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Philippines Macroeconomist/Strategist

Jun Trinidad

Macroeconomics

<ul>
<li>The 1Q18 balance of payments (BoP) deficit of 1.6% of 1Q GDP downplayed the current account shortfall (-0.3% of 1Q GDP) as the fundamental reason behind PHP’s woes. Instead the BoP highlighted <strong>residents </strong>deploying capital in foreign portfolio assets that resulted in net portfolio outflows of US$2.1bn leading to net financial outflows equivalent to 2.1% of 1Q GDP.</li>
<li>While its convenient to attribute residents search for USD ‘hedge’, appeal of rising global rates relative to low local rates, and other investment opportunities overseas as factors driving this ‘export’ of capital, the opportunity for <strong>portfolio diversification </strong>as global monetary conditions change may be too tempting to pass up. </li>
<li>1Q GDP (+6.8%YoY) maintained its robust pace despite these net outflows. PHP faded to 52 in Mar having started the year at 50, as it took the brunt of the BoP shortfall although rising global rates and higher local inflation contributed as well.</li>
<li>The capital base that supported residents export of capital and other outflows likely came from US$37.7bn (April) of foreign currency deposit units (FCDU) owned by private residents parked with onshore banks (local and foreign). The fact that FCDU remains sizeable (nearly 50% of the BSP’s foreign reserves) and still improving, highlights the residents portfolio bias to the ‘devil’ we know. </li>
<li>Aside from PHP weakness, the risk of sizeable net outflows from residents investments overseas could also be another reason (but not the primary one) for BSP to adjust its policy rate in succeeding months particularly if residents portfolio diversification results in a ‘disorderly’ FX market. </li>
<li>The persistent BoP shortfall coupled with risk asset market sentiment fallout from unresolved US-China trade disputes with dire EM Asia implications could provoke PHP to probe 54 in near-term prior to 4Q recovery prospects in the 53 range. The short-duration segment of the curve would offer safe refuge in in 3Q18 against a backdrop consisting of policy rate uncertainty, PHP volatility and potential for GDP growth to test 7% in 2H18.</li>
</ul>


The 1Q18 balance of payments (BoP) deficit of 1.6% of 1Q GDP downplayed the current account shortfall (-0.3% of 1Q GDP) as the fundamental reason behind PHP’s woes. Instead the BoP highlighted residents deploying capital in foreign portfolio assets that resulted in net portfolio outflows of US$2.1bn leading to net financial outflows equivalent to 2.1% of 1Q GDP.
While its convenient to attribute residents search for USD ‘hedge’, appeal of rising global rates relative to low local rates, and other investment opportunities overseas as factors driving this ‘export’ of capital, the opportunity for portfolio diversification as global monetary conditions change may be too tempting to pass up. 
1Q GDP (+6.8%YoY) maintained its robust pace despite these net outflows. PHP faded to 52 in Mar having started the year at 50, as it took the brunt of the BoP shortfall although rising global rates and higher local inflation contributed as well.
The capital base that supported residents export of capital and other outflows likely came from US$37.7bn (April) of foreign currency deposit units (FCDU) owned by private residents parked with onshore banks (local and foreign). The fact that FCDU remains sizeable (nearly 50% of the BSP’s foreign reserves) and still improving, highlights the residents portfolio bias to the ‘devil’ we know. 
Aside from PHP weakness, the risk of sizeable net outflows from residents investments overseas could also be another reason (but not the primary one) for BSP to adjust its policy rate in succeeding months particularly if residents portfolio diversification results in a ‘disorderly’ FX market. 
The persistent BoP shortfall coupled with risk asset market sentiment fallout from unresolved US-China trade disputes with dire EM Asia implications could provoke PHP to probe 54 in near-term prior to 4Q recovery prospects in the 53 range. The short-duration segment of the curve would offer safe refuge in in 3Q18 against a backdrop consisting of policy rate uncertainty, PHP volatility and potential for GDP growth to test 7% in 2H18.


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