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Pioneer Unfazed by More Bond Sales as Union Buys: Southeast Asia

November 23, 2012

Southeast Asian government plans to boost bond sales next year aren’t deterring Union Investment Privatfonds and Pioneer Investments, who say they favor sovereign securities from Thailand and the Philippines.

Union Investment bought debt of the two nations recently, instead of Indonesian notes, because their currencies have been more stable than the falling rupiah, Sergey Dergachev, a senior portfolio manager in Frankfurt, said in a Nov. 20 interview. Pioneer plans to buy new issues from Thailand because it has a better credit rating than the other countries, Yerlan Syzdykov, who oversees emerging-market bonds, said in a Nov. 16 interview.

Southeast Asian governments are issuing more debt to build roads, rail, ports and schools, spending that lifts productivity and economic growth, unlike in Europe where states often borrow to fund social programs. Thailand plans to sell a record 525 billion baht ($17 billion) of local-currency notes in the year through September 2013, 52 percent more than the year before. The Philippines expects to increase domestic borrowings by 9 percent in 2013, while Indonesia aims to boost sales of local and foreign-currency securities by 13 percent, excluding the replacement of maturing debt.

“Investors will be happy to direct their flows to Asia,” said Dublin-based Syzdykov at Pioneer, which manages 153 billion euros ($197 billion) of assets. “We are reducing our Indonesian allocation due to potential politically induced volatility in the pre-election year.” Indonesians will vote for a new president in 2014.

Spreads Tighten

Pioneer’s $944 million emerging-market bond fund has returned 24 percent over the past year, beating 98 percent of its peers, data compiled by Bloomberg show. Thailand, the Philippines and Indonesia are the largest Southeast Asian countries in terms of issuance and weighting in the major debt indexes, Syzdykov said. The relative scarcity of sovereign notes from the region has resulted in yield premiums over Treasuries narrowing, he said.

The yield gap between Thailand’s 10-year securities and similar-maturity U.S. debt shrank 47 basis points since this year’s peak on June 1 to 171 basis points today, according to data compiled by Bloomberg. Over the same period, the spread for Indonesian bonds decreased 132 basis points to 373, while that for the Philippines narrowed 121 basis points to 335.

Standard & Poor’s assigns Thailand a BBB+ rating, its third-lowest investment grade, while ranking the Philippines and Indonesia three levels lower at BB+, the top junk assessment.

Resilient Economies

Southeast Asia’s economies have proved remarkably resilient to the 2008 financial crisis and ensuing global slowdown. Domestic consumption and rising investment look set to buoy growth over the next few years, says the Organization for Economic Cooperation and Development, who forecast this month that Indonesian gross domestic product will increase by an average of 6.4 percent from 2013 through 2017. Thailand and the Philippines will expand by 5.1 percent and 5.5 percent, the Paris-based organization forecast.

The Thai government is planning to spend more than 2 trillion baht on infrastructure and water-management projects over the next seven years to boost growth and prevent a repeat of last year’s worst floods in almost 70 years. The Philippines has proposed a record 2 trillion peso budget for 2013 to build roads, hospitals and schools. Indonesia has already allocated $185 billion of funding for highways, ports and power stations, out of its $416 billion 15-year development plan.

“The most important source of financing for the region now is bonds,” Iwan Azis, head of regional economic integration at the Asian Development Bank in Manila, said in a Nov. 21 interview. “Any effort to increase the liquidity of the bond markets are a welcome development. Asia has huge deficits in both physical and social infrastructure.”

Commodity Price Vulnerability

The state finances of Indonesia, the world’s largest exporter of power-station coal, may come under pressure due to declining commodity prices, Union Investment’s Dergachev said. The Newcastle coal spot price has dropped 27 percent this year to $81.60 a ton on Nov. 16, data compiled by Bloomberg show.

“A lot will depend on commodity prices, where Indonesia is far more sensitive than the Philippines and Thailand,” said Dergachev, who helps manage $8.5 billion of emerging-market assets.

Five-year credit-default swaps protecting Thai sovereign debt have fallen 97 basis points this year to 84.9 basis points yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That compares with a 92 basis point drop to 99.7 for the Philippines and an 84 basis point decline to 124.6 for Indonesia.

Strengthening Currencies

The Philippine peso has strengthened 6.6 percent against the dollar this year, the second-best performance among Asia’s 11 most-traded currencies, according to data compiled by Bloomberg. The Thai baht has advanced 2.8 percent, while the rupiah has weakened 5.7 percent. The three currencies will gain 2.6 percent, 2.4 percent and 1.4 percent, respectively, by the end of 2013, according to median estimates in Bloomberg surveys.

“Increased supplies from ASEAN nations don’t really change our rather bullish view on their bonds,” Yichun Shi, a Taipei- based portfolio manager who oversees NT$2.6 billion ($89 million) of assets at Eastspring Securities Investment Trust Co., a unit of Prudential Plc, said in a Nov. 15 interview. “If we decide to increase holdings, it would be Thai bonds for the appreciation potential of the baht.”

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