Philippine Markets Newsletter

MONDAY MACRO: How the U.S. central bank may impact the Philippine stock market

January 17, 2022

Amidst a high inflation environment, the U.S. central bank has been facing pressures to raise its country’s interest rates.

Let’s take a look at how one action from one of the world’s largest economies can have a significant impact across developing countries, including the Philippines.

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The Monday Macro Report
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With how interconnected the world is, economic, financial, and even political activities in one country impact not just its neighboring countries but also the rest of the world.

A recent example is Indonesia’s ban on coal exports. As the biggest exporter of coal used for power generation, Indonesia’s policy drove global coal prices up.

Though the export ban is slowly being relaxed, its effect will still impact coal-importing countries like Japan and the Philippines this year.

One other event is the U.S. central bank—the Federal Reserve—looking to start raising interest rates in 2022.

Similar to many other economies, the U.S. has been experiencing high inflation in the previous months. Global supply chain constraints and recovering consumer demand have partially driven the surge in prices, but low-interest rates have also contributed to inflation.

Low-interest rates mean borrowing costs are cheaper and saving is less worthwhile. As a result, people and businesses are more incentivized to spend, elevating the economy’s aggregate demand.

Recently, Federal Reserve Chairman Jerome Powell has said that interest rates will be raised more over time if inflation persists at high levels. This has led many to forecast interest rates will go from the 0bps-25bps range to the 75bps-125bps range by year-end, based on the table below.

While the Federal Reserve’s chief concern is the U.S. economy, its actions can significantly impact other countries given the U.S.’s influential role in global trade. The Philippines in particular has the United States among its top 5 import and export partners so its actions will be felt even more.

For Philippine investors, the direct consequence of a higher U.S. interest rate is that it will lead to capital outflows in the country and will continue to keep global investors away from the Philippine market.

In terms of investments globally, the U.S. is widely regarded as the benchmark. An investment in the U.S. is preferred and is perceived as safer compared to the same investment in another country.

As a result, when U.S. interest rates rise, the Philippines may experience capital outflows since investments in the U.S. have become more lucrative.

To prevent this scenario, the Philippine central bank—Banko Sentral ng Pilipinas (BSP)—is therefore pressured to raise its own interest rates, even though the country’s economic conditions do not warrant such an action yet.

Another consequence is that it makes borrowing U.S. dollar-denominated loans more expensive, which limits the options Philippine businesses may have to get financing.

However, despite the consequences laid out, the impact of this event is likely to cause stock market volatility only in the short term.

The long-term performance of Philippine equities still depends largely on the fundamentals of the businesses, which is unlikely to materially change because of the U.S. interest rate environment.

About the Philippine Markets Newsletter
“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 Newsletter
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