Philippine bond risk has climbed above Malaysia’s by the most in eight months, a sign investors are souring on the nation just as it seeks a higher debt rating.
The cost to insure Philippine bonds against non-payment using credit-default swaps has risen 12 basis points from this year’s low on June 10 to 92 as inflation accelerated to the fastest since 2011 and a court ruling blocked government spending plans, according to CMA. That’s eight basis points higher than Malaysia, which despite being rated three levels above the Philippines by Moody’s Investors Service had a higher risk for most of the second half of 2013.
Moody’s, which upgraded the Philippines three times since President Benigno Aquino took power in 2010, finishes its annual review of the country’s ranking this week after the Supreme Court last month struck down parts of a state stimulus program. A “strong case” for an upgrade remains because of a discrepancy between the rating and the market, central bank Governor Amando Tetangco said in an Aug. 13 interview in Manila.
“The Philippines has gone through multiple ratings upgrades and beyond a certain point you start hitting barriers,” Rahul Bajoria, a Singapore-based economist at Barclays Plc, said in a Aug. 13 phone interview. “Philippine credit has been trading on the expensive side for quite some time. A little bit of a price reversal is not surprising.”
Low incomes and the prospect of increased turmoil in the Middle East reducing remittances from overseas Filipinos are among the obstacles, Bajoria said. The Philippines has a gross domestic product per capita of $2,765, compared with $10,514 for Malaysia, according to 2013 data from the World Bank.
Inflation quickened to 4.9 percent in July, helping push the real yield on the country’s 10-year debt to minus 0.58 percent yesterday. That compares with 0.61 percent for Malaysia and 1.5 percent for Thailand. Philippine local-currency notes have declined 0.4 percent in the past month, the worst performance in Asia, according to indexes compiled by Bloomberg. The peso is steady at 43.67 per dollar this quarter, the only major Southeast Asian currency not to post gains.
Standard & Poor’s boosted its rating on Philippine sovereign debt to BBB, its second-lowest investment grade, on May 8. That was the fourth upgrade from the company since 2010. Moody’s and Fitch Ratings Ltd. rank the country at their lowest investment-grade levels.
Moody’s, which has a positive outlook on its rating, is concerned about whether the Supreme Court ruling will hurt government spending and if reforms can continue when Aquino’s term expires in 2016, Philippine Budget Secretary Butch Abad told reporters in Manila on Aug. 13. Moody’s didn’t respond to an e-mail seeking comment.
Economic growth was 5.7 percent in the first quarter from a year earlier, compared with 6.3 percent in final three months of 2013 and 7 percent or higher in each of the previous five quarters. Bangko Sentral ng Pilipinas raised its benchmark rate by 25 basis points to 3.75 percent on July 31, the first increase in more than three years, and will lift it to at least 4 percent by the end of the year, according to seven of 11 analysts surveyed by Bloomberg.
The World Bank cut its expansion forecast for the Asian nation last week, citing weaker government spending and tighter monetary policy. GDP will increase 6.4 percent this year and 6.7 percent in 2015, compared with previous estimates of 6.6 percent and 6.9 percent, the lender said.
The yield on 10-year sovereign peso bonds rose 52 basis points this year to 4.32 percent. That’s still lower than the 6.7 percent rate on similar-maturity notes from Colombia, which is rated one level higher by Moody’s at Baa2.
Economic growth is still above the long-term average, inflation is within the target range of 3 percent to 5 percent and the banking system is strong, the central bank’s Tetangco said in the interview this week.
Demand for default-swap contracts has also risen as conflicts in Iraq and Ukraine intensified, according to Rajeev De Mello, who manages $10 billion as head of Asian fixed income at Schroder Investment Management Ltd. in Singapore.
“A lot of emerging-market funds have increased their corporate exposures as sovereigns offer very little spread,” he said in an e-mail interview on Aug. 13. “They use the more liquid sovereign credit-default swaps to hedge their risks when they are a bit more concerned.”
Since 2010, President Aquino has impeached the country’s top judge for concealing his wealth, passed a tax on cigarettes and liquor and enacted a bill providing free contraceptives in the face of opposition from the Catholic church. The budget deficit was 1.4 percent of GDP last year, the least since 2008.
Sustained, strong economic expansion that narrows the income gap with ‘BBB’ range peers without the “emergence of imbalances,” is one of the considerations for a positive rating action, Fitch analysts Thomas Rookmaaker and Andrew Colquhoun in Hong Kong, wrote in an Aug. 12 e-mail. A reversal of the reforms implemented by the Aquino administration will affect the rating negatively, they said.
The 54-year-old president, who is limited to a single six-year term by law, told local broadcaster TV5 on Aug. 13 that he may consider supporting calls to amend the constitution to curtail judicial power and allow him to run again. That doesn’t mean he will automatically seek another term, he said.
“The reform momentum, at least from the growth perspective, is probably slowing,” Nizam Idris, head of foreign-exchange and fixed-income strategy in Singapore at Macquarie Bank Ltd., said in an Aug. 13 interview in Manila. “Put together with the political uncertainty about who’s going to be the next president, rating agencies are being cautious in pushing ratings up.”
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