Philippines Macroeconomics Weekly Update #1

MACROECONOMICS WEEKLY UPDATE

The Bangko Sentral ng Pilipinas (BSP) has ruled out another 75-basis-point (bps) rate hike as it is looking at further raising key policy rates by 25 to 50 bps on 18 Aug 2022. Moreover, during the Post-SONA Economic Briefing 2022, BSP Governor Felipe Medalla said the Monetary Board is unlikely to hold another surprise offcycle meeting. Medalla added that the remaining rate increase would be data-dependent.

Department of Finance (DOF) Benjamin Diokno said that the country does not need to borrow as much as it did the last few years with the crisis. He said that the government’s fiscal consolidation strategy will bring down the debt to GDP ratio from the current 63.5% to less than 60% by 2025 and cut the deficit to GDP ratio from the current 6.4% to 3% by 2022.

The International Monetary Fund (IMF) has raised its 2022 gross domestic product (GDP) forecast for the Philippines to 6.7%, from the original target of 6.5%, due to the strong recovery momentum felt in 1H22. The latest GDP projection of the IMF is well within the revised 6.5% to 7.5% growth target set by the Cabinet-level Development Budget Coordination Committee (DBCC). However, IMF expects a moderate growth momentum in 2H22 and in 2023 with its lowered GDP growth forecast of 5%-6.3% for the next year due to the impact of the war in Ukraine, slowdown in major trading partners, faster US monetary policy tightening, and high inflation.

In the near and medium term, the government sees the highest growth potential from the information technology business process management (IT-BPM) and mining sectors. During the Post-SONA (State of the Nation Address) Economic Briefing, Trade Secretary Alfredo Pascual said that the IT-BPM sector’s potential is even greater now with the heightened digitalisation and use of online services during the pandemic. While Finance Secretary Benjamin Diokno emphasized the mining sector’s high growth potential amid the lifting of the four-year-old ban on open pit mining.

The Philippine Statistics Authority (PSA) reported a 12.3% y-o-y drop in the inventory of rice to 2,220.21 thousand metric tons (MT) as of 01 June 2022. Stock held by the National Food Authority (NFA), commercial retailers, and households posted a 22.0%, 15.2%, and 7.3% y-o-y decline respectively. Similarly, corn inventory dropped by 9.2% yo-y to 873.48 thousand MT. Corn held by households and commercial wholesalers decreased by 48.0% and 2.7% y-oy, respectively

PThe new administration’s ramped up focus on infrastructure, digitalization, as well as its assurance that there will be no lockdowns, are supportive of the property market recovery, according to property consultancy firm JLL Philippines. JLL executive Janlo De Los Reyes also noted recent laws such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the amended Public Service Act, and Foreign Investment Act will improve the Philippines’ attractiveness as an investment destination. For the next couple of quarters, JLL sees continued gradual property market recovery.

The Department of Agriculture (DA) said that price pressures on fertilizers must ease by the next planting season as overseas fertilizer shipments are expected to arrive in Oct-22. According to the Undersecretary-designate for Consumer and Political Affairs and DA spokesperson Kristine Y. Evangelista, they are continuing to research and source cheaper fertilizer. She noted that logistics play a huge role because even if the fertilizers are cheap, if they are sourced somewhere far away, they will end up becoming more expensive.

According to the Philippines Statistics Authority (PSA), the tourism industry’s water consumption in 2021 came in at 132.54m cubic meters (cu.m.) (+19% y-o-y). However, consumption data in 2021 is still significantly lower than the 705.14 million cu. m. of water used by the industry in 2019. Meanwhile, the tourism industry’s energy consumption decreased by – 4.7% y-o-y to 3,041.99 kilotons of oil equivalent (KTOE) in 2021. Moving forward, the tourism industry is expected to return to pre-pandemic levels sooner than later as mobility restrictions ease worldwide.

