After months of soured risk sentiment due to heightened uncertainty surrounding the recent debt ceiling impasse, investors now cheer the Senate approval of a deal that will steer the US away from another grave risk of a default until January 2025.

At the height of the political gridlock, the yield on the US T-bill maturing on June 6 peaked at 6.79%–much higher than the later-dated bill maturing on July 27, which hovered at 5.17% in the same day. This is as investors grew reluctant to hold bills dated near the June 5 deadline, lest the US fails to come to an agreement on time.

Since the bipartisan deal passed the US House of Representatives, the pricing distortion in the US T-bill yield curve corrected (Chart 1).

Inflation further eased to 6.1% in May (from 6.6% in April), driven by the decline in transport, food and non-alcoholic beverages, and room and accommodation prices. This is in line with BusinessWorld’s median analyst estimate, as well as our forecast of 6.1%.

Given this, we retained our full year 2023 average inflation forecast of 6.0%, but revised the 2024 estimate downwards to 4.5% (from 4.5%-5.5%).

Check out our latest inflation report and outlook for further details.

Metrobank expects a continued easing in the year-on-year Consumer Price Index (CPI) inflation rate, potentially settling at 6.1% in May 2023 from 6.6% in April. This forecasted print falls within the Bangko Sentral ng Pilipinas’ (BSP) range of 5.8% to 6.6%, driven by the continued decline in the prices of fuel and select food commodities. Should this materialize, the BSP may take a step back in hiking interest rates in its upcoming Monetary Board meeting on June 22, keeping the benchmark rate at 6.25%.

The official May 2023 Inflation print will be out tomorrow, June 6, 2023, at 9:00 AM.

See our May pre-inflation print report for further details.

Concerns about the commercial real estate (CRE) sector moved to the forefront following the fall of Silicon Valley Bank (SVB) and the mini banking crisis that ensued thereafter.

Why? Well, the work-from-home arrangements that led to high vacancies raised questions about the future of US office space. One of the scarier numbers being thrown around is the amount of CRE debt that needs to be refinanced over the immediate term, with the most common refrain citing USD 1.5 trillion maturing over the next three years.

Smaller US banks remain meaningful players in commercial real estate lending. Banks with less than USD 5 billion in assets still comprise about 30% of holdings, with another 21% held by banks with USD 5-25 billion in assets.

Are CRE concerns valid?

Despite the seemingly dire numbers, we believe the CRE concerns are overblown.

As our research partner, CreditSights, has reported, banks do not normally participate in fixed-rate lending for CRE, as around 81% of CRE loans under the coverage of CreditSights have variable interest rates. This lessens the risk of unexpected price adjustments when the loan matures.

Moreover, longer-term trends indicate that CRE loan exposures as a percentage of the banking system’s tangible equity are still at multi-decade lows, much lower than what we saw before the economic downturns in the late 1980s and mid-2000s, indicating that banks are not taking on too much risk in the CRE sector.

Ratios to take note of

The ratio of outstanding commercial mortgages to GDP can be a proxy for CRE demand. The historical behavior of this measure shows that during financial crises, the ratio considerably deviated from its long-term trend.

What is interesting is that there has not been a surge in debt levels that would lead to a significant deviation for more than 10 years. The brief spike in 2020 stemmed from the COVID-19 pandemic, but generally, there has not been a persistent trend of heightened borrowing.

When comparing bank lending for CRE to the Commercial Property Price Index, which reflects asset valuations, we observe that valuations have outpaced loan growth since the financial crisis. This suggests that there is a more careful and balanced approach to leverage and loan-to-value (LTV) ratios in the CRE market.

Better prospects this time around

Banks have substantially scaled back their lending for construction and development projects since the 2008 crisis. These loans have not significantly increased since then. Note that these development loans had high default rates compared to other types of CRE loans and were a major driver behind the losses that banks sustained during the financial crisis.

While construction lending has been relatively flat since 2017, stabilized CRE lending, or loans for CRE properties that are already operating and generating consistent income, has been gradually growing, slightly exceeding the growth of total bank lending.

