton.
Rice did not participate in the broad commodities rally earlier this year but is now
outperforming wheat, palm oil and others with a gain of about 20%. Any further
gains, therefore, will swell the cost of our imports and impact inflation. This
could become a bigger problem if, as we expect, domestic rice production falls
short of projections due to the very high cost of fertilizer. Inflation might
definitely not have peaked yet last month.

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Unit 2904-AEast Tower, Philippine www.mytrade.com.ph asc.research@abacus-sec.com.ph 8667-8900 (63.2) 634-5206

Stock Exchange Centre, Exchange
Road, Ortigas Center, Pasig city 1600

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