Colliers Philippines reported a net absorption of 45,100 sqm in the Metro Manila office market in 2Q22, the highest recorded since 1Q20, with deals equally split between the traditional and outsourcing segments. With the continued positive take-up, Colliers said office space take-up is seen to hit 350,000 sqm this year, an improvement from the −273,100sqm decline in 2021. For the rest of 2022, Colliers forecasts the delivery of 356,200 sqm of new office space, and an annual completion of about 543,300 sqm from 2023 to 2026. Meanwhile, vacancy is seen to reach 18.2% by end-2022 from 15.7% in 2021 due to the substantial projected completion of 808,900 sqm this year

The Bureau of Customs (BoC) said that their July collection reached P84.43bn, exceeding its monthly target of P60.78bn. In the first seven months of the year, the BoC collected P481.14bn, surpassing its P388.6bn target by 24% and increased by 34% y-o-y from P358.92bn. BoC Commissioner Yogi Filemon L. Ruiz attributed this strong performance to improved valuation and digitalization of their Customs systems. In addition, he also noted import values have gone up as the economy gradually reopened with import values improving due to the higher global prices of oil and other commodities.

POWER AND UTILITIES NEWS

Manila Electric Co. (MER) will conduct more competitive biddings, possibly this year, for 900 megawatts (MW) of power supply requirement; however, the firm hasn’t approved it yet for submission to the Department of Energy (DOE). These capacities are aligned with Meralco’s submitted power supply procurement plan (PSPP). In terms of when the competitive selection process (CSP) will be conducted for the total 900MW, this will depend on when Meralco will submit their Terms of Reference to the DOE for its approval.

ACEN Corp. (ACEN) recently approved the divestment of all of its shares in its own subsidiary, South Luzon Thermal Energy Corporation (SLTEC) through energy transition financing. The deal valued at P3.7bn involves the early retirement of ACEN’s remaining coal-fired power plant in its portfolio, the 244-MW coal plant in Calaca, Batangas. Subject to regulatory approval, the shares will be acquired by ETM Philippines Holdings, Inc. (EPHI) and The Insular Life Assurance Co., Ltd. (InLife). ACEN will utilize the proceeds from the divestment to fund more renewable energy projects

Aboitiz Power Corp. (AP), recorded net income of P10bn (-2% y-o-y) in 1H22 due to the impact of liquidated damages from typhoon Odette earlier in the year. Excluding those one-off impact, AP’s core net income for 1H22 would have surged by 15% y-o-y on the back of increased peak demand in the Luzon and Visayas grids. AP reported booked nonrecurring gains of P861m during the Apr-22 to Jun-22 period for its subsidiary Therma Luzon, Inc.’s hedge and the appreciation of the US dollar, while recording P34m in non-recurring gains.

Manila Electric Co. (MER) has pursued competitive offers for the supply of 500 megawatts (MW) of renewable energy for the electricity distributor’s mid-merit requirement starting in 2026. MER invited interested parties to challenge through a competitive selection process (CSP), the offer of Ahunan Power, Inc. (API) for P4.0511 per kilowatt-hour (kWh) headline rate and levelised cost of electricity. API’s offer to supply renewable energy is exclusive of pumping or charging energy cost, for the 20-year contract that will start on Feb. 26, 2026. MER’s third-party bids and awards committee said bidders have until August 10 to submit their expression of interest.

President Ferdinand R. Marcos Jr. has vetoed House Bill 10554, an act that aims to expand the franchise of Davao Light and Power Co., Inc. (DLPC). He noted that the area of expansion would cause DLPC to ‘kill’ the current franchise holder, North Davao Electric Cooperative, Inc. (Nordeco). President Marcos pointed out to the senate that the act could be subjected to a court challenge should Nordeco defend its interests and operations. Furthermore, the measure would violate Section 27 of Republic Act No. 9136, where it allows franchises to continue operating throughout their whole term.

MINING AND OIL NEWS

According to an article from Philstar, Phoenix Petroleum Philippines Inc. (PNX), has also not been able to pay its suppliers, particularly bioethanol manufacturers. These are Universal Robina Corp. (URC)- La Carlota, ProGreen AgriCorp., Absolut Distillers Inc., Asian Alcohol Corp., and Far East Alcohol Corp. Collectively, these companies are seeking payments from PNX Petroleum amounting to P646.97m as of end Apr-22.

Phoenix Petroleum Philippines Inc. (PNX) is optimistic of overcoming difficulties amid the challenging business environment. In a statement made to the Philippine Stock Exchange in response to The STAR column, PNX said that the reported P646.97m outstanding payables the company has with bioethanol manufacturers are being addressed. PNX added that while recovery is underway, the company said that it is not immediate, as it has been set back by the emerging threats of a recession in developed markets due to rising prices across the world and prevailing geopolitical risks.

