The yield on the junk dollar bonds of the
Philippines is at a record discount to higher-rated Indonesian notes as confidence in the nations’ leaders diverges.
Philippine President
Benigno Aquino, 53, halfway through a six-year term, increased taxes and ousted the country’s top judge last year for illegally concealing his wealth, impressing Pictet Asset Management and Kokusai Asset Management Co. Indonesian President
Susilo Bambang Yudhoyono, 63, who is in his final year in office, failed to cut fuel subsidies in 2012 as the annual shortfall in the current account rose to a record.
A Tartanilla driver inspects the hoof of a horse as he awaits passengers in Cebu. The Philippines may shun the global bond market this year, breaking a run of sales that stretches back a decade as it boosts domestic borrowing, Treasurer Rosalia de Leon said this month. Photographer: Veejay Villafranca/Bloomberg
“In terms of fundamental reforms, the Philippines is improving while Indonesia is not,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet Asset, which oversees $29 billion of emerging-market debt globally, said in an interview last week. “The yield gap between their hard-currency bonds is likely to stay or widen until
Indonesia starts to implement real reforms.”
Philippine debt due 2037 yielded 3.97 percent on March 5, 91 basis points less than similar-maturity securities from Indonesia, according to data compiled by Bloomberg. The spread, which was 71 yesterday, increased from 29 basis points a year ago. The outperformance raises question marks over why Moody’s Investors Service and Fitch Ratings have left the Philippines’rating unchanged after raising Indonesia from junk status more than a year ago.
Dollar Sales
The Philippines may shun the global
bond market this year, breaking a run of sales that stretches back a decade as it boosts domestic borrowing, Treasurer Rosalia de Leon said this month. Indonesia said in February it would sell dollar debt in the first half of 2013.
Aquino’s government recorded a current-account surplus of $7.2 billion for the first nine months of last year as remittances from overseas workers increased 6.3 percent in 2012 and revenue from foreign companies outsourcing functions, including
call centers, to the Philippines rose 18 percent.
In Indonesia, the broadest measure of trade swung to a deficit of $24.2 billion in 2012, the biggest annual shortfall since Bloomberg began compiling the data in 1989, from an excess of $1.7 billion in 2011. The government spent 211.9 trillion rupiah ($22 billion) on fuel subsidies last year, discouraging the energy saving required to reduce its import bill.
It has been cheaper to insure Philippine debt against non-payment than Indonesia’s since July 2011.
Five-year credit-default swaps on the former’s bonds dropped 44 basis points to 97 basis points in the year through March 13, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. Those on Indonesia’s notes fell 23 basis points to 131.
‘Policy Slippages’
Standard & Poor’s said in April 2012 it refrained from awarding Indonesia investment-grade status as the country’s push to lure investment was at risk from “policy slippages” such as the failed attempt to cut fuel subsidies earlier that year. President Yudhoyono said this week that his government is weighing the pros and cons of raising fuel prices or choosing another method that would more effectively target the subsidies at poorer consumers in a nation where almost one in five people lives on less than $1.25 a day, according to the
World Bank.
Both countries have the highest junk rating of BB+ from S&P, which raised the outlook on the Philippines rating to positive in December, saying a revision is possible this year as public finances and governance improve. Aquino said in January the nation “is on the cusp” of winning an investment-grade rating. Moody’s rates Indonesia at its lowest investment grade of Baa3, while it assesses the Philippines one level below that at Ba1.
Corruption Perceptions
“The Philippines’ credit has been improving while there are some short-term concerns about Indonesia’s macroeconomic management,” Takahide Irimura, Tokyo-based head of emerging-market research at Kokusai Asset, which runs
Japan’s biggest mutual fund, said in a March 5 interview. “Political situations in both countries have been stable, but Yudhoyono’s term ends soon” raising concern about what will happen next, he said.
Yudhoyono, who campaigned on promises to reduce corruption in 2009, has been beset by recent scandals within his own Democrat Party. Last year, Muhammad Nazaruddin, the former treasurer of the party, was sentenced to four years and 10 months in prison for taking 4.68 billion rupiah in bribes.
The Philippines is now seen as less corrupt than Indonesia, according to Transparency International’s Corruption Perceptions
Index. It improved to 105th place in 2012 from 139th in 2009, a year before Aquino became president. Indonesia was ranked 118th last year, slipping from 111th three years earlier, according to the Berlin-based watchdog’s website.
Priced In
Indonesia’s dollar bonds are “slightly more attractive”than its neighbor from a valuation perspective because Philippine bonds have already priced in an investment-grade status, Jonathan Liang, a Hong Kong-based senior portfolio manager for fixed income at AllianceBernstein LP, which oversees $437 billion globally, said in a March 7 e-mail interview.
Gross domestic product in Indonesia will increase 6.3 percent in 2013, while the Philippine economy will expand 5.9 percent, according to the median estimate of economists in Bloomberg News surveys. Authorities in Jakarta plan to invest more than $300 billion by the end of next year on infrastructure and manufacturing facilities, Coordinating Minister for the Economy Hatta Rajasa said in December.
“Indonesia continues to devote a meaningful amount of capital towards fixed-asset investment, helping to alleviate bottlenecks in its economy, which we believe will help them sustain long-term economic growth and lower inflation,” Liang said.
‘Weak Momentum’
Pioneer Investments said it prefers the Philippine’s local-currency debt due to the “weak momentum” for the rupiah notes. The Philippine 10-year peso bond
yield slumped 95 basis points this year to 3.45 percent, while the Indonesian rate added 25 basis points to 5.44 percent, data compiled by Bloomberg show. Indonesia’s securities returned 0.5 percent this year, compared with 7.8 percent for the peso-denominated notes, according to indexes compiled by HSBC Holdings Plc.
The peso will strengthen 2.9 percent against the dollar in 2013 after rallying 6.8 percent last year, according to the media estimate of economists surveyed by Bloomberg. It fell 0.1 percent to 40.625 yesterday. The rupiah will advance 0.1 percent this year after weakening 5.9 percent in 2012. It declined 0.1 percent to 9,700 yesterday.
Hakan Aksoy, a
fund manager at Pioneer in
London, which oversees 156 billion euros ($202 billion) of assets, said his company was short against its benchmark for rupiah bonds, meaning the firm holds less than the index it follows.
‘Inflow Bandwagon’
“After the election in Indonesia, we may increase our position,” he said in a March 5 interview. “We also expect to see lower rupiah levels in the meantime.”
Developing-nation bond funds have attracted inflows of $15.3 billion in the first two months of this year, compared with $10.1 billion in the same period in 2012, according to EPFR Global. Overseas investors raised their
holdings of Indonesian local-currency government notes by 48.5 trillion rupiah in the six months through March 8 to 283.8 trillion rupiah, according to finance ministry data. There are no equivalent figures available for the Philippines.
“We are still more positive on the Philippines than on Indonesia,” Pictet’s Ting said. “Indonesia is riding on the emerging-debt inflow bandwagon and benefitting from that. If they do not take the opportunity to address their structural problems, it will not be nice when outflows start.”
