Schroder sees losses as Aquino rejects risk of an overheating PHL economy

PRESIDENT Aquino’s confidence that there is no risk of overheating in Southeast Asia’s fastest-growing economy isn’t reflected in the country’s bond market.

Sovereign peso notes fell 5 percent in three months in local-currency terms, the most among 32 emerging-market indexes tracked by Bloomberg, while the Philippines currency dropped 2 percent against the dollar. Inflation quickened to a two-year high in January and Nomura Holdings Inc., Japan’s largest brokerage, is forecasting 100 basis points of interest-rate increases this year.

“The inflation story has become a little bit more worrying,” Rajeev de Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder Investment Management Ltd., said in a February 18 interview. “Once they start moving the rates, then the bonds will be at a little bit more interesting level.”

Mr. Aquino said in a February 19 interview, the economy can cope with the current pace of growth above 7 percent without excessive inflation or asset bubbles. Credit Suisse Group AG warned last week the Philippines could overheat if policy settings are kept “too loose for too long” and a government report this week showed the country’s balance of payments (BOP) swung to the biggest deficit in at least 16 years last month.

Real yields

PHILIPPINE gross domestic product increased 6.8 percent in 2012 and 7.2 percent in 2013, the fastest two-year pace since 1954 to 1955, data compiled by Bloomberg show. The government is targeting growth of 6.5 percent to 7.5 percent this year. The $250-billion economy is underpinned by demand for homes and office space and the need to create jobs for millions entering the labor force, Mr. Aquino said.

The BOP shortfall was $4.48 billion in January, compared with a surplus of $419 million the previous month, as net portfolio outflows swelled to a record $1.8 billion amid an emerging-market rout, central bank data showed on February19.

Bangko Sentral ng Pilipinas has kept its overnight borrowing rate at a record low 3.5 percent since October 2012 and next reviews policy on March 27. The scope to keep interest rates steady has narrowed, central bank Governor Amando M. Tetangco Jr. said on February 7, two days after a report that showed inflation accelerated to 4.2 percent in January, compared with a monthly average of 2.9 percent in 2013.

Ten-year peso sovereign bonds give investors a yield of 0.13 percent after adjusting for consumer-price gains, compared with 0.73 percent for Malaysia and 1.86 percent for Thailand.

Inflation risk

INVESTORS should be underweight on Philippines currency securities as borrowing costs will probably be raised next quarter, Wee-Khoon Chong, head of rates strategy Asia ex-Japan at Nomura in Singapore, said in a February 18 e-mail interview. Inflation could reach 4.7 percent this year, Nomura predicts, more than the central bank’s estimate of 4.3 percent.

The yield on Philippines benchmark 10-year bonds has risen 67 basis points, or 0.67 percentage point, to 4.33 percent in three months, according to data compiled by Bloomberg.

Declines in peso notes will be limited as local banks pump excess cash into the securities, said Guan Yi Low, who helps oversee about $97 billion as investment director at Eastspring Investments in Singapore. The domestic cash supply rose by more than 30 percent every month from July to December, central bank data show.

Excess cash

“FURTHER weakness in the bond market will be limited due to the ample liquidity in the banking system,” Low said in a February 18 interview. “Monetary tightening has already been priced in,” she said, adding that Eastspring, a unit of UK’s Prudential Plc. sees 25 to 50 basis points of policy-rate increases this year.

The peso has rallied 1.8 percent since touching a three-year low of 45.475 per dollar on February 4, prices from Tullett Prebon Plc. show. The currency has weakened 8.7 percent against the dollar in the past year, compared with 8.4 percent for Thailand’s baht and 18 percent for Indonesia’s rupiah.

Morgan Stanley recommended investors buy the peso via non-deliverable forwards as policy-makers may curb excessive weakness in the currency that could stoke imported inflation, and expectations of rate increases will also be supportive, strategists including Hong Kong-based Geoffrey Kendrick and Kewei Yang wrote in a report released on February 7.

Taper impact

U.S. 10-year Treasury yields have risen 63 basis points to 2.76 percent since the end of May last year, after the Federal Reserve first signaled its intention to cut its monthly bond purchases. Yields worldwide will probably drift higher as the US central bank continues tapering and the Philippines won’t be immune, Schroder’s de Mello said.

“We have concerns on domestic inflation and currency weakness, which is stemming from the emerging-market vulnerability,” Jill Singian, a trader in Manila at Bank of the Philippine Islands, the nation’s largest lender by market value, said in an interview yesterday. “The longer end of the yield curve still has room to catch up.” –Lilian Karunungan & Yumi Teso / Bloomberg News