PXP Energy Corp. (PXP) recorded a decrease in its core net loss to P2.1m (from P22.2m in 1H21) in 1H22. Consolidated net loss attributable to equity holders of the parent company was lower at P6.4m (from P23.2m in 1H21) resulting from higher profit from Service Contract (SC) 14C-1 Galoc operations and reduction in general and administrative expenses. PXP’s consolidated petroleum revenues surged to P45.1m (+130.% y-o-y) coming from 2 completed liftings of crude totaling 291,216 barrels of crude oil (bbl) at US$97.13/bbl in SC 14C-1 Galoc.

Petron Corp. (PCOR) posted a consolidated net income of P7.7bn (1H21: P3.9bn) in 1H22, mainly due to higher sales volume and pump prices. Consolidated revenues came in at P398.5bn (1H21: P174.1bn). Petron’s consolidated sales volumes from the Philippines, Malaysia, and its trading unit in Singapore grew 34% y-o-y to 51.4m barrels as more industries, including aviation travel, rebounded from the pandemic’s impact.

Philex Mining Corp. (PX) posted a core net income of P1.3bn (+16% y-o-y) and core EBITDA of P2.35bn (+16.1% y-o-y) in 1H22 on the back of higher prices of Gold in the period and continued optimisation of operating costs and expenses. Operating costs and expenses slightly rose to P3.3bn (+2.4% y-o-y) attributable to increasing production cost brought by COVID-19 pandemic and Russia-Ukraine conflict which affected import prices of materials particularly fuel and power.

REAL ESTATE NEWS

Citicore Energy REIT Corp. (CREIT) reported a net income of P300.84m for 1H22 (1H21:P65.68m), driven by the commencement of the Company’s lease contracts on its freehold properties in Armenia, Tarlac City and San Ildefonso, Bulacan City, its leasehold properties in Brgy. Talavera, Toledo City, Cebu, Silay City, Negros Occidental and Brgy. Dalayap, Tarlac City and its solar farm in Clark Freeport Zone, Pampanga. CREIT’s 1H22 gross revenues came in at P663.58m (1H21:P130.7m). CREIT also declared a cash dividend of P0.044 per share for the 2Q22, payable on 14 Sept 2022 to shareholders on record as of 19 Aug 2022. The amount represents 107% of the distributable income for 2Q22, which also indicated an annual yield of 7.33%, excluding special dividends based on the 20 Jul 2022 closing price of P2.38 per share.

INFRASTRUCTURE NEWS

International Container Terminal Services, Inc. (ICT) signed a conditional share subscription and purchase agreement with Indonesia’s Indo Port Holding Pte Ltd. and Eastlog Holding Pte Ltd. to acquire majority ownership (66.7%) in PT East Java Development. With 47 years left in its concession, PT East Java Development holds the rights to a multipurpose terminal in Lamongan Regency, East Java. The number of shares to be acquired is 1m for US$46.5 per share.

GMR Megawide Cebu Airport Corp. (GMCAC), the consortium between Megawide Construction Corp. (MWIDE) and India’s GMR group, anticipates domestic flight traffic to return to pre-pandemic levels by 4Q22 and international traffic by 2Q23. The Mactan-Cebu International Airport Authority said aircraft traffic, both domestic and international, rose by 174% to 20,551 during 1Q22 from 7,489 in 1Q21. GMCAC has stated that the percentage of domestic flights at Mactan International Airport (MCIA) has already returned to 70%. The firm also noted that more Korean airline companies have resumed direct flights to Korea from MCIA after over two years of economic downturn due to the COVID pandemic.

INDUSTRY NEWS

Shakey’s Pizza Asia Ventures, Inc. (PIZZA) said that it launched healthy and eco-friendly plant-based offerings in its menu across its restaurant network. The company partnered with unMEAT, the plant-based meat alternative brand manufactured by Century Pacific Food, Inc. (CNPF), to roll out plant-based burgers, nuggets, and pizzas. Its R&B milk tea also launched its new 100% plant-based milk tea this year with no cholesterol and fewer calories compared to regular milk tea.

