Philstecks Research Philstocks Forecast. 2024: Will the Tides Finally Turn? January 31,2024 GOPGrowth 5.4% -5.8% Inflation 3.8% -4.2% Philippine Peso 54.80-55.80 (Overnight Reverse Repurchase Rate 6.0% PSE Earnings Per Share Growth 5%- 15% PSEi Year-end Level 6998.71 7,665.26 Economic Growth Slows in 1st Nine Months of 2023 In the frst three quarters of 2023, the Philippine economy grew by 5.5% y/y, slower compared to the same period of the previous year’s 7.8% and the 5-year historical average (excluding 2020), at 6.4%. Household consumption, which remains as the biggest chunk of aggregate demand grew by 5.7%, slowing down from last year's 8.8%. This is as elevated inflation and to some extent, higher interest rates, welghed on consumer spending activities. Investments also sawa slower growth of 3.8% compared to last year's 17.7% due to the high interest rate environment and tempered confidence towards the local economy. Government spending also slowed down in the first three quarters of 2023, ‘especially in the second quarter wherein several government agencies underspent their respective budgets. Lastly, our balance of trade in the 1st 9 months of 2023 posted a deficit of P1.81 billion, wider than 2022's P1.79 billion and the 5+ year average of P1.48 billion. The widened trade deficit shows our growing dependence on foreign sources for our consumer goods coupled with the global challenges this year that has dampened foreign demand for our products. ‘ea ros Domestic Produ Expenditure Appresch (in Mn Pap) Source: Philippine Statistics Authority From a sectoral standpoint, the services sector, the biggest contributor to the local economy, experienced ash in growth from 2022's 1st 9 months of 9.0% to 7.1%. This came amid a decline in growth of all ofits sub sectors withthe public administration and defense dropping the most from 3.7% in 2022 to only 0.9% in 2023. The industrial sector hadthe slowest growth among the sectors rising 3.8%, slower than 2022's 7.4%, with the contributions of the mining sector contracting 0.2%. Only the agricultural sector improved its output growth from the 1st 9 months of 2022's 0.8% to 1st 9 months of 2023's 1.1%. ‘ea ros Domestic Product Indust On Approach (inn Php) Source: Philippine Statistics Authority ‘Onaseasonally adjusted basis, the local economy was stil on an uptrend in the Ast 9 months of 2023, implying that itis still in its expansion phase. Within the said period, seasonally adjusted GDP was up by 5.5% y/y. However, a period of contraction was seen in Q2 wherein GDP fell by 0.7% q/4 as all of the aggregate demand side components except for exports experienced a decline. During the quarter, inflation dampened consumption, the government underspent, and high interest rates weighed on investments. Meanwhile, from an industrial standpoint, all sectors experienced output decline with the agricultural front having the steepest fal of 1.1% q/q to 447.31 Mon, Seasonally Adjusted Real GOP Source: Philippine Statistics Authority Labor Market Further Tightens The Philippines’ labor market has been strong in the 1st 111 months of 2023. Inthe said period, on average the country’s, labor force participants grew 1.68% y/y to 50.22 million. Aside from the new graduates for the year, the rise can also be attributed to the improving confidence towards the availability of jobs amid the economy's full reopening, causing many to join the labor market. The number of employed also expanded by 2.78% y/y to 47.97 million while the unemployed declined by 17.16% yly to 2.24 million. This reflects the increase of job creation within the economy amid its expansion. The unemployment rate for the 1st 11 months came in at 4.5%, lower than the last 5-year average (excluding 2020) of 5.9196, While this shows a strong labor market, it may also be considered tight which in turn may exert demand-si~ pressures on inflation. Az \Labor Force «a 2,000.00 6 51,000.00 50,000.00 6 4300.00 6 4800000 47,200.00 c 4600.00 ss 45,0000 56 44,000.00 ce ee He efee OOo (mms Labor Force Participation Rate Labor Force in (000) Source: Philippine Statistics Authority Employment Rate 96 51,0000 50,000.00 49,c0000 955 95 _ 48,000.00 sas 47,000.00 46,200.00 