Bloomberg News

Peso Defies Curbs as Schroder Bets on Junk Exit: Southeast Asia

February 21, 2013

The Philippine peso is set to defy efforts to curb its gains as Schroder Investment Management Ltd. and Mizuho Corporate Bank Ltd. say its advance is cooling inflation and the nation will exit its junk debt rating.

Peso bonds have handed investors a 5.4 percent return this year, the most in Asia outside of Japan, followed by India’s 2.5 percent, local-currency debt indexes compiled by HSBC Holdings Plc (HSBA) show. Central bank Governor Amando Tetangco said Jan. 25 the nation is poised to win its maiden investment-grade credit rating in the first half and the monetary authority is studying stepping up measures to curb excessive capital inflows.

“We continue to like the peso” and will take advantage of a correction to buy Philippine bonds, Rajeev De Mello, who manages more than $8 billion as the Singapore-based head of Asian fixed-income assets at Schroder, said in a Feb. 20 interview. “Policy makers don’t want the peso to appreciate too much. They are actually benefiting from it on the inflation side. The nation is on track to win a rating upgrade.”

The peso advanced 0.8 percent this year, slower than the gain in the last five quarters, after Bangko Sentral ng Pilipinas restricted the use of currency forwards in December to curb speculation and cut the interest rate on its special- deposit accounts in January. It will rally a further 3.1 percent to a 14-year high of 39.5 per dollar by the end of 2013, according to the median forecast of 24 analysts in a Bloomberg survey.

Inflation, Imports

The peso’s one-month non-deliverable forwards rose 0.3 percent, the most this month, to 40.72 per dollar as of 11:05 a.m. in Manila on optimism the nation will lure more inflows.

Inflation will average 3 percent this year, the least since 2007, even as economic growth accelerates, the central bank said on Jan. 24. Dubai crude oil, a benchmark for the Philippines, has risen 2.5 percent this year and 18 percent since the end of June, according to data compiled by Bloomberg. The Southeast Asian nation imports almost all of its oil.

The central bank forecasts a 12 percent increase in imports this year as faster economic growth increases demand for capital goods. Overseas purchases gained 1 percent in the first 11 months of 2012, official data show.

President Benigno Aquino is planning record spending this year as he seeks more than $17 billion of investment in highways and airports to spur economic growth of as much as 7 percent after a 6.6 percent expansion in 2012, which was among the fastest in Asia.

S&P, Moody’s

“Higher growth will eventually mean demand will increase for certain commodities, and that will put upward pressure on prices,” Joey Cuyegkeng, an economist at ING Groep NV in Manila, said in a Feb. 15 interview. He predicts inflation will average 3.6 percent to 3.7 percent this year and forecasts the peso strengthening to 39.5 per dollar by year-end.

Aquino signed a law in December to increase tobacco and liquor taxes, prompting Standard & Poor’s to raise its credit- rating outlook to positive from stable. The budget deficit probably narrowed to 2.3 percent of gross domestic product in 2012, Budget Secretary Butch Abad said on Feb. 14. That’s down from 3.5 percent in 2010. The ouster last year of the country’s top judge, Renato Corona, for illegally concealing his wealth boosted Aquino’s campaign to clean up corruption.

S&P assigned the Philippines its top junk ranking in July, following a similar assessment by Fitch Ratings in June 2011. Moody’s Investors Service raised the nation’s rating to Ba1, one step below investment grade, on Oct. 29.

Overseas Remittances

The average yield of Philippine government bonds dropped 66 basis points this quarter to a record low of 4.28 percent on Feb. 20, according to an HSBC index. That compares with 5.91 percent for Indonesia, rated one step higher by Moody’s.

The cost of protecting five-year Philippine debt against non-payment using credit-default swaps has dropped 48 basis points to 103 basis points in the past year, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The peso is attractive because of the possibility of a credit-rating upgrade and as remittances by Filipinos living overseas support the currency, according to Shigehisa Shiroki, chief trader on the Asian and emerging-markets team at Mizuho Corporate Bank in Tokyo. Money sent home, which accounts for 10 percent of GDP, rose 6.3 percent in 2012 to a record $21 billion, exceeding the central bank’s 5 percent growth target, official data showed Feb. 15.

“Such money is coming in no matter what the peso’s levels are, and creates very stable inflows,” Shiroki said in a Feb. 13 interview. “The rising peso helps contain imported inflation. The central bank doesn’t seem to worry too much about the peso’s appreciation as long as the pace is not too fast.”

Currency Intervention

Foreign investors have bought $840 million more Philippine stocks than they sold so far this year, a third of the $2.5 billion net purchases for the whole of 2012, exchange data show.

Bangko Sentral ng Pilipinas has intervened to manage the peso, Tetangco said on Jan. 15, a day after the currency reached 40.55 per dollar, its strongest level since March 2008. Policy makers will keep the exchange-rate market-determined and aren’t targeting a specific level, he said. The Philippine currency touched the same high on Feb. 14.

The peso is “fully valued” after warnings by the monetary authority that it may take steps to counter appreciation, Adam McCabe, who helps oversee $6 billion as deputy head of Asian fixed income at Aberdeen Asset Management Plc in Singapore, said in a Jan. 24 interview.

Western Asset Management Co., a unit of Baltimore-based Legg Mason Inc. (LM:US), plans to buy Philippine debt as it receives more money into its bond funds to maintain its overweight position, according to Chia-Liang Lian, Singapore-based head of investment management for Asia excluding Japan. An overweight position means he holds more than the benchmark index he follows.

“BSP has made it quite clear they are not targeting any specific peso level,” Lian, who manages $12 billion of Asian fixed-income assets, said at a Feb. 6 media briefing. “All they were concerned about was to manage the pace of capital flows in and out. We expect the Philippines to migrate to investment grade within the next one to 1 1/2 years.”

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net


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