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Philippines Slips From Best to Worst on Peso Loss

Teller Counts Philippine Peso Banknotes
A teller counts Philippine peso banknotes for a photograph inside a Bank of the Philippine Islands branch in Manila. Money supply in the Philippines has increased since the central bank phased out its special-deposit accounts last year to curb peso speculation. Photographer: Julian Abram Wainwright/Bloomberg

Philippine bonds, Southeast Asia’s biggest gainers in 2013, are delivering the region’s only losses this month after inflation accelerated to a two-year high and the peso slumped.

Local-currency government notes dropped 1.1 percent in 2014, after gains of 5.2 percent last year that were the best among 10 Asian indexes compiled by HSBC Holdings Plc. Consumer-price increases of 4.1 percent are giving investors in Philippine 10-year securities a real yield of 0.2 percent, compared with 2.3 percent for Thailand and 1.3 percent for Malaysia, data compiled by Bloomberg show.

Bangko Sentral ng Pilipinas will need to curb money supply before raising interest rates from a record low if inflation exceeds 5 percent, and to thwart losses in the peso, according to Bank of America Merrill Lynch. A 10.2 percent decline in the currency from an almost five-year high in January last year and devastation caused by Super Typhoon Haiyan are pushing up prices in the $250 billion economy.

“We haven’t invested in the country for an extended period due to the bonds offering very little in terms of yield,” Anders Faergemann, a London-based senior fund manager at PineBridge Investments who helps oversee $4.3 billion of emerging-market debt, said in a Jan. 16 e-mail interview. “We are seeing extensive inflationary pressures building.”

Spread Widens

The yield on the Philippines’ 10-year government notes has climbed 49 basis points, or 0.49 percentage point, to a six-month high of 4.29 percent in 2014, according to data compiled by Bloomberg. Conversely, similar-maturity U.S. Treasury rates dropped 18 basis points to 2.84 percent even as the Federal Reserve started to reduce its debt-buying program in January.

The government sold 9.62 billion pesos ($213 million) of bonds due in 2016 today, short of the 25 billion pesos planned, according to the Bureau of Treasury. The average yield rose to 2.399 percent, compared with 2.054 percent at the last auction of the same debt on July 16.

Money supply in the Philippines has increased since the central bank phased out its special-deposit accounts last year to curb peso speculation, helping fuel inflation, said Claudio Piron, head of emerging Asia foreign-exchange and fixed-income strategy at Bank of America Merrill Lynch in Singapore.

Domestic liquidity has expanded more than 30 percent every month since July, Bangko Sentral data show, which Piron said could push consumer-price gains above the central bank’s upper target of 5 percent by October.

The sell-off in Philippine debt increased the spread over Treasuries by 66 basis points this year to 144, more than double the 2013 low of 67, according to data compiled by Bloomberg. That compares with a gap of 560 in Indonesia, whose local-currency notes returned 0.6 percent this year after posting losses of 13 percent in 2013, the worst among developing nations.

Worst Carry

Indonesian bonds are providing a real rate of return of 0.06 percent after accounting for inflation of 8.4 percent in December, the fastest in Southeast Asia. The rupiah is the region’s best-performing currency this year, reverting from the biggest loss in 2013.

“We’re getting to be more and more concerned about the inflationary expectations” in the Philippines, Piron said in a Jan. 15 interview. The central bank “should increase the carry attraction of the currency,” he said.

The peso provided the worst carry trades in Asia over the past month, in which investors source funds in a country with low borrowing costs and put the money into a nation with higher interest rates.

The peso is underperforming on speculation the monetary authority is favoring a weaker currency to revive growth after Typhoon Haiyan, David Bloom, London-based head of global foreign-exchange strategy at HSBC, said in a Jan. 17 briefing in Singapore. The central bank isn’t targeting any particular level and will assess the inflation outlook to guide policy, Governor Amando Tetangco told reporters in Manila the same day.

‘Good Entry’

“Our policy actions are foremost in pursuit of our mandate of keeping prices stable,” Tetangco said today in a text message to Bloomberg News. “Our policy on the FX rate is to essentially allow the market to determine its value, but with scope for official action to contain excessive rate movements.”

The peso depreciated 1.5 percent over the past month to 45.193 per dollar in Manila today, the weakest level since 2010. The currency may climb 1.5 percent to 44.50 by the end of the second quarter, according to the median estimate of 22 analysts surveyed by Bloomberg since mid-December.

While Bank of America’s Piron said sustained weakness in the peso beyond the 45 level will stoke inflation, Pioneer Investments sees the 45 to 47 range as a “good entry” point as increasing remittances from overseas Filipinos support economic expansion.

Money sent home by the approximately 10.5 million Philippine nationals working abroad rose 6.1 percent in the first 11 months of 2013, exceeding the central bank’s 5 percent target, official data showed on Jan. 15. December figures are due on Feb. 17.

‘Strong’ Remittances

The International Monetary Fund predicts the Philippines’ gross domestic product will increase 6 percent in 2014, slowing from 6.8 percent last year, estimates released in October show. That’s still faster than the 5.4 percent average forecast for Southeast Asia’s five major economies.

“We are constructive” on the Philippines, Hakan Aksoy, an emerging-markets fund manager in London at Pioneer, which oversaw 169 billion euros ($229 billion) globally as of end-Sept., said in a Jan. 17 e-mail interview. “Remittances continue to grow and they still look strong.”

The Philippines won investment-grade status from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings in 2013 for the first time as President Benigno Aquino’s economic reforms helped spur the fastest expansion in the region.

The cost of insuring Philippine government bonds against non-payment for five years using credit-default swaps increased one basis point this year to 115, according to data provider CMA. That compares with 114 for Malaysian debt, 158 for Thailand’s and 220 for Indonesian securities.

No Merit

Inflation in the Philippines reached a four-year low of 2.1 percent in August before the typhoon struck in November, devastating crops and causing an estimated 571 billion pesos ($12.6 billion) in damages, the economic planning agency said in December. The central bank forecasts price gains will average 4.5 percent in 2014.

Bangko Sentral will probably raise its benchmark overnight borrowing rate to 4 percent by the fourth quarter from 3.5 percent now, according to the median estimate of 14 analysts in a Bloomberg survey.

Mirae Asset Management Co. is underweight in Philippine government bonds, meaning it holds less of the debt than a benchmark index the company follows to track performance.

“The level of Philippine local yields is still too low to entice investors,” Kim Jin Ha, a global fixed-income fund manager at Mirae Asset in Seoul, which oversees $59 billion, said in a Jan. 16 phone interview. “With inflation flirting around 4 percent, the real yield doesn’t merit buying for now.”

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