Philippine Markets Newsletter

MONDAY MACRO: Even at a technical recession, Uniform Accounting shows Philippine listed companies to be resilient

August 10, 2020

The Philippines is now officially at a technical recession with Q2 2020 GDP growth result revealed last Thursday. This is the highest contraction that we have ever seen since 1981.

Banks are also growing concerned about borrowers’ ability to pay in the current economic environment.

Though at a glance it might look like there are more problems than there are solutions, near-term economic recovery is not as far-fetched as it seems. Uniform Accounting highlights through this chart whether or not Philippine companies can remain resilient enough to weather the storm.

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For a technical recession to happen, the economy must experience two consecutive economic contractions.

The Philippine economy contracted by 0.2% in Q1 2020, then by 16.5% in Q2 2020. The Q2 2020 contraction was expected, as we highlighted on our June 15th Monday Macro report. It was in mid-March when the community quarantine began in Metro Manila, setting restrictions to business operations, suspending public transportation operations, and banning non-essential travels.

Many businesses either temporarily closed shop or downsized their workforce. Others that could no longer sustain their operations were forced to permanently close. One of the effects of this is at least 7.3 million Filipinos out of work.

More unemployed citizens means less money going around to spend on even the basic goods such as food. When this aggregate consumption level decreases, businesses won’t be able to collect enough revenue. When businesses aren’t earning enough, they’ll be forced to either cut costs or shut down, leading to higher unemployment.

This vicious cycle illustrates how critical it is for the local economy that Philippine companies, especially the smaller businesses, operate even amidst the pandemic.

While it’s a more prudent approach to use reinvested earnings to fund operations, borrowing money is another way for business owners to remain open. This is especially encouraged when interest rates are low, similar to today’s interest rate environment. The Bangko Sentral ng Pilipinas (BSP)’s series of aggressive policy rate cuts to aid in the spurring of the economy has made this ideal environment possible.

However, even with low interest rates, a bigger hurdle remains–banks have reduced their appetite for risk and their willingness to lend.

In the Q2 2020 Senior Loan Officer Survey (SLOS) conducted by the BSP, banks reportedly tightened their credit standards to enterprises and households, as well as to real estate loan borrowers. This is the first time since 2009 that banks have tightened their standards, ending their 44 consecutive quarters of unchanged credit standards.

While the break reflects the banks’ cautious sentiment toward the local economic environment, it should also be noted that loan demand declined during the same period. This makes sense given the uncertainty surrounding the pandemic, especially when quarantine measures are implemented with limited lead time for businesses to react.

However, once businesses are allowed to open again, loan demand is expected to pick up as earnings generation becomes more stable. Supplementing it with the easing credit standards should help economic growth pick up in the process.

As we have highlighted in our previous articles, this recession is not a credit-driven event, implying that a faster-than-expected economic recovery is likely. Credit-driven recessions historically have a lot more inherent problems that need to be resolved before economic growth kicks back in.

According to Labor Secretary Silvestre Bello III last May 25, 2020, no company in the Philippines has filed for bankruptcy yet, while in the United States and other countries there have been multiple instances.

This is evidently clear in our aggregate Credit Cash Flow Prime (CCFP) chart below. We have aggregated all publicly-listed companies in the Philippine Stock Exchange (PSE) and removed those that are in the top 30, or the current constituents of the PSE Index.

As a refresher from our April 6th Monday Macro report, the aggregate CCFP uses Uniform Accounting numbers where the bars represent the financial obligations that Philippine companies need to service. This “stack” bar includes items like debt maturities, dividends, required reinvestment levels into the business, and rent.

We have also mentioned in our June 1st article that as long as the companies are able to adapt to this new environment and generate earnings, Cash Available for Outlays will consistently be way above Debt Maturities and Interest Expense. In addition, in its worst scenario of no or immaterial Gross Cash Earnings’, companies will only have sufficient cash flow to cover this year’s debt obligations.

Diving deeper, if we remove the top 30 companies from the universe and focus on the smaller publicly-listed companies, we get this:


In the current scenario, for the next five years, the smaller companies will also likely be able to withstand the current economic situation given their ability to adapt and retain their earnings generation capability. They have enough cash available for outlays, which they can tap to cover all financial obligations when their earnings fall short.

The companies can also opt to postpone any maintenance capex (yellow bar) for the year. These are expenses related to the upkeep of their assets and operations, which they can delay in the near-term.

That said, prudent credit monitoring is still necessary. We continue to see strong credit fundamentals for Philippine businesses, and the BSP continues to employ aggressive measures to lessen the economic blow of the pandemic. Combining these two factors, we see that recovery from this recession will be faster than credit-driven recessions the Philippines has experienced before.

About the Philippine Market Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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