Analysis: Is the market really wary of Duterte?

MANILA, Philippines – A week before the national elections, are investors getting wary of a potential Duterte presidency?

With the peso and the Philippine Stock Exchange index (PSEi) down in recent days, some observers rang alarm bells over foreign fund outflows as surveys showed tough-talking Davao City Mayor Rodrigo Duterte, who has vague economic plans, leading the presidential polls.

But if volatility or how wide are the swings or changes are considered, data showed the local bourse and currency are not only moving in tandem with their regional counterparts now, they also follow a generally risk averse trend common during looming change in government.

“It will be very hard to point out what exactly influences the market,” said Emilio Neri Jr., lead economist at Bank of the Philippine Islands.

From Jan.1 to April 26 this year, the peso added 0.12 percent on a normalized basis against the dollar. It closed at 99.9168 last Tuesday, according to data culled from Bloomberg.

At that level, the local currency was weaker than its counterparts in Southeast Asia. On that same day, the Indonesian rupiah closed 95.8143, Malaysian ringgit at 91.4336 and Thai baht at 97.6833. 

The base mark is 100 with movement up signaling weakness, while a downward adjustment means strength. While these currencies ended up stronger than the peso, data also showed that it was the least volatile among the four from January to April.

For economists, the fact that other regional currencies also weakened, more so at a higher magnitude, is a sign the Philippines remains on the investor map.

“Emerging markets are all weakening and it is due to global developments,” Neri said.

“At some point, we are better because we are not that volatile. We do not want a volatile currency. That’s why the BSP (Bangko Sentral ng Pilipinas) intervenes from time to time to smoothen its movements. Otherwise, it could be damaging to businesses,” he added

Remrick Patagan, research director at the Institute for Development and Econometric Analysis Inc., said exchange rates are “inherently unpredictable” affected by many factors.

“While players might have a better grasp of market sentiments, disentangling the effects of shocks (or news) on sentiments and, in turn, the effects of those sentiments on foreign exchange markets is extremely problematic,” he said in an e-mail.

This may include sentiments on news here and and abroad. For instance, when recent news of Duterte leading the surveys came, the US Federal Reserve signaled and eventually kept interest rates low just as the government reported two-year low economic growth.

Elsewhere, the Bank of Japan also kept interest rates low as well as its by ¥80 billion credit program that aims to flood its economy with money to boost prices and gross domestic product.

For Jonathan Ravelas, chief market strategist at BDO Unibank Inc., there were a “combination of factors” that drove the peso to end the week down at 46.89 to a dollar last Friday.

“The dollar was oversold and then there were heightened expectations from the Fed as well as renewed China concerns,” he said in an e-mail.

To put into context, a slowing China, magnified by reports of missed corporate quarterly earnings and deflation worries, prompted some investors to leave emerging markets such as the Philippines.

In the same way, positive news from the US could lure them back to the world’s safe haven giving the greenback a boost and weakening its counterparts in developing countries. 

Previous elections

Interestingly, the peso had shown wild fluctuations in the run-up to the 2010 elections than in 2016, data showed.

While it ended trading stronger at 96.7826 on April 30, 2010, the currency moved from over 100 level until early March before strengthening its way to that level until April.

Similar to 2016, it also traded weaker than some of its counterparts such as rupiah (95.8205) and ringgit (92.9848) by the end of April. It only performed better than the baht (97.1636) that day.

The PSEi, on the other hand, remained up 4.77 percent since the start of the year to close at 7,159.29 last Friday. That was slower than the 9.49-percent increase during the same period in 2010.

The fact that it remains up, no matter by how much, indicates investors see the economy’s strength intact, Neri said.

“The economy will continue to perform well because you have a very healthy consumption base driven by overseas Filipino remittances,” he added.

While analysts asked by The STAR refrained from stating political opinions, an earlier report by think tank GlobalSourcePartners provided a glimpse of how investors would react to the poll results.

Fund managers they asked seemed to favor a win by administration bet Manuel Roxas II and will “buy” more local equities. On the other hand, views are mixed for a win by Vice President Jejomar Binay and Sen. Grace Poe.