Philippines Beyond Fundamentals as Bonds Pricier Than Singapore

  • Bond returns this quarter better those in Indonesia, Malaysia
  • Run coming to an end, say AllianceBernstein, Nikko Asset

Dollar bonds in the Philippines beat their Southeast Asian peers this quarter, avoiding the currency collapses seen in neighbors more reliant on commodities. AllianceBernstein LP and Nikko Asset Management Co. see that run coming to an end.

With economic growth slowing ahead of a presidential election next year, the Philippines faces a raft of its own challenges: infrastructure needs upgrading, traffic is worsening and a dispute in the South China Sea still isn’t resolved. While JPMorgan Chase & Co. indexes show the extra spread over Treasuries investors demand to hold Philippine dollar debt has widened by 21 basis points this quarter, for dollar bonds in Asia more generally, it’s up about twice that.

Philippine dollar bonds are “very tightly priced already,” said Anthony Chan, an Asian sovereign strategist in Hong Kong at AllianceBernstein, which manages some $485 billion globally. “Certainly, it’s not at a level where you should be adding at this point. If you want to add, you should add Indonesia and Malaysia if you see stability returning.”

Investors were getting paid an 88 basis-point spread for owning the nation’s $2 billion 3.95 percent 2040 debentures on Monday, less than the 97 basis-point premium on Temasek Holdings Pte’s 3.375 percent 2042 notes, Bloomberg-compiled prices show. Standard & Poor’s scores the Philippines at BBB, eight levels below the top AAA grade of Singapore’s state-owned investment company.

Thanks to a steady stream of dollar inflows from overseas workers, Philippine U.S. currency-denominated notes have returned 0.91 percent this quarter through Sept. 28 compared with a 3.89 percent decline for Indonesian dollar debentures and a 2.31 percent loss on securities from Malaysia, the JPMorgan indexes show.

Filipinos working overseas have sent home $2.1 billion on average every month this year, and the country hasn’t suffered the magnitude of capital outflows of its closest neighbors. Foreign fund managers have withdrawn 14.1 billion ringgit ($3.2 billion) from Malaysia’s bond market this quarter through Aug. 31, central bank data show, and they trimmed 8 trillion rupiah ($545 million) from their Indonesian sovereign debt holdings through Sept. 22, according to data from that nation’s finance ministry. Both currencies are languishing near levels last seen in 1998.

It’s Expensive

“The Philippines is expensive and continues to be expensive, it’s beyond fundamentals now,” said Leong Wai Hoong, a Singapore-based money manager at Nikko Asset, which manages some $162 billion. “There aren’t enough Philippine dollar bonds to keep up with the remittances. Much of Asia has become a very technically-driven market.”

Investors still perceive the Philippines as less risky in the credit-default swap market. The cost of insuring the Southeast Asian nation’s sovereign debt against nonpayment has gained 49 basis points this quarter, versus a 107 basis-point increase in Indonesia and a 101 basis-point advance in Malaysia, according to data provider CMA. Contracts on Temasek, a proxy for the sovereign, added 8.8 basis points, the least in the region.

Sovereign risk has helped drive the performance of Philippine dollar notes to date, according to Ben Sy, the Hong Kong-based head of Asia fixed income, currencies and commodities at JPMorgan’s private banking unit. Even so, Sy is holding his country view at neutral for now, versus underweight on both Malaysia and Indonesia.

‘Quite Stable’

“Sovereign risk is quite stable for the Philippines and they’re an exporter of labor so there are little capital outflows,” he said. “Indonesia and Malaysia are badly impacted by lower commodity prices and currency reserves.” Commodities make up one fifth of Malaysia’s exports, according to central bank statistics.

Companies in the Philippines have sold $1.94 billion of dollar-denominated bonds this year versus $3.38 billion from Indonesian issuers and $7.62 billion from corporates in Malaysia, according to data compiled by Bloomberg. Offerings from the Philippines have totaled $17.1 billion since 2008, half the issuance from Indonesia.

Supply scarcity and demand from investors at home have kept the Philippine market “a bit distorted,” according to Sean Chang, the head of Asian bond investments in Hong Kong at Baring Asset Management Ltd., which manages about $36.5 billion globally. Selling Philippine credit-default swaps may be an option to take advantage of the dislocation, he said.

“There’s a lot to look forward to in the Philippines after the recent credit rating improvements and this trend could go on for some time,” he said. “Valuations don’t look cheap though. This is the only factor keeping us at neutral or hold.”

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