Default Swaps Show Optimism as Philippines Enters Election Year

  • Net notional amount of debt protected fell 32% in 2015
  • Cost of contracts rose by the least in Southeast Asia

If global investors are worried by Philippine elections in May, they’re keeping it under wraps in the bond market.

The net amount of sovereign debt protected against non-payment by credit-default swaps fell 32 percent last year to $1.49 billion, Depository Trust & Clearing Corp. data show. Volumes averaged $2.6 billion during former President Gloria Arroyo’s reign until mid-2010 when Benigno Aquino took over, based on DTCC data starting in Oct. 2008. The cost of a Philippines contract providing coverage for five years rose 19 basis points in 2015, the smallest increase in Southeast Asia, as jumps of more than 70 basis points were recorded for Indonesia, Malaysia and Vietnam.

Moody’s Investors Service scores political risk from the coming election as “low," citing the stability marking Aquino’s last year in office that contrasts with the political turmoil that dogged the two preceding administrations. The opposition had tried to impeach Arroyo since 2005, even as she denied accusations of corruption and electoral fraud. Before her, Joseph Estrada, was ousted in 2001 and later jailed for corruption.

“If investors needed to hedge something, they probably did it for other countries rather than the Philippines," said Wee-Ming Ting, the head of Asian fixed income in Singapore at Pictet Asset Management Ltd., which oversees $16.5 billion of emerging-market debt. “While they will be watching the coming election, they are also not expecting any big change in policy. The presidential candidates are quite similar in terms of policies."

Under Aquino, the Philippines outgrew its “Sick Man of Asia" tag and earned World Bank commendation as the continent’s “rising tiger” in 2013. The nation posted 6.6 percent average annual growth since 2012, its best pace since the 1970s, as his administration shrank the budget deficit and tackled corruption. In March 2013, Philippine debt was elevated by Fitch Ratings to investment grade for the first time.

Investors See Less Need to Insure Philippine Debt
Investors See Less Need to Insure Philippine Debt

Philippine Vice President Jejomar Binay and Senator Grace Poe are tied in the
latest survey of support for this year’s candidates. The Social Weather Stations poll held Dec. 12-14, showed 26 percent support for both Binay and Poe. Mar Roxas got 22 percent, followed by Davao Mayor Rodrigo Duterte with 20 percent. While the candidates lining up for the top post have not detailed their economic policy platforms, they say infrastructure has to be improved and the tax system reviewed.

“The Philippines is fairly well positioned to sustain the momentum of a positive credit trajectory," said Christian de Guzman, a senior analyst with Moody’s in Singapore. “We are not saying there aren’t any risks but in terms of broader policy there’s not going to be any sharp left turns, sharp right turns. If the election is your biggest worry I guess it’s not much of a concern in terms of the entire Philippine credit story."

The Contenders

Binay, 73, is the ex-mayor of the country’s most-important business district, Makati City. He heads a dynasty that controlled Makati, with his son having held the same post. He said he’ll give his finance chief a free hand to choose a tax commissioner and vowed to decentralize decision-making.

Poe, 47, the adopted daughter of a movie star, is fighting a legal battle to stand amid questions regarding her citizenship and residency. She pledged to boost spending on infrastructure and has backed calls for lower taxes in exchange for better compliance.

Roxas, 58, was endorsed by Aquino and was the former Interior Secretary of the current administration. Duterte, 70, has become a national figure through his hard line on crime, calling for drug addicts to be executed.

Ratings Upgrades

Moody’s and Standard & Poor’s boosted their credit rating for the Philippines four times during Aquino’s administration and have given the nation their second-lowest of 10 investment grades. Fitch ranks the Philippines one level lower as it awaits developments on the election.

“It’s not a case of identifying this candidate is good, this candidate is not so good," said said Andrew Colquhoun, Hong Kong-based head of Asia Pacific sovereigns at Fitch in Hong Kong. “We’d like to see what they do once they’re in office. It’s hard to make predictions based on someone’s background or CV."

Whichever party wins will seek to improve revenue generation, spending efficiency and keep the debt profile relatively low, said Kyran Curry, S&P’s director of sovereign ratings in Singapore.

‘Benign Event’

The successor of Aquino, who is barred by law to run for a second term, will inherit a country that boasts the fastest growth among the five largest economies in Southeast Asia. Revenue from outsourcing such as customer call centers will rise 19 percent to $25 billion in 2016, the IT and Business Process Association of the Philippines said. Money sent home by overseas Filipinos increased 3.7 percent to $20.6 billion in the first 10 months of 2015.

The Philippines also benefited from falling crude prices, posting a balance of payments surplus of $1.8 billion in the first nine months of 2015, a reversal from the $3.4 billion deficit a year earlier. Inflation cooled to a record-low 0.4 percent in September and October, before quickening to 1.1 percent in November and 1.5 percent in December.

“If you were to rank the Philippines’ political risk against a myriad of global economic and geopolitical risks, the Philippine election is a benign event," said Paolo Magpale, the Manila-based treasurer at BDO Private Bank Inc., unit of the country’s largest bank. “Investors are hoping the next president won’t deviate from the current strategy."

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