Wilcon Depot, Inc. (WLCON) reported a P1.0bn (+56% y-o-y) net income for 2Q22, bringing the 1H22 aggregate net income to P1.9bn (+49% y-o-y) which is above our expectations. The 2Q22 net income growth was attributed to the increase in volumes and contribution of higher margin products which was partly offset by the higher operating expenses due to the said increase in volumes. WLCON’s 1H22 revenues rose by 19% y-o-y to P15.9bn amid the 11.8% y-o-y growth in comparable sales as well as the contribution of the three additional depots in Luzon.

Philippine Seven Corporation (SEVN) allotted P2bn worth of capital expenditures this year for the opening of up to 300 new 7-Eleven stores with a target 50%-50% split between franchisee and company-owned stores. This is nearly double the 164 additional stores they opened in 2021. Moreover, SEVN plans to continue installing cash recycler automated teller machines (ATMs) in their outlets nationwide and increase essentials in their product lineup.

Balai Ni Fruitas (BALAI) reported a P9m net income in 2Q22, almost five times higher y-o-y, bringing the aggregate 1H22 net income to P15m which is 18 times higher than the P800,000 earnings last year. This is despite the increasing raw material prices as BALAI continued to benefit from economies of scale and improved store performance. Similarly, BALAI’s revenue nearly tripled to P145m from 1H21’s P56m coming from a lower base as the brand Balai Pandesal only started being reflected in Jun-21. Moving forward, BALAI added 7 stores in the first half bringing its store network to 84 branches.

PLDT Inc. (TEL) is scheduled to decommission about 185 telecom towers that provide time-division duplex LTE to its legacy wireless service called Home Ultera. With this, over 3,000 subscribers of Home Ultera who are eligible for service migration will have the option to either move to higher speed fixed fiber plans or to a postpaid wireless service for the home at no additional cost. This migration initiative will cover 58 areas across the Philippines including Bohol, Bulacan, Cebu, Iloilo, and Metro Manila.

BANKING AND FINANCE NEWS

China Banking Corp.’s (CHIB) 1H22 net income rose to P10.1bn (+39% y-o-y) – ahead of consensus expectations – on higher net interest income and lower provisions. Net interest income rose to P22.0bn (+16% y-o-y), while fee-based income dropped by 46% y-o-y to P3.2bn on the back of lower trading and foreign exchange gains. Loans expanded 14% y-o-y to P655bn on the back of significant growths in both business and consumer loans. Operating expenses was flat at P11.1bn (- 0.3% y-o-y). Non-performing loans (NPLs) ratio eased y-o-y at 2.3% in 1H22 (1H21: 3.5%) and NPL cover further improved to 128% (1H21: 99%). As of Jun-22, capital ratios remain well above regulatory requirements with Common Equity Tier 1 (CET 1) Ratio and Capital Adequacy Ratio (CAR) at 14.8% and 15.7%, respectively.

BDO Unibank, Inc. (BDO) reported 2Q22 net income of P12.3bn (+11.1% y-o-y), bringing 1H22 net income to P23.9bn (+11.8% y-o-y) – in line with our/consensus estimates. The bank’s gross loan book grew by 9.0% y-o-y to P2.5tr driven by corporate, credit card and mortgage loans. On the funding side, deposits grew by 10% y-o-y to P2.8tr, driven by the 11% y -o-y expansion of CASA. This translated to a CASA ratio of 85% (FY21: 85%). Net interest income was higher at P69.4bn (+7.8% y-o-y), despite a flat NIM at 4.06% (2Q21: 4.06%). Meanwhile, non-interest income rose to P34.3bn (+15.5% y-o-y) driven by the strong performance in fee-based income (+26.1% y-o-y to P17.6bn). Operating expenses grew at a manageable pace of 5.9% y-o-y to P64.5bn, bringing pre-provisions profit to P39.2bn (+18.1% y-o-y). The bank booked provisions of P8.2bn (+21.3% y-o-y) – higher than we expected despite NPL ratio further easing to 2.39% (1Q22: 2.72%). This translated to a NPL Coverage ratio of 137.5% (1H21: 99.9%). Finally, BDO’s capital ratios remain well above regulatory requirements with Capital Adequacy Ratio (CAR) at 14.5% and Common Equity Tier 1 (CET1) ratio.

