The great debate at the moment is whether the Philippines' debt – which is trading more like a single B credit than a BB+ – is great value for a forward-looking investor, or a case of the market accurately reflecting the state of the Philippines. That is, it is dire and ripe for a downgrade.
One person who has thought long and hard about this is Joey Cuyegkeng, the chief economist of ING Barings in Manila. “At these levels, I think it’s a buy,” he says. Indeed, he smiles, “At these spreads – if I had the money – I’d put it in these bonds.” A recommendation indeed.
To what does Cuyegkeng attribute such value? “I am confident the Philippines will keep its BB+ rating in the next 12 months.” He says that the Philippines is facing a perception problem, and that investors also fear the government will come to the international bond markets with more of its paper. “The perception is that the budget deficit will grow and that the Philippines will flood the international market. I think – for this year – the chances of that are low.”
He says the government has put together a menu of alternative means of raising money that will help it avoid going to the international markets. This menu includes:
- The continued issuance of longer term debt in the local market;
- The issuance of Ps30-40 billion of small denominated government bonds to small savers;
- The continued success of its privatization bonds. There was scepticism when the government said it would sell Ps5 billion ($111 million) of these. In fact, it has sold Ps8 billion;
- The issuance of US dollar FRCDs locally, taking advantage of the US dollars in the local banking system.
These instruments should make certain that the government does not issue any more international debt this year, he says. This is important as concern that another international bond issue is in the pipeline is probably the key factor depressing spreads. Cuyegkeng reckons these domestic funding avenues will suffice for the remainder of 2000, although he predicts that international markets will have to be tapped again next year.
The budget deficit, says the economist, is on an improving trend, although he isn’t outright bullish in this respect. “This year’s deficit will be Ps112 billion, and the government is predicting it will be Ps85 billion next year. My estimate for next year is Ps100 billion.”
His more pessimistic forecast is grounded on two assumptions. The government assumes it will raise Ps19 billion from privatization, but more crucially it assumes the tax take from the inland revenue and customs bureau will rise by 10%. “In the first seven months of this year the Bureau of Inland Revenue has raised its tax take by 3%, but the Bureau of Customs figures have dropped by 3%. So they will have to do something drastic to hit 10% next year. And next year is an election year which will make things more difficult.”
However, even if his view is less rosy than the government’s, he stresses that his forecast still sees the budget deficit improving – hence his strong belief that a downgrade is not on the cards in the next year. Cuyegkeng’s forecasting skills came to the fore two weeks ago when he upped his forecast for this year’s GDP growth to 3.7%. His prescient revision came a fortnight before the government released the second quarter number which showed growth of 4.5%, beating the consensus view by almost a percentage point.
Looking beyond perceptions
He says he has been trying to look beyond the negative perceptions on the Philippines and focus more on the numbers. “There have been a lot of positive developments in the Philippines. Legislation opening up the retail sector has gone through, and [foreign firm] Casino is looking at a local acquisition. Amendments to the General Banking Act were also welcome from a foreign investor’s point of view. The e-commerce law was also positive.”
He would welcome the passing of the Power Reform Bill later this year, which he says would have fiscal benefits for the government to the tune of Ps6 billion to PS10 billion, and could lead to the privatization of Napocor’s power generation business. “There has been much that has been positive in the first eight months of 2000 that has been lost amid all the negative news,” he says.
What of the Philippines' president, the gaff-prone ‘Erap’ Estrada? Surely perception on the Philippines cannot change while he is around? Cuyegkeng notes that his term runs until 2004, and says it isn’t out of the question that Estrada may do a Clinton – learning from the mistakes of the early part of his administration only to flourish in the latter part. “The legislation that has gone through in the first eight months of this year is very positive. It had been awaiting approval for the previous 18 months. Things are moving much faster now. This is a good sign.”
However, for Estrada to rebuild his negative image abroad will take longer – considerably longer – than the few months it took to damage. No one doubts it will take a while. Cuyegkeng notes that the negative net outflows of foreign portfolio investment, that made the second quarter so painful, seems to have bottomed. “We have seen some buying interest in the last couple of months. Previously, fund managers were zero-weighted or underweight the Philippines. Now we are seeing big fund managers nibbling at local blue chip stocks.”
ING Barings, the firm Cuyegkeng represents, is one of the biggest intermediaries for foreign fund flows – along with Jardine Fleming and Merrill Lynch – so its sense of the market is worth noting.
Then again, while I am in the Philippines, another hostage is taken by Commander Robot in Jolo – this time, an American (because his ransom is apparently 10 times that of a European). And staff at my hotel, the Peninsula, routinely check bags for explosives at the doorway – now a common practice throughout top Manila establishments, and one that didn’t occur on my last trip to the country in March.
These are the perceptional problems. For the economy’s sake, let’s hope Cuyegkeng is right about the numbers, and for the Philippines’ sake, that Estrada has entered his Clintonesque second half.
