Days before the US election, Philam Asset Management, Inc. (PAMI) takes a look at the possible outcomes and local economic effect, if bold presidential candidate Donald John Trump of the Republican Party secures one of the most powerful seats in the world. It is understood that politics is one of the three key variables in for next year’s growth and inflation. The recent electoral episodes has since introduced volatility over on the American economy.
A quick background, Trump announced his candidacy for president of the United States of America (USA) in June of 2015. He quickly emerged as a front-runner for his party’s nomination. On May of 2016, Trump’s remaining Republican rivals choose to suspend their campaigns leading to July, where he was formally nominated for US President at the 2016 National Convention. Despite the combination of the numerous protests, accusations, unprecedented media coverage, and international attention brought about by his controversial statements, Trump remains at a close inch on the polls after democratic presidential candidate, Hillary Clinton.
Following the race trail, we take a look at what Trump’s possible win will mean to the Philippine economy.
Economic experts are bleak on Trump’s potential gain
370 prominent economist call Trump the dangerous and destructive choice for America in a notable letter sent October 31, 2016. With a diverse collection of views on policy issues, this set of Nobel Laureates for Economics have joined to express that their clear and superior choice is the Democratic presidential candidate, Hillary Clinton.
Trump proposes an incoherent economic agenda. The letter continues to disapprove of his platform by stating “His reckless threats to start trade wars with several of our largest trading partners, his plan to deport millions of immigrants, his trillions of dollars of unfunded tax cuts, his casual suggestion that the United States could threaten default on its debt in order to renegotiate with our creditors as if Treasuries were a junk bond—each of these proposals could jeopardize the foundation of American prosperity and the global economy.”
These statements run true and likely for the American economy. Although, this is not a leading deterrent in the present Philippine economic growth.
Local economic growth will slow, if Trump is truthful to his rhetoric
Despite the dwelling possible downturn, the Philippine economy is not dependent on trade for growth. However, its dependence on the United States as a source of capital or wealth cannot be overestimated.
According to a study by the Asian Development Bank (ADB) in 2009, “As one of the world’s largest recipients of remittances, the Philippines received remittances roughly 12% of its gross domestic product in 2008. “ Remittances have grown to become the single most important source of foreign exchange to the local economy. About four-fifths of overseas Filipinos personal remittances to the Philippines come from (or are reported by correspondent banks/money transfer operators with head offices in) the United States. In the last twelve months, remittances recorded 26.38 billion U.S. dollars – or 4.58 billion U.S. dollars more than the country’s external trade deficit. Remittances “bankroll” the local economy’s need to import.
Approximately three-fourths of the country’s export of business process outsourcing services cater to U.S.-based companies. This year, the Information Technology-Business Process Outsourcing industry expects revenues to grow to 25 billion U.S. dollars.
A Trump win will not reverse the inflow of remittances or BPO revenues, but economic incentives to hire local labour and attract U.S. companies back to the United States will restrain their growth.
Will the local stock market fall
Local stock prices have already fallen, promptly. Clinton’s lead over Trump has been narrowing since mid-October, during which time, the benchmark PCOMP Index fell – from the recent high of 7,721 (19 October) to 7,227 (4 November) – by more than 6%!
The anxiety of sellers of Philippine stocks has been understandable. The value or theoretical price of a stock is based on the present value, and, importantly, the certainty of the cash flows that the company generates year after year. If the stability of the operating environment is jeopardized or exposed to risk, shareholders will fret – this is the situation that the local market finds itself today.
The increase in the compensation or return that investors are demanding from owning and bearing the risk of Philippine equity has resulted in a theoretical price of PCOMP Index that, we think, will be no higher than today’s price for a period of more than a year. (If local interest rates or the cost of borrowing money does not rise, the wait will be much shorter.)
Reality and opportunities
The looming assessments should keep investors aware and quick to act. Investors should have a longstanding outlook and keep steady with their decisions. PAMI encourages to buy into the market weakness. Long-term investors who have remained faithful to the resiliency of the Philippine economy will be rewarded again.