As Benigno Aquino closes out a presidency that delivered the Philippines four Standard & Poor’s rating upgrades, investors are turning to the country’s dollar debt to shelter from peso losses.
The nation’s US currency bonds are rising almost twice as fast as local notes, pushing the yield on the securities due 2024 down 52 basis points this year to 2.49 per cent. The peso is the only major Southeast Asian currency to weaken in 2016 before a May 9 presidential vote in which there are five contenders and no clear frontrunner.
“Peso weakness and dollar bond strength reflect locals sheltering in dollar assets pre-elections,” said Edwin Gutierrez, who helps oversee about $11 billion as head of emerging-market sovereign debt at Aberdeen Asset Management Plc in London. “The market will monitor any signs of fiscal slippage with concern since the Aquino administration has done a fantastic job in that regard.”
The success of the president in shrinking the budget deficit to around a sixth of the 314 billion pesos ($6.6 billion) when he came to power in 2010 has been rewarded with a more than halving of the sovereign’s local-currency borrowing costs and a record low yield paid at a dollar debt sale last month. Vice President Jejomar Binay, who topped a poll of contenders last month, has promised to pay for generous income-tax exemptions by boosting collection.
Binay was picked by 29 percent of 1,200 respondents in a Social Weather Stations survey conducted from February 5 to 7. Senator Grace Poe and Rodrigo Duterte, the crime-busting mayor of Davao City, received 24 per cent each. That beats the 18 per cent for Mar Roxas, a former secretary of the interior endorsed by Aquino, who’s prohibited from running for another term. Poe has also said she favours lowering taxes.
“There is fiscal risk moving forward based on populist measures that some of the candidates are espousing,” said Joey Cuyegkeng, an economist at ING Group NV in Manila. “That’s why we’ve been a bit cautious,” although the market is largely being driven by external factors and the risk of a runaway fiscal deficit is low, he said.
The Philippines posted a budget deficit of 46.5 billion pesos in the first 11 months of last year, compared with a shortfall of 73 billion pesos for the whole of 2014. The country’s debt-to-gross domestic product ratio is 45.5 per cent, lower than the 53.5 percent in Malaysia and 50.6 percent in Thailand.
Default Swaps
The peso has fallen 0.8 per cent in 2016, trailing gains of 3.1 per cent in Indonesia’s rupiah, 2.6 per cent in Malaysia’s ringgit and 1.3 per cent in the Thai baht. That marks a reversal of fortune for the Philippine currency, Southeast Asia’s best performer last year. The 50 basis-point drop in the yield of the Philippine 10-year dollar bond this year compares with a 27-point decline in same-tenor peso notes to 3.83 per cent.
There isn’t much election nervousness as it would take time for economic fundamentals to deteriorate, said Smith Chua, chief investment officer for the asset management and trust arm of Bank of the Philippine Islands in Manila. Dollar notes are benefiting from the nation’s relatively strong economic fundamentals and because investors want to hedge their peso risk, he said.
The cost to insure five-year Philippine sovereign bonds using credit-default swaps rose 11 basis points to 119 this year, compared with a drop of 3 to 230 for Indonesian debt and a decline of 7 to 175 for Malaysian notes.
“Unless there is clarity that the fiscal program is sustainable, interest rates will rise, crowding out government development spending and damping private investment,” said Romeo Bernardo, director at the Institute for Development and Econometric Analysis Inc. in Manila. The next administration must pursue its investment and expenditure program “responsibly,” said Bernardo, who was finance undersecretary from 1990 to 1996. Bloomsberg
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