...the economic pace

Economy seen to grow at a faster clip

By: Doris C. Dumlao
Philippine Daily Inquirer

Monday, June 27th, 2011

US banking giant Citigroup this year expects the Philippine economy to grow at a faster pace than its original outlook of 4.8 percent given the “benign” impact of the social unrest in the Middle East and North Africa, and the supply disruption problems in Japan.

Growth in gross domestic product (GDP) is seen to pick up further next year to at least 5.3 percent while inflation is expected to average this year at 4.8 percent—well within the Bangko Sentral ng Pilipinas’ target range—before slowing to 3.8 percent next year.

Based on Citi’s second-half 2011 regional outlook dated June 24, a section on the Philippines cited a slowdown in inflation, prompting the central bank to ease its hike of key interest rates. The bank noted that real rates were in a non-negative range, which meant that interest rates were no longer below the inflation rate.

“Benign MENA and Japan supply disruption risks raise potential upside to our below-trend full-year ’11 GDP forecast of 4.8 percent. Diversity in remittance and export flows could further offset event risks,” said Citi head of equity research Minda Olonan. “Meanwhile, domestic liquidity is buoyant, with total forex reserves reaching … $85 billion and bank LDR [loan to deposit ratio] at 63 percent.”

At the equities market, Olonan noted that Philippine stocks would likely come under pressure until the third quarter as weaker consumer sentiment and higher costs could continue to weigh on corporate earnings in the second quarter.

She said the estimated market earnings growth of 6.3 percent for 2011 would be below historical trend.

“However, a positive macro backdrop sets the stage for a better earnings outlook in 2012,” Olonan said.
In terms of valuation, she said the local equities market was no longer trading cheaply relative to earnings outlook for this year, especially when compared with valuations across Asia-Pacific markets.

Nevertheless, she said, there was room for the main-share Philippine Stock Exchange index to hit 3,667, or a modest 11-percent upside from current levels.

“Given a neutral market outlook, we believe stock selectivity is the key to superior returns. We favor stocks that are liquid and have been relative underperformers and that have a dominant industry position, specifically Banco de Oro, Ayala Land and Cebu Pacific,” Olonan said.

Energy Development Corp., on the other hand, was cited as a “top buy” as a play on the power shortage theme. Citigroup also likes Globe Telecom as a yield play.

In explaining Citi’s stock picks, Olonan said:

Ayala Land is a “defensive” property developer with integrated business structure and trading at 30 percent discount to net asset value;

Banco de Oro is the country’s largest bank with a strong current account-savings account deposit base and improving cost efficiency;

Cebu Pacific is a battered airline stock with strong market position and resilient margins;

EDC is a play on increasing demand for renewable energy amid an impending supply shortage;

Globe Telecom is the cheapest Southeast Asian telco with a positive turnaround story.

The bank said that among the risks to its outlook was that the Philippines remained vulnerable to global instabilities, such as the delayed Eurozone bailout and potential strengthening of the dollar.

With the PSEi largely stable, and with net positive foreign buying in the second quarter, Citi sees the market at risk of a foreign liquidity outflow. However, it noted that the government execution of its infrastructure agenda by 2012 should be a key milestone for a market re-rating.