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Stable Prices Lead to Optimism in PHL

How quickly sentiments can change. Nearly a year ago, when the inflation rate accelerated to 6.7 percent in September and October, investors and consumers turned pessimistic on their outlook on the economy.


Household consumption last year was slowing down in anticipation of higher prices ahead amid the perceived rice supply lack, the stock market index was just above 7,000 points and the peso was trading below 52 to a US dollar toward the end of 2018.


The tit-for-tat trade tariffs between the United States and China were weighing down investor’s sentiment further, while doomsayers and other critics of the Duterte administration were already predicting the collapse of the Philippine economy.


Our economy, however, recovered fast from the inflation blip. I see more stability now, with rising inflation already a thing of the past. Real estate prices are going up—an indication of strong demand and greater purchasing power—while Philippine stocks have just entered the bull market territory after the benchmark index pierced through 8,200 points on July 15, 2019. The peso, on the other hand, has slowly appreciated, hovering near 51 against the greenback.


I have noticed that Filipino businessmen and investors tend to be optimistic and spend more when real-estate prices and the stock market rise. The strong policy response of the Bangko Sentral ng Pilipinas to address the creeping inflation toward the last quarter of 2019 has also helped stabilize the economy and calmed investors.


The Monetary Board’s calibrated move to reduce interest rates and lower the reserve requirements of banks in a bid to thwart further inflationary pressures also added to the positive sentiment of businessmen. Reducing the reserve requirements of universal and commercial banks by 2 percentage points will release about P190 billion in additional liquidity into the financial system. This implies lower interest rates and serves as an incentive for businessmen to expand.


The central bank’s policy reaction and the government’s move to liberalize rice importation through the enactment of the rice tariffication law have indeed neutralized the inflationary trend. The central bank in a report for the second quarter said the inflation rate dropped to 3 percent from 3.8 percent a quarter ago. The figure brought the average inflation in the first half to 3.4 percent, which is within the official target range of 2 percent to 4 percent for the full year.


Businessmen, as a result, have become more bullish in the second quarter, boosted in part by election-related spending in the run-up to the elections in May.


The latest business expectations survey conducted by the central bank showed that the overall confidence index in the second quarter increased to 40.5 percent, from 35.2 percent in the first quarter. This means the number of optimists increased and continued to be greater than the number of pessimists.


“Respondents attributed their more upbeat outlook to expectations of the usual uptick in demand during summer [in view of the foreseen increase in the number of local and foreign tourists], enrollment and harvest periods, election-related spending in the run-up to the elections in May 2019, sustained increase in orders and projects leading to a higher volume of production,” according to the BSP survey.


The survey showed that businessmen turned bullish because of the continued rollout of government infrastructure and development projects with the approval of the 2019 national budget.


“They were also optimistic that their business operations would benefit from the favorable macroeconomic conditions in the country, particularly the easing of inflation in 2019,” the BSP noted.


The BSP said the sentiment of businesses in the Philippines reflected the more positive business outlook in Canada, France, Greece, Hungary, Israel and South Korea. Business sentiments in Brazil, Chile, the euro area, the Netherlands and the United States, however, were less buoyant.


With President Rodrigo Duterte reaffirming his resolve to complete more major infrastructure projects through the “Build, Build, Build” program in his latest State of the Nation Address, coupled with his high approval ratings, I expect more investors to come and see for themselves the Philippine growth story. Our strong economic fundamentals are enough to make businessmen optimistic about the economy.