The sector that attained significant expansion is multifamily properties, such as apartments. Note that multifamily lending is reinforced by strong demand, particularly because people need shelter and these multifamily properties are a necessity, combined with other factors such as affordability.

Dismantling concerns

Banks’ exposure to office properties is relatively minor compared to their total loan portfolios. Banks also have strong reserve levels, and they hold senior positions in the capital structures of these properties, which diminishes possible risks.

It is important to note that larger national banks usually have a bigger share of lending in industrial and office assets, while smaller banks play a more prominent role in lending in the retail and hotel markets.

Hence, recent concerns about office assets should not be taken to reflect the overall health of the broader CRE market.

Moreover, banks only have a limited amount of non-agency Commercial Mortgage-backed Securities, or CMBS securities, which are higher-risk securities with no government backing, in their holdings. This further reduces their exposure to potential risks.

Although smaller US banks have significant exposure to CRE lending, they also tend to be more biased toward lower-risk owner-occupied CRE loans, making up 40-50% of holdings for banks with assets of less than USD 5 billion.

Recent concerns about the CRE sector seem exaggerated, as there has been a significant decrease in banks’ exposure to higher-risk construction and development loans, a relatively low level of leverage in the CRE market, and other changes in the banks’ overall CRE lending approach.

The total CRE market has been more stable compared to past periods of financial crises, indicating that banks are in a much better position now to handle potential risks.

Challenges and opportunities

While we believe the CRE risk is not systemic, challenges remain for the smallest banks amid tight lending conditions and high interest rates. Despite the disconnect with market pricing, the US Federal Reserve has explicitly stated it does not expect policy rate cuts this year to deal with recessionary risks, namely, the looming credit crunch, the debt ceiling standoff, and the climate hazard from El Niño.

Thus, in a risk-off environment, there are opportunities in the fixed-income market as we think the Fed has reached the peak of its tightening cycle. Capital gains can be realized when the real pivot, i.e., policy rate cut, takes place.

The perceived economic uncertainty warrants a preference for high-quality assets like government securities and investment grade (IG) credits over equities. A new easing cycle on the horizon, granted that inflationary pressures ease, could then present opportunities for the equities market.

For now, it is prudent to be conservative and switch to higher-yielding assets as inflation remains elevated, and wait until the US Fed and the Bangko Sentral ng Pilipinas see a compelling reason to cut interest rates.

ANNA ISABELLE “BEA” LEJANO  is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.

Just as the country is nearing the end of summer days and saying hello to cooler months, dry spells and droughts are seen looming in some areas of the Philippines due to El Niño.

According to PAGASA, recent conditions and model forecasts indicate an 80% probability of an El Niño occurring within June to August. This is seen to persist until the first quarter of 2024.

El Niño is caused by the warming of the sea surface temperature in the Pacific that can affect air and sea currents. This then results in reduced rainfall which could lead to droughts and stronger typhoons later.

Why should we be concerned?

While not a new phenomenon in the Philippines, the past El Niños have resulted in dips in agricultural production, whether weak or strong.

The last El Niño to hit the Philippines was the one in 2015-2016, which lasted for approximately 18 months. According to the Food and Agriculture Organization (FAO), 1.48 million metric tons of crops, including rice, corn, cassava, banana, and rubber were lost, resulting in a total of USD 325 million worth of damage and production losses. This also affected 413,456 farming households which needed support to start anew in the next cropping season.

Hot sea water temperatures in the 2015-2016 El Niño also led to a decline in fisheries production, particularly in the aquaculture sector. Mindanao also had power supply shortages because the operations of hydroelectric dams were hampered by low water levels.

Rice and corn production typically suffers during El Niño episodes. Source: PSA, World Bank Report

El Niño typically occurs every two to seven years, with La Niña and neutral conditions in between. Based on records, the world’s hottest year so far was 2016, and there is a high possibility of reaching new record high temperatures in 2023, according to climate analysts.

What now?

The looming El Niño will likely hit corn and rice’s main cropping seasons and subsequent harvest seasons.

