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Philippine election rattles credit markets

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The Philippines' status as one of the best-performing sovereign credits in Asia could be at risk when the country elects a new president on Monday, after a campaign where the economy was almost an afterthought.

[SINGAPORE] The Philippines' status as one of the best-performing sovereign credits in Asia could be at risk when the country elects a new president on Monday, after a campaign where the economy was almost an afterthought.

Rated Double B in 2010 when President Benigno Aquino took office, the country now enjoys investment-grade status (Baa2/BBB/BBB-) as he reaches the end of his six-year, non-renewable term.

The economy is growing at around 6.2 per cent, inflation fell to 1.5 per cent in the 2015 fiscal year, and the budget deficit has shrunk to around one per cent from 3.5 per cent in 2010.

Mr Aquino is likely to be replaced by one of two populist candidates - Davao City mayor Rodrigo Duterte, who has championed extra-judicial killings and claims to have taken part in some, or senator Grace Poe, the adopted daughter of two film stars, who was initially ruled ineligible on the grounds of her length of residency in the Philippines.

Mr Duterte was slightly ahead of Ms Poe in the latest opinion polls, causing concern to some investors.

"While both Poe and Duterte have a fairly populist platform that will see some deterioration in fiscal discipline, Poe will be preferred, despite her lack of experience, as she appears to be supported by a group of advisers who have helped her develop her 20-point platform," said Leong Lin Jing, investment manager at Aberdeen Asset Management.

"She is also seen to favour businesses, as such garnering the support of the San Miguel Group. Duterte, on the other hand, has given little concrete plans apart from his tough stance on crime and the need to build industries and factories. His recent comments have also spurred a backlash from the international community after he has declared he is willing to sever ties with the US and Australia."


Such pronouncements threaten to impact foreign direct investment or the willingness of credit investors to buy Philippine bonds.

"What Duterte has commented recently is not going to give a lot of comfort to foreign investors," said Joep Huntjens, head of Asian debt at NN Investment Partners.

"All of the candidates want to encourage FDI, but there might be a risk that foreign investors would be cautious under Duterte. From a bondholder view, the other candidates might be better. In the near term, volatility of Philippine US dollar bonds might increase if he were to win the elections."

Philippine bonds have outperformed, thanks to strong fiscal discipline and the Treasury's habit of combining new issues with liability-management exercises, which means demand far outstrips supply.

The country's five-year CDS is quoted at 118bp bid, well inside the levels for higher-rated Malaysia (A3/A-/A-) and Thailand (Baa1/BBB+/BBB+).

Its January 2021 dollar bonds were quoted at a Z spread of just 78bp