4500.00 4a00.00 43,000.00 42,000.00 s & & sm Ho ofcmpaye(n'000) Employment ate) Source: Philippine Statistics Authority Inflation Rate Inched Up Within Expectation Headline Inflation in 2023 averaged 6.00%, falling within our forecast range of 5.8% to 6.2%. The average inflation in 2023 was slightly higher than the 2022's 5.8% primarily driven by elevated prices in key sectors. Nearly half of the 6.00% inflation in 2023 stemmed from the 7.9% y/y rise in the price of food and non-alcoholic beverages. The second highest contributor was the group of housing, water, electricity, gas, and other fuels, whose price index rose 4.9% y/y, accounting for 1 percentage point of the overall inflation. Meanwhile, the Alcoholic Beverages and Tobacco group had the biggest price increase, up by 10.7% yiy. Only the financial services recorded no increase in 2023. Core inflation rose from 2022's 3.9% to 2023's 6.6% implying that there were also strong demand side pressur > contributing to the accelerated increase in the general price level. YS‘Ona positive note, inflation has been on a downtrend since peaking at 8.7% in January. This can be attributed to the following: + High base effects + Eased trade barriers and government directives to import selected agricultural commodities which have mitigated our food inflation ‘Episodes of easing oil prices ‘+ Impact of the Bangko Sentral ng Pilipinas’ monetary tightening. Headline & Core inflation Source: Philippine Statistics Authority BSP Continues on its Hawkish Path Interest rates ‘Tocounter the still above government target inflation in Q1 which included the January peak of 8.7%, and tokeep inflation expectations in check, the Bangko Sentral ng Pilipinas raised the overnight reverse repurchase rate (policy rate) by 50 and 25 basis points in February and March respectively, bringing the interest rates to 6.25%. Despite the BSP's initial interventions, the country still experienced unexpected challenges on consumer prices when the headline inflation rate surged in September. Responding promptly, the BSP implemented a 25 basis point off-cycle increase in its overnight reverse repurchase rate, bringing it to 6.50% in October. Following the surge in September, inflation declined, and interest rates remained at 6.50% throughout 2023, ClInterest Rates 660% Ss0% sso% est al E2GK GSK GK GIN ISK 520% 500% som 5. 540% Source: Bangko Sentral ng Pilipinas Reserve Requirement Ratio In June, the BSP decided to reduce the reserve requirement ratios (RRR) of the different banking sectors by varying degrees: 250 basis points for universal and commercial banks, as well as non-bank financial institutions with quasi- banking functions; 200 basis points for digital banks; and 100 basis points for thrift banks, rural banks, and cooperative banks. This reduction, effective since June 30, aims to ensure the stability of domestic liquidity and cree post the expiration of the pandemic relief measures introduced by the BSP during the crisis. conditions During the pandemic, the BSP allowed banks to include their lending to micro, small, and medium enterprises (MSMEs) and pandemic-affected large enterprises as part of their reserve requirement. The reduction in RRR aligns with the central bank's broader initiative to bring down these ratios to single digits, aligning with the practices of neighboring peers, ‘The Global Economy and Its Impact on the Local Economy 2023 has been a tough year for the global economy. Monetary authorities of many advanced economies led by the Federal Reserve pursued tightening to rein in inflation. China's economy, one of the most significant in the globe, has also experienced challenges against its post-pandemic recovery. We also saw events that shook confidence towards the global economy including the financial system problem in the US which started with the collapse of Silicon Valley Bank, the fall of Credit Suisse, and the Israel-Hamas conflict which adds to the ongoing Russia-Ukraine war. The said obstacles trickled down to the local economy. In 2023, the Philippines’ exports value dropped by 7.6% y/y to $73.52 billion, Electronic products which were our top exports observed a 9.2% y/y drop in value. Cl