Worst Emerging Debt Falls on Philippine Growth Without Rate Cuts

  • GDP increased 6% in third quarter, fastest in Southeast Asia
  • Goldman says El Nino will push up food inflation next year

Philippine government bonds, the worst emerging-market performers, have become a victim of the nation’s success as the economy grows without interest-rate cuts.

Peso sovereign notes have dropped 3.3 percent over the last three months, the most among around 30 developing nations and the only Asian sovereign securities to decline, according to Bloomberg indexes. The bonds fell on Friday after official data the day before showed growth accelerated to 6 percent last quarter, the fastest among Southeast Asia’s five biggest economies.

Quickening growth makes it harder for the central bank to justify rate cuts, and Goldman Sachs Group Inc. sees an increase next as an El Nino weather pattern pushes up food costs. The government’s acceptance of higher yields at a sale in October was a trigger for a drop in the notes, which are set for the biggest monthly decline since December 2013, according to BDO Private Bank Inc.

“The local economy is strong and inflation might even be a worry,” said Paolo Magpale, the Manila-based treasurer at BDO Private Bank, a unit of the country’s largest lender. “Other countries cut rates because they need to stimulate their economies. The Philippines is not in that position.”

While the increase in gross domestic product last quarter trailed the 6.3 percent median estimate of economists, it was still the most since the final three months of 2014. Bangko Sentral ng Pilipinas has held its policy rate at 4 percent since September 2014 and 6 of 12 analysts surveyed by Bloomberg see one or more increases in borrowing costs next year.

El Nino

“GDP turnout confirms the economy doesn’t really need further monetary stimulus at the moment,” central bank Governor Amando Tetangco said in mobile-phone message to reporters on Thursday. “But we are mindful of risks from natural disasters and global developments including slower-than-expected growth among our trading partners.”

The El Nino, which brings drier weather to Asia, will push up Philippine inflation by more than 0.8 percentage point next year, according to a Goldman note released Nov. 20. The U.S. lender sees inflation of 2.8 percent in 2016, 6.1 percent annual growth and an interest-rate cut in the fourth quarter. Consumer-price gains eased to just 0.4 percent in September and October.

“Although Philippine fundamentals remain very solid -- we have resilient growth and we have benign inflation -- we’re still not immune to price actions,” said Jill Singian, a portfolio manager at Bank of the Philippine Islands in Manila. “The El Nino is a persistent risk to domestic inflation.”

The yield on the 10-year sovereign bonds rose nine basis points on Friday to 4.80 percent, taking its increase this month to 110 basis points, according to midday fixings from Philippine Dealing & Exchange Corp. Yields will probably stay near current levels as investors wait to see whether the Federal Reserve will raise borrowing costs next month, Singian said.

Safe Haven

The Philippine peso has been the most resilient currency in Southeast Asia to the prospect of a Fed liftoff and the slowing Chinese economy. It’s lost 5.2 percent this year, compared with drops of 8.1 percent in Thailand’s baht, 9.9 percent in Indonesia’s rupiah and 17 percent in Malaysia’s ringgit.

Pioneer Investment Management Ltd., which oversees 217 billion euros ($230 billion), is “cautious” on Philippine bonds and its holdings are close to benchmark levels due to external risks including the potential for higher volatility in China’s yuan, said Hakan Aksoy, a London-based debt fund manager.

AllianceBernstein LP, which oversees $478 billion, views the Philippines as a safe-haven market given its economic stability, but not one for particularly high returns, said Vincent Tsui, a Hong Kong-based economist.

“It’s a stable market but not really attractive for capital gains,” he said. “We see further rate cuts in Thailand and Indonesia but not the Philippines.”

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