The Philippine peso has gone from first to worst in Southeast Asia as a court ruling declaring parts of a government stimulus program unconstitutional threatened to choke spending and slow economic growth.
The peso advanced 0.2 percent this month, compared with a 1.4 percent jump in the Indonesian rupiah and a 0.8 percent gain in the Malaysian ringgit, after the July 1 Supreme Court ruling that provisions of the $3.3 billion Disbursement Acceleration Program were illegal. The currency led the region with a 2.7 percent rally last quarter as the nation got a credit-rating upgrade from Standard & Poor’s.
President Benigno Aquino said in a July 15 speech that the decision, which stops the government from funding projects outside of the budget, would have a “chilling effect” on the economy as it removes the flexibility to meet changing conditions. Gross domestic product increased 5.7 percent in the first three months from a year earlier, slowing for a third quarter from last year’s peak of 7.9 percent.
“The most direct hit would be the Philippines’ sovereign assessment in the absence of a strong capital-expenditure cycle to sustain GDP growth,” Anthony Chan, Asia sovereign strategist in Hong Kong at AllianceBernstein L.P., which oversees $480 billion globally, said in a July 16 e-mail interview. “The next would be peso negative but local-bond positive if growth and inflation slow.”
Aquino, who is prohibited from running for the presidency again when his six-year term ends in 2016, has seen his popularity rating fall to record lows this week. His administration is targeting 404 billion pesos ($9.3 billion) of infrastructure projects this year, twice the amount it spent in 2011, Public Works Secretary Rogelio Singson said in May. Annual spending should double by 2016, he said.
The Supreme Court ruled the executive branch violated the separation of powers under the constitution by transferring its savings from other projects to the DAP, and by funding spending outside the General Appropriations Act. Aquino said the government would appeal.
“This decision seems to indicate that President Aquino has lost his grip a bit, but not enough to threaten the stability in political, economic and fiscal conditions he has built,” Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which oversees about $36 billion, said in a July 16 phone interview.
S&P raised the nation’s rating to its second-lowest investment grade on May 8, saying in a statement that it believed reforms to address structural, administrative, institutional and governance shortcomings would endure beyond the current government. It was the fourth upgrade from S&P since Aquino took power. Moody’s Investors Service and Fitch Ratings assign the country their lowest non-junk rankings.
Moody’s is “taking a closer look,” as the judicial ruling may hurt economic growth, while showing there is rule of law, Christian de Guzman, vice president in Singapore, said in a July 15 phone interview.
The peso has strengthened 1.9 percent to 43.565 per dollar this year, according to prices from Tullett Prebon Plc. That compares with gains of 4.1 percent in Indonesia’s rupiah, 2.8 percent in Malaysia’s ringgit and 1.6 percent in Thailand’s baht. The Philippine currency is the most expensive of the four in inflation and trade-weighted terms, an index compiled by the Bank of International Settlements show.
The peso will weaken 0.5 percent to 43.8 per dollar by year-end, according to the median estimate of 25 analysts surveyed by Bloomberg. The political impasse will turn the currency into a laggard, as it already faces adversity from high valuations, Tamara Henderson, an economist at Bloomberg LP in Singapore, wrote in a report yesterday.
Interest-rate increases may buoy demand for Philippine sovereign bonds, providing some support to the peso. Eleven of 12 analysts surveyed by Bloomberg predict Bangko Sentral ng Pilipinas will boost its overnight borrowing rate by at least 25 basis points this year from a record low 3.5 percent.
The yield on the nation’s benchmark 10-year notes rose 43 basis points in 2014 to 4.23 percent. That compares with a decline of 21 basis points to 3.90 percent for Malaysian securities and a 14 point drop to 3.79 percent in Thailand.
The court decision doesn’t appear to have affected the cost of insuring Philippine bonds against non-payment. Five-year credit-default swaps on the nation’s debt were little changed at 89 this month, according to CMA. Similar contracts on Malaysian notes slipped one basis point, or 0.01 percentage point, to 84.
“The ruling doesn’t deter us from investing in the Philippines,” Mark Capstick, a London-based portfolio manager at BNP Paribas Investment Partners, which oversees 488 billion euros ($660 billion), said in a July 15 e-mail interview. “We think the ruling may cause the government to step up its efforts in fighting corruption in a bid to save some face.”
The Philippines improved its ranking in Transparency International’s corruption perceptions index to 94 of 178 nations last year, from 134 in 2010. The court ruling has damaged President Aquino’s “teflon-like popularity” and could create cracks in his coalition, Ramon Casiple, executive director of the Institute for Political and Electoral Reform in Manila, said in a July 14 interview.
The Philippines’ economy will expand 6.3 percent in 2014, compared with 7.2 percent last year, according to the median estimate of 23 analysts surveyed by Bloomberg.
“The prospect of slower fiscal spending weighs on the GDP growth outlook in the near term,” Gundy Cahyadi, an economist in Singapore at DBS Group Holdings Ltd., said in a July 16 interview. “If this issue blows out, then there’s going to be a lot more negativity dragging on the peso.”
To contact the reporter on this story: Lilian Karunungan in Singapore at email@example.com