Philippines Outgrowing Sick Man Tag Cuts Bond Risk: Asean Credit

Bond investors are endorsing Philippine President Benigno Aquino’s view that his country has outgrown its label as the Sick Man of Asia, awarding it the same default risk as a nation rated two levels higher.

Credit-default swaps insuring the sovereign notes of Southeast Asia’s fastest growing economy have dropped 28.5 basis points this year to 85.5 basis points. That’s the same as Malaysia, even though its western neighbor has a A- rating from Standard & Poor’s, two levels higher than the BBB for the Philippines.

Aquino said last month that the Philippines was no longer the “Sick Man of Asia,” amid an increase in exports and remittances from overseas workers. S&P raised the country’s rating one rank on May 8, a year after elevating it to investment grade. Central bank Governor Amando Tetangco said May 13 others will follow “sooner rather than later.” Moody’s Investors Service and Fitch Ratings Ltd. upgraded the sovereign higher than junk last year.

“The debt dynamics in the Philippines are improving,” said Chua Hak Bin, a Singapore-based economist at Bank of America Corp. “There is a good chance Philippines will get a credit-rating upgrade from the other two international assessors.”

President Aquino said in an interview with Bloomberg Television on May 22 that he’s optimistic Moody’s or Fitch will follow with upgrades.

“We believe that the fruits of our labors are manifesting themselves,” he said.

Enduring Reforms

Anti-corruption champion Aquino, who is increasing spending to a record to lure investments and boost growth, will end his six-year presidency on June 2016. Economic growth last year of 7.2 percent in the Philippines was the fastest in Southeast Asia. While expansion will slow to 6.3 percent in 2014, according to the median estimate of economists surveyed by Bloomberg, that’s still the highest in the area and compares with a predicted 5.2 percent for Malaysia.

When Standard & Poor’s raised Philippines to BBB from BBB-last month, it said that it now believes “the ongoing reforms to address shortcomings in structural, administrative, institutional, and governance areas will endure beyond the current administration.”

Narrowing Gap

Malaysia is rated A3 by Moody’s and A- by S&P and Fitch, four steps higher than speculative-grade at all three rating companies. In contrast, the Philippines has a Baa3 score from Moody’s with a positive outlook, and a BBB- grade from Fitch. Both are three levels below Malaysia.

“Malaysia’s credit-default swaps should trade lower than Philippines given its higher credit rating,” said Wong Chee Seng, a currency strategist at AmBank Group in Kuala Lumpur said in a telephone interview on May 27. Improving perceptions of the Philippine’s credit risk stem in part from strength in the nation’s currency, he said.

The peso has gained 1.7 percent against the dollar this year, after dropping 7.6 percent in 2013 following a 6.9 percent increase in 2012.

Public debt to gross domestic product in the Philippines has fallen to 53.1 percent from 62.4 percent in 2007, according to Bank of America’s Chua. In Malaysia, the ratio climbed to 54.8 percent from 40.1 percent in the same period, he said.

Malaysian Debt

Household debt in Malaysia is the highest in Asia outside Japan at 86.5 percent of GDP last quarter, raising expectations for the central bank to raise interest rates, according to a Bank of America report on June 4.

Monetary tightening could lead to debt-rating upgrades for Malaysia and to its credit-default swaps falling below the Philippines, according to AmBank Group’s Wong.

“One way to stem credit companies’ concerns of rising household debt is to put interest rates on a higher scale,” he said.

Dollar notes for the Philippines have gained 15 percent this year compared with 8 percent in Malaysia, according to JPMorgan Chase & Co. indexes.

Borrowers from the Philippines have issued $2.45 billion in dollar-denominated notes this year, led by $1.5 billion from the sovereign. In the latest, SM Investments, a holding company owned by billionaire Henry Sy, sold $350 million of 10-year securities this week at a 4.875 percent yield.

That compares with $300 million from Malaysia, where Export-Import Bank of Malaysia Bhd has been the sole issuer.

Activity has also increased in the Philippine domestic debt market, where sales have more than quadrupled to 122.7 billion pesos this year from the same period in 2013, according to data compiled by Bloomberg.

“The outlook on ratings for the Philippines is positive following the recent upgrade,” said Wee-Khoon Chong, Singapore-based head of rates strategy for Asia ex-Japan at Nomura Holdings Inc. “There is a good chance for a further upgrade by other rating agencies.”

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