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Duterte goodbye to US swelling costs on US$42b bonds

Philippine President Rodrigo Duterte's decision to greet his hosts in China by saying "goodbye" to the US looks set to come with a hefty financial price tag.

[SINGAPORE] Philippine President Rodrigo Duterte's decision to greet his hosts in China by saying "goodbye" to the US looks set to come with a hefty financial price tag.

As Mr Duterte's war on drugs drew criticism from the US and European Union, foreign-currency notes issued by the Philippines handed investors a three-month loss of 2.3 per cent, the worst among developing nations, according to JPMorgan Chase & Co indexes.

That means the government and corporate issuers will pay more when adding to their US$42 billion pile of such bonds. Jens Nystedt, a New York-based portfolio manager at Morgan Stanley's asset arm, which oversees about US$406 billion, sees room for a 50 basis point widening in sovereign yield premiums.

"Recent public statements have made some analysts worry about unpredictability of the new leadership," he said. "The new administration remains popular at home and pragmatic on the economic front. That said, we will follow closely local business sentiment to see whether the rhetoric has any impact on local dynamics and the country's ability to attract foreign direct investments."

Morgan Stanley Investment, Amundi Asset Management and Natixis Asset Management say they've been underweight Philippine bonds and prefer Indonesia. The spread on Philippine sovereign bonds over Treasuries has widened to 108 basis points from a low of 78 basis points in April. China offers a spread of 155, even though it is rated five levels higher than the Philippines by S&P Global Ratings, and Indonesia 227.

Mr Duterte, who met Chinese President Xi Jinping in Beijing this week to mend relations strained over territorial disputes, wants to build on his nation's US$19 billion in exports shipped in 2015 to China, its biggest trading partner.

He raised a middle finger when cursing the EU last month for criticism of his drug war, in which police data shows more than 3,000 suspects have been killed. He told an investment forum in Beijing on Thursday that he announced "separation from the US, both military" and economic, after saying Wednesday night "it's time to say goodbye".

Mr Duterte, whose term started June 30, said he was mulling plans to require US visitors to the Philippines to obtain a visa and he might go to Russian President Vladimir Putin and tell him "there's three of us against the world".

On Thursday, State Department spokesman John Kirby described the US as "baffled" by Mr Duterte's rhetoric.

"That creates another round of uncertainty in the financial markets," said Joey Cuyegkeng, a senior economist in Manila at ING Groep NV. "I don't know whether it's posturing to further the relationship with China or it's part of his anti-US rhetoric." The peso fell 0.3 per cent as of 9:30am Manila time on Friday. The currency dropped to the weakest in seven years this month and US$298 million fled the nation's bonds in August.

Mr Duterte needs funding as he plans to boost 2017 government spending 12 per cent, widening the deficit to 3 per cent of gross domestic product from an estimated 2.7 per cent this year.

The current-account surplus may slide to US$3 billion next year from US$5.8 billion this year due to rising imports, the central bank said in September.

Trade Secretary Ramon Lopez said aid from Chinese partners would include a US$3 billion credit facility from Bank of China Ltd. Pacts on transport infrastructure, financing from Export-Import Bank were among those forged as China committed to support development in the Philippines.

"Philippine bonds exhibit a very low spread versus US Treasuries, meaning their spread doesn't offer much protection," said Brigitte Le Bris, head of emerging-market debt and currencies in Paris at Natixis Asset Management, which oversees US$365 billion. "Mr Duterte's comments about the US, about the EU were very badly perceived by the market."

Demand for the nation's US dollar bonds from local banks has played a key role in limiting the yield spread blowout as they invest money remitted by Filipinos working overseas.

The sovereign spread is a benchmark for company yield premiums. Among the largest corporate issues are the US$1.2 billion debt due 2024 of state-owned Power Sector Assets & Liabilities Management Corp, and the US$750 million and US$516 million notes due 2023 of conglomerates JG Summit Holdings Corp and San Miguel Corp.

"I have to see what will happen with the politics," said London-based Sergei Strigo, head of emerging-market debt management at Amundi, which oversees US$1.1 trillion.

"Obviously, we're monitoring the situation but for this time we still prefer Indonesia on a relative-value basis."