Philippine bonds steady as credit-crunch fears allayed

Despite unfavourable fiscal news released in the countryÆs budget report, Philippine bonds hold steady following BernankeÆs address to the US Congress.
News yesterday that the fiscal deficit in the Philippines is up by one-third had little impact on the countryÆs sovereign bond spreads. Instead, they reacted to US Federal Reserve chairman Ben BernankeÆs mid-week address to Congress.

BernankeÆs speech allayed some fears of an imminent credit crunch as a result of US subprime troubles, causing Philippine five-year CDS to move in by 3bp, and sovereign bonds to remain steady.

This occurred despite the Philippine budget figures showing a deficit increase in the first half of the year to Ps41 billion - 30% above the countyÆs target - and a drop in government expenditure of 4% below the first-half target.

ôThe market is purely trading on subprime mortgage headline news, on emotion and momentum. Credit fundamentals are disappearing,ö says one UK-based investor.

However, even in the long-term, investors who spoke to FinanceAsia do not believe yesterdayÆs results are a warning sign of slipping fiscal policy, or of deteriorating spreads. Sources believe that the Philippines is still heading the right way and that, in a more benign market environment, sovereign bonds would be trading significantly tighter.

ôWe are not that put off by the latest news, since we expected a point where there would be less juice. The strong general liquidity of Philippine bonds and a healthy balance of payments offsets the first quarterÆs disappointing fiscal results,ö says one investor.

ôThere are also still massive remittances from overseas, which have strongly supported the peso,ö he adds.

Investors are also confident that government officials are continuing to implement former Treasurer Omar CruzÆs successful policies despite this first half's poor performance. Cruz had won the favour of the market for delivering on his promises, and expertly accessing the debt markets. Under his tenure, the spread on Philippine five-year sovereign debt tightened by 350bp, and the government saved around Ps130 billion on interest costs.

Regarding yesterdayÆs fiscal deficit numbers, MoodyÆs regional credit officer for Asia, Thomas Byrne, says: ôThis performance is not inconsistent with MoodyÆs B1 rating and stable outlook. Our ratings tolerate some temporary set-back in fiscal performance. The wider budget deficit will be financed by privatisation receipts, so a build-up in government debt can be contained over the near-term.ö

However, the Philippines is still looking to the credit agencies for that long-awaited credit upgrade. For this, MoodyÆs expects a substantial deficit reduction, driven by revenue, and a decreased reliance on external financing by the public sector.

The rating agency has not yet seen a fundamental improvement in economic performance, which would enable a significant boost in government revenue collections. These are still below levels recorded in the late-90s. Further, investment is 15% below of GDP, one of the lowest among emerging market economies rates by MoodyÆs.

ôThe Philippines will need stronger, broader-based GDP growth to reduce fiscal pressures in the long run. Continued success in fiscal policy will help generate confidence in the economy, boosting investment and growth.ö
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