El Niño, which is expected to be felt in the country from July 2023 to March 2024, could hit corn and rice production at their critical months. Source: USDA

While importing might be the easy solution, major rice producing countries are most likely to face similar challenges. For instance, Thailand, the world’s second-biggest rice exporter, is considering reducing its cropping season to just one instead of the usual two seasons this year due to the feared impacts of El Niño.

Food inflation, while moderating, remains elevated, and a shortfall in rice or agricultural production in general might prompt a new round of price increases.

Strategies have been laid down to mitigate the impacts of the looming El Niño with high priority given to water supply infrastructure and early water and power conservation efforts. This, it is hoped, could alleviate production dips, and help the country endure the heat.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

The Intergovernmental Panel on Climate Change (IPCC) Six Assessment Report does not give a pretty picture of where humanity is going in its climate change actions.

The report says the world is on its way to irreversible global warming. This, in turn, is causing many weather and climate extremes, which are felt as powerful storms, heavy rains, and severe heat waves in different parts of the world.

The report stressed that governments have a key role to play. The costs, however, are steep, and agreeing on the same policies and technology standards is tricky.

If governments are unable to meet halfway to combat climate change, the hope is still for the private sector to step up and even lead in pushing for climate change adaptation investments.

Capital markets as key driver

Speaking at the recent Wealth Matters webinar held by Metrobank, Fred Wood, director and product strategist of Blackrock investments, said that it is capital markets that should drive change towards climate investments, especially in energy transition.

Wood said that climate investments have been steadily increasing over the last few years, primarily as a reaction to the effects of weather extremes on the overall supply chain. Energy is a major sector that needs to transition.

A continuous and reliable source of electricity is what fuels key industries worldwide, from manufacturing to logistics. Yet it is one of the biggest sources of carbon dioxide, which makes up a large part of the greenhouse gases that cause global warming.

Costly transition

“Energy transition is going to involve an enormous amount of investment, material, and cause a lot of disruptions in many industries. We’re still making more carbon each year, and the challenge we face is quite considerable. But there are lots of opportunities,” Wood said.

According to Wood, sustainable energy sources, such as wind and solar, are gradually becoming more appealing as investment opportunities. The prices of wind turbines and solar panels are coming down, enabling mass production of such equipment and its subsequent adoption. Companies that are involved in the manufacturing of wind and solar-based energy facilities are most likely to achieve more growth as institutional investors favor them over fossil fuel-based industries.

And because of growing public sentiment and growing government concerns about energy security, policies in many economies are making it easier for renewable energy projects to get their permits to start building. Sometimes it’s faster than even getting nuclear power plants started.

Fast deployment

“It takes 10 to 15 years to plan and start building a nuclear power plant in Europe. Solar farms only take months, permitting issues notwithstanding,” he said.

Answering the question on political and regulatory disagreements over what to do to curb pollution by two of the world’s biggest sources of greenhouse gases, the US and China, Wood said that companies coming from these two superpower economies are gradually adapting by including sustainability sections into their corporate reports.

For Wood, it makes good and sound business sense to add sustainability reports that mark up the value of companies’ efforts.

“I think regardless of what the regulatory environment is in these companies, they’re all changing. It’s the investors who are making it happen and the companies are being rewarded,” Wood said.

Need to move fast

Indeed, climate investments are at a critical juncture, as demand is also being driven by the ongoing conflict between Ukraine and Russia. The latter’s oil pipelines were turned off, which has also forced some European countries that were once dependent on Russian oil to look for other sources. The effect is also that these countries are actively investing to transition to renewables, as forecasted by research firm McKinsey.

But there is still a need to further mobilize more private investments. In an article by the World Bank, of the estimated USD 30 billion spent on climate adaptation measures as of 2018, only USD 500 million — roughly 1.6% — came from private sector investments.

It is hoped that with the effects of climate change already pushing economies around the world to adapt quickly, the decision to fast-track climate investments will be expedited before it is too late.

ALEXANDER VILLAFANIA is a writer for Metrobank’s Wealth Insights. For almost 20 years, he authored stories on science, technology, and education as a journalist for several local news organizations. He has since transitioned to writing more about financial literacy, believing that helping people develop a healthy relationship with money is key to enabling positive socio-economic and environmental change.

