High levels of liquidity and continued solid growth in the domestic economy are feeding into the Philippines’ retail sector, with sales rising on a tide of improving consumer sentiment. However, the central bank could move to take some of the heat out of the market in an effort to counter the creeping inflation fuelled by supply side pressures.
According to the latest Bangko Sentral ng Pilipinas (BSP) consumer expectations survey released in mid-June, the confidence index rose 1.5 points in the second quarter. Although the index was still in negative territory (-17%), the figure suggests that shoppers will be more willing to make purchases.
A number of factors contributed to the rise. According to Rosabel B. Guerrero, director of the BSP’s Department of Economic Statistics, “Respondents attributed their more favourable outlook to the availability of jobs as well as an increase in the number of employed family members, increasing family income due to higher salary, strong business activity and better harvest.”
Also supporting retail spending was the rise in remittances from Filipinos overseas. Cash transfers from workers abroad rose 5.2% in April, to $1.9bn for the month, according to data issued by the BSP on June 16, taking the January to April total to $7.4bn. The bank has forecast that 2014 remittances will break last year’s record of about $23bn by 5%, making more funds available for consumer outlays.
Rate rise could cool sales
Growing consumer demand, while supporting sales, is also driving inflation. Price increases reached a two-and-a-half-year high in May, rising to 4.5% year-on-year from 4.1% in April, with bubbling consumer demand cited as one factor stoking inflationary fires. The May figure was near the top end of the BSP’s forecast of 3.9-4.7%
The steady rise in consumer inflation could prompt the BSP to raise its key rates at least once before the end of the year. This could put a brake on retail spending, particularly the component funded by bank credit, and also reduce the disposable incomes of consumers who have other loans outstanding. The bank has already moved to drain some of the liquidity out of the financial markets, raising the reserve requirement ratios for universal, commercial and thrift banks by 1% at the end of May, thus reducing the amounts available for lending.
Retail growth outside the capital
A recent report by global bank HSBC highlighted strong growth in the Philippines retail sector, bolstered by solid domestic consumption and buoyant consumer sentiment amid a weakening environment for equities. “Modern retail formats like convenience stores and hypermarkets that are growing from a low base have substantial multi-year growth potential,” said Herald van der Linde, the report’s author and HSBC’s head of equity strategy for the Asia Pacific region.
Retail mall development is also expected to grow in the coming years, spurred by rising demand and the low starting point to which van der Linde refers. The Philippines had 13m sq metres of retail space in shopping malls at the beginning of 2014, more than half concentrated in Metro Manila, according to a report in May by international real estate firm Jones Lang LaSalle. But as new projects go up in and around the capital, regional mall space is expected to draw level with that in Manila by 2015, with a total of 1.4m sq metres of retail space to be added, the result of ramped up building development and growing demand in provincial areas.
Regions such as Cebu, Davao, Cavite and Pampanga have lower per capita retail floor space than Manila, hence there are positive investment opportunities for developers and retailers outside the capital, as rising wages and disposable incomes translate into sales potential.
With many analysts forecasting the Philippines economy to maintain growth of 6% or more this year, with similar growth in 2015, prospects should remain bright for the country’s retailers, despite a possible tightening of monetary policy from the BSP.