Philippine Bonds Too Expensive for Julius Baer: Southeast Asia

Philippine dollar bonds, the best performing in Asia over the past year, are expensive compared with higher-rated debt from Persian Gulf nations, according to Bank Julius Baer & Co. Ltd.

The securities have returned 16.5 percent in the past 12 months, an HSBC Holdings Plc index shows, amid speculation the Southeast Asian nation will win investment-grade credit ratings. The yield on the Philippines’ 4 percent notes due January 2021 rose four basis points to 2.72 percent as of 4 p.m. in Manila, compared with 3.01 percent for Qatar’s 4.5 percent dollar bonds due January 2022, according to prices compiled by Bloomberg. Qatar is ranked nine levels higher than the Philippines by Moody’s Investors Service.

“Philippine sovereign dollar bonds look rich to us,” Neo Teng Hwee, the head of portfolio management for Singapore at the Swiss wealth manager, which oversees more than 179 billion Swiss francs ($184 billion), said in an interview yesterday. “On a rating-adjusted basis notes from the Gulf Cooperation Council countries look relatively attractive.”

Near-zero interest rates in advanced economies have prompted global funds to seek high yields in developing nations. Emerging-market debt funds attracted $19.1 billion this year through Aug. 9, compared with $7.9 billion for the whole of 2011, according to Morgan Stanley, citing data from U.S. research firm EPFR Global. The yield premium on Philippines’ dollar notes over Treasuries reached 155 basis points on Aug. 9, the least since July 2011, according to an index compiled by JPMorgan Chase & Co.

Remittances Rising

The GCC comprises Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait. The average yield on GCC bonds, including sovereign and corporate securities, was 3.86 percent yesterday, according to the HSBC/Nasdaq Dubai GCC Conventional US Dollar Bond Index.

Standard & Poor’s raised the Philippines debt rating to BB+, one step below investment grade, in July, citing the strong external position and growth prospects. Moody’s Investors Service, which still ranks the $225 billion economy at the second-highest junk level, boosted its outlook to positive in May, while Fitch Ratings raised its assessment to one step below investment grade last year. Barclays Plc said last month it would take the Philippines 12 to 18 months to become investment grade.

Money sent home by the more than 9.4 million Filipinos living abroad rose 5.1 percent in the first half of 2012 from a year earlier, official data released today show. Remittances, which make up about 10 percent of the economy, increased 4.2 percent in June from a year earlier. Bangko Sentral ng Pilipinas Governor Amando Tetangco said yesterday a 5 percent growth forecast for remittances this year is “realistic” despite the global slowdown.

‘Structurally Expensive’

Philippine dollar bonds rallied 4.4 percent in July, the most since August 2010, as the increasing amount of money sent home by overseas workers prompted local banks to invest in the notes, making them “structurally expensive,” Neo said.

Gross domestic product increased 6.4 percent in the first quarter from a year earlier, the most among Southeast Asia’s five biggest economies. The peso has strengthened 3.7 percent this year, the second-biggest gainer among Asia’s 11 most-traded currencies after the Singapore dollar, as foreign funds pumped a net $2.2 billion into the nation’s stocks, exchange data show. President Benigno Aquino increased state spending to a record in 2012 to help achieve a 6 percent expansion target this year and 7 percent in 2013.

Export growth slowed to 4.2 percent in June from a year earlier, following a 19.7 percent increase the previous month, official data show. A slowdown in China’s economy may hurt overseas sales, which have recovered this year after dropping in each of the eight months through December 2011, central bank Governor Tetangco said yesterday. China is the Philippines’ third-largest export market after Japan and the U.S.

U.S. Monetary Easing

Credit Agricole CIB recommended that clients sell the Philippine peso against Malaysia’s ringgit, given the peso’s “excessive outperformance” and weakening fundamentals, according to a research note written by Hong Kong-based strategists Mitul Kotecha and Dariusz Kowalczyk. Equity inflows, a key driver of this year’s appreciation of the peso, may end or at least slow, according to the note released today.

The government plans to narrow the budget deficit to 2 percent of GDP by 2013 from a target of 2.6 percent this year. The Philippines plans to repurchase “high-coupon” dollar- denominated bonds to rein in costs, Finance Undersecretary Rosalia de Leon said on June 1.

Federal Reserve Bank of San Francisco President John Williams said the central bank should begin a third round of bond purchases amid signs U.S. growth is slowing, the San Francisco Chronicle reported on Aug. 10. Speculation the U.S. will ease monetary policy should support Philippine debt, said Smith Chua, a Manila-based portfolio manager at Bank of the Philippine Islands, which oversees more than 700 billion pesos ($16.6 billion).

Shift Funds

“Investors are looking for alternatives that are safe but have a higher yield, which leads you to the Philippines,” said Chua. The plan to buy back the dollar debt, which may take place in the next few months, could drive the price of Philippine dollar notes higher because of their “scarcity value,” he said.

Credit-default swaps on five-year Philippine government debt dropped 57 basis points this year to 135 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value in exchange for the underlying securities should the issuer fail to adhere to debt agreements. A basis point equals $1,000 annually in a contract protecting $10 million of debt.

“Philippine dollar debt has been particularly attractive due to its improving credit, making it a bit expensive,” Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co. that oversees about $43 billion, said in an interview yesterday. “It’s quite possible some investors will shift funds to other countries or to corporate bonds.”

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net.

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