The Bangko ng Sentral ng Pilipinas (BSP) kept the policy rate unchanged at 6.25%, after around a year of rate increases. This was attributed to easing inflation, as the inflation print slowed to 6.6% in April from 7.6% in March.

The BSP likewise revised its full-year average inflation forecast downward for both 2023 and 2024, as it estimates inflation to slow further and reach the target band of 2-4% by yearend.

We project the RRP rate to stay at the 6.25% level for the rest of the year, with a potential cut by year-end to 6.0% due to the projected downward trajectory of inflation.

Please see our report here for more information on meeting updates and our outlook.

The Bangko Sentral ng Pilipinas (BSP) Monetary Board is set to determine anew the policy rate direction for the Philippines tomorrow, May 18. Given the satisfactory March and April inflation outturn which BSP earlier noted would be the basis for tomorrow’s policy rate decision, the latest deceleration makes a stronger case for a pause in the policy rate hikes. This is consistent with BSP’s signals in the past weeks.

See our full report for more details.

The Philippine economy expanded by 6.4% year-on-year in the 1st quarter of 2023, faster than the 6.1% median analyst poll forecast and still within the government’s full-year target of 6%-7%. While a softer landing versus last year, the country still posted faster growth in the 1st quarter vs major emerging economies, indicating that the Philippines’ growth is normalizing back to its pre-pandemic trajectory as economic activity fully resumed.

Challenges, however, still remain amid still-elevated inflation, high interest rates, a looming El Niño, and a weaker global demand. Nonetheless, the Philippines is still expected to experience robust growth in 2023, with full year GDP growth expansion seen to settle at 6% at the lower end of the government’s target range of 6%-7%.

For more information, please see our full report.

Most economies bank on the tourism industry to propel local economic activity. After being locked down for nearly two years, travel has been up and running globally.

However, high inflation and high interest rate spur worries that these may constrict spending on travel and discourage tourists from splurging. As of end-2022, global tourism has recovered but is still at approximately 20% below 2019 levels.

Thus, one may ask, is revenge travel over? Let’s look at the numbers.

Rising air passenger traffic

According to the International Air Transport Association (IATA), global air passenger traffic declined by 66% in 2020 versus 2019 as countries closed borders due to COVID-19. However, 2023 data bring good news as IATA announced a strong demand growth in air travel for March 2023 as it did in January and February.

More and more people are travelling every year. (Source: IATA)

Total air travel traffic in March 2023 (measured in revenue passenger kilometers or RPKs) rose by 52.4% versus March 2022 and is already 88.0% of March 2019 levels. RPK is simply the number of revenue passengers multiplied by the number of kilometers flown. Thus, looking at the RPK growth, there is firm evidence of strong demand for air travel market-wide, with Asia Pacific travelers topping the growth chart.

PH tourism in numbers

The tourism industry is an important catalyst for growth in the Philippines. In our past article, we highlighted this sector’s contribution to the country’s Gross Domestic Product which captured a 12.9% share of GDP in 2019. It drastically went down to 5.1% and 5.2% in 2020 and 2021, respectively.

We see a resurgent tourism industry in the Philippines. (Source: Department of Tourism; *excluding OFW arrivals)

Currently, the Philippines is still short in terms of its 2019 performance relative to tourist arrivals. However, it has certainly gained much more momentum than last year. The Philippines documented 1.7 million international tourists from January to April this year, which almost nearly reached the international tourist arrivals totaling 2 million in 2022 (excluding OFW arrivals) based on the Department of Tourism (DOT) data.

Tourist arrivals from China have also multiplied since its reopening, and so does the rest of the Philippines’ top visitors in 2019.

No signs of fatigue just yet

Despite moderate spending worries, the two largest payment card network processors have reported spikes in 1st quarter revenues attributed to a boost in travel spending. Mastercard Inc. and Visa Inc. saw that spending growth on their cards accelerated in the first three months of the year as cross-border travel continued to rebound.

Just recently, the World Health Organization (WHO) announced that COVID is no longer a public health emergency of international concern. This could spur further cross-border travel in the months to come and boost the Philippine economy.

So, is revenge travel over? The numbers are clear and the answer is – not yet.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.