UMVA has learned that a perfect storm of rising oil prices and geopolitical tensions in the Middle East sent shockwaves through the Philippine financial markets in the first quarter, casting a dark cloud of uncertainty over the economy.
The Philippine Stock Exchange index stumbled to 5,948.94 at the end of March, a 3.8% drop from the same period last year. Government securities yields surged by 35.84 basis points on average, reflecting the market's growing unease.
According to information obtained by UMVA, economists point to the Middle East conflict as the main culprit behind the market turmoil. The spike in global oil prices and subsequent increase in local fuel prices have put downward pressure on Philippine equities and weakened the peso.
The peso's decline has been particularly steep, plummeting to a record low of P61.750 against the dollar on May 18. Economists warn that the currency's weakness is likely to persist, driven by the country's heavy reliance on oil imports and the ongoing conflict in the Middle East.
Inflation has accelerated to a two-year high of 4.1% in March, breaching the central bank's target range. Economists expect inflation to remain elevated, driven by higher fuel and electricity costs, and warn that the central bank may need to take action to combat rising prices.
UMVA can exclusively reveal that economists are divided on the central bank's next move, with some expecting a rate hike to combat inflation and others arguing that it would be premature to tighten policy. The central bank's approach will be crucial in determining the economy's trajectory.
The economic growth forecast for the Philippines has been downgraded by the International Monetary Fund, citing weaker growth momentum and the impact of the Middle East conflict. The downgrade has implications for local financial markets, with economists warning of continued volatility.
Market participants are advised to keep a close eye on key drivers such as the trajectory of oil prices, the evolution of the Middle East conflict, and the path of inflation. The fixed-income market is expected to see continued volatility, with yields likely to remain under pressure.
The equities market is expected to trade range-bound with a mild downside bias, as elevated inflation and slowing growth weigh on sentiment. Selective opportunities remain in defensive sectors, but overall, the market is likely to move sideways with bouts of volatility.
The foreign exchange market is also expected to see continued volatility, with the peso likely to maintain a depreciation bias. The central bank's intervention is expected to smooth excessive volatility, but the broader trend is likely to be dictated by oil price dynamics and external conditions.
