Moody’s Misses on Southeast Asia Debt as S&P ErrsLilian Karunungan and Elffie Chew
The bond market is telling Moody’s Investors Service and Standard & Poor’s that they’ve got it wrong in rating sovereign debt in Southeast Asia.
The cost of protecting notes sold by Indonesia, Thailand, Malaysia and the Philippines against default averages 96 basis points, CMA data show, compared with 262 for Italy and Spain. Debt stood at 51 percent of gross domestic product in the Philippines and 25 percent in Indonesia, both rated junk by S&P, compared with 126 percent in Italy, ranked three levels higher.
“The international agencies are wrong in their ratings of some of the Asean sovereigns,” Lee Kok Kwan, deputy chief executive officer of CIMB Group Holdings Bhd., Malaysia’s top bond arranger, said in a March 5 interview in Kuala Lumpur. “Market prices for the last three years have been so completely divorced from ratings.”
The credit-default swap market is anticipating upgrades for some of the largest economies among the 10-nation Association of Southeast Asian Nations, which the International Monetary Fund forecasts will expand 5.5 percent in 2013 compared with 0.2 percent shrinkage in the euro area. Ratings companies are losing their following among investors. Almost half the time, government bond yields fall when an action suggests they should climb, or they increase even as a change signals a decline, according to 38 years of data compiled by Bloomberg.
Interest rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.
Asean leaders responded to a collapse in their currencies 15 years ago by bolstering their foreign reserves and reining in excessive spending. International reserves in Malaysia, Indonesia and Thailand average $137 billion and their gross savings were at least 31 percent of 2011 GDP, compared with $33 billion and about 20 percent across France, Italy and Spain, according to official and World Bank data.
Philippine President Benigno Aquino said in January the nation “is on the cusp” of winning an investment grade, with central bank Governor Amando Tetangco saying on Jan. 25 the upgrade may be achieved in the first half of 2013. S&P raised the outlook on the country’s rating to positive in December, saying a revision is possible this year as public finances and governance improve.
Insuring Philippine debt against default has been cheaper than for Spain since April 2010, according to data provider CMA, which is owned by McGraw-Hill Cos. It costs 95 basis points to protect Philippine notes, compared with 259 for Spain. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Contracts for the Southeast Asian nation dropped 11 basis points this year.
Since the end of September 2010, Moody’s has lowered Spain’s ratings by nine steps from its top Aaa rank to Baa3, the lowest investment grade. The Philippines was upgraded two notches in the same period to the highest junk level of Ba1, while Indonesia was raised two times and currently matches Spain.
S&P said in April it refrained from joining Fitch Ratings and Moody’s in awarding Indonesia investment-grade status as the country’s push to lure investment is at risk from “policy slippages” such as the failure to cut fuel subsidies.
The director general of Indonesia’s debt management office, Robert Pakpahan, said last month the government hopes S&P will change its mind. Southeast Asia’s largest economy is “maintaining stable and sustainable economic growth, and good governance,” he said in a Feb. 6 interview in Jakarta.
The cost of insuring Thailand’s sovereign debt using five-year credit-default swaps is 182 basis points lower than Italy’s, yet S&P rates both nations BBB+, the third-lowest investment grade. The contract for Malaysia, which is assessed five levels below Aa1-rated France by Moody’s, matches that of the European nation.
“We don’t dismiss off hand the CDS, but they have limited use for sovereign analysis” because swings in the contracts can be volatile, Thomas Byrne, a senior vice president at Moody’s in Singapore, said in a March 6 telephone interview. “We’re trying to have a rating that has stability over the outlook, which is one or two years, or sometimes longer.”
While the Philippines has been upgraded since the 2008 global financial crisis, it is rated junk because a large portion of the nation’s budget goes towards servicing its debt, Byrne said.
Ratings and market indicators often diverge because they could be driven by different factors in the short term, Lisa Coory, S&P’s head of communications for Asia-Pacific in Hong Kong, said in an e-mail today. Bond spreads and credit-default swaps reflect the market sentiment as well as the liquidity of a security, and not just its credit quality, Coory said.
Global funds added $6.5 billion to holdings of Thailand’s government debt this year and 13.5 trillion rupiah ($1.4 billion) in Indonesia, official data show. Foreigners poured a net $1.2 billion into Malaysia’s bonds in January.
The inflows are supporting regional currencies. Spot returns on the Malaysian ringgit, Singapore dollar and Philippine peso are forecast to rank in the top 10 this year among 25 emerging-market exchange rates tracked by Bloomberg. The Thai baht has appreciated 2.8 percent and the peso 0.7 percent this year, the biggest gainers in Asia.
Western Asset Management Co. has the Philippines as the “single-largest overweight” position in its Asian Opportunities Fund on optimism it will exit junk status as early as in one year, Chia-Liang Lian, Singapore-based head of investment management for Asia excluding Japan, said at a Feb. 6 media briefing. An overweight position means he holds more than the benchmark index he follows. The fixed-income unit of Baltimore-based Legg Mason Inc. manages $462 billion globally.
“Asean sovereign credits today are very popular despite their international credit ratings, whether in terms of amount or price,” CIMB’s Lee said. “However, some funds that would like to buy the bonds can’t because their mandate limits them to only A-rated paper.”
Pacific Investment Management Co.’s $288 billion Total Return Fund managed by Bill Gross is the world’s biggest bond fund and limits its Asia holdings to Japan and South Korea, according to data compiled by Bloomberg. The two north Asian nations are rated Aa3 by Moody’s, the fourth-highest investment grade.
Japan’s government debt stands at 219 percent of GDP, the largest among the developed nations. Asia’s second-biggest economy has a budget deficit of 7.9 percent of GDP, compared with 0.6 percent for Indonesia, 1.8 percent for the Philippines and 1.2 percent for Thailand. South Korea enjoys a budget surplus and its public debt amounts to 33.7 percent of GDP.
Indonesia’s dollar-denominated bonds due January 2016 yield 2.1 percent, according to data compiled by Bloomberg, compared with 3 percent for similar-maturity notes of Italy.
“What the ratings agencies publish versus what’s actually been traded in the market is quite evident,” Leslie Foo, managing director for global markets at Malayan Banking Bhd., said in a March 6 interview. “Even sovereign wealth funds are actually beginning to invest in emerging markets or Asean credits because of the value and given the countries’ balance sheets versus where the yield is currently.”