HOLDINGS NEWS

SM Prime Holdings, Inc. (SMPH) posted 1H22 consolidated revenues of P46.3bn (1H21: P41.1bn; +13% y-o-y), bringing net income to P14.1bn (1H21: P11.6bn; +21% y-o-y) for the period– below our and consensus forecast. By segment: (i) malls now account bulk or 44% of the company’s total revenues, with the recorded upswing of a 92% y-o-y growth to P20.6bn vs P10.7bn in 1H21. Amid the easing of quarantine restrictions, mall rental income surged by 80% y-o-y to P18.6bn during the period (1H21: P10.3bn); (ii) residential segment dipped 25% to P18.2bn in the first half of 2022 (1H21: P24.5bn) and posted a decline in revenue contribution now at 39%.

The decline was attributed to the cancelled sales as an effect of the lapse of the Bayanihan Act and the uncertainty brought about by the pandemic. Reservation sales, on the other hand, improved by 8% y-o-y to P59.4bn in 1H22 (1H21: P55.1bn); finally, (iii) other business segments contributed 10% to revenue, which include offices (P2.8bn; +14% y-o-y), and hotels and convention centres (P1.7bn; +205% y-o-y), totalling to P4.5bn in consolidated revenues in 1H22, +49% higher from 1H21. Universal Robina Corporation (URC) recorded a 1H22 net income of P6.5bn – ahead of consensus albeit below our expectations. This earnings result is lower compared to last year due to the non recurring gain on sale of idle assets recorded in 2021; without this, 1H22 net income is 14% y-o-y higher than the 1H21 core net income at P5.2bn. URC’s 1H22 revenue grew 23% y-o-y to P71.1bn amid the double-digit contribution from the company’s business units. Sales from Branded Consumer Foods (BCF) Philippines, BCF International, and Agro-Industrial & Commodities (AIC) grew 20%, 43%, and 15% y-o-y to P35.1bn, P15.6bn, and P19.4bn respectively.

boitiz Equity Ventures, Inc. (AEV) posted a core net income of P9.1bn (-36% y-o-y) in 1H22, below consensus estimates, dragged by its financials, cement, and food businesses. The power segment accounted for 52% of AEV’s total income, while banking contributed 31%. Income contributions from food, infrastructure, and real estate segments were at 12%, 4%, and 2%, respectively. Aboitiz Power Corp. (AP) posted core net income of P9.2bn (-9% y-o-y) in 1H22, in line with consensus estimates, amid outages related to Typhoon Odette at the early part of the year.

Excluding those one-off impact, AP’s core net income for 1H22 would have surged by 15% y-o-y on the back of fresh contributions from GNPower Dinginin (GNPD) Units 1 and 2, higher availability of the GN Power Mariveles Energy Center Ltd. Co. (GMEC) facility, timing windfall on the account of higher indices and higher water inflows. For Banking, Union Bank of the Philippines (UBP) posted net income of P6.0bn (-27% y-o-y) due to extraordinary trading gains recorded in 1H21. Net interest income grew to P17.0bn (+15% y-o-y) on the back of higher yields in earning assets, coupled by lower cost of funds from the expansion of its Current Account and Savings Account (CASA) deposits. For Food, net profit decreased to P194m (-84% y-o-y), given the weaker margins from its flour division amid the sharp increase in wheat costs. AboitizLand, Inc. and its subsidiaries recorded a consolidated net income of P1.2bn (1H21: P385m) primarily due to increased construction activity for its residential business as well as increased sales of high value lots. For Infrastructure, Republic Cement & Building Materials, Inc. posted a net income of P177m (-87% y-o-y) due to lower market demand for cement due to the increase in prices of steel and other construction materials.

PHILIPPINE STOCK MARKET UPDATE

The PSE index continued to climb, gaining 67.78 pts (up 1.07%) to close at 6,430.08 despite tensions between the US and China over Taiwan. Net foreign buying continued (+727M) while value turnover rose to P6.1B (up 4% from the previous day). Trading ended mixed for the sectoral indices, as gains from Holdings (up 2.06%) and Industrials (up 0.90%) were partially offset by Mining & Oil (down 1.10%). Among index movers were SM (up 3.38%), after strong Q2 earnings results, BDO (up 4.17%) and JGS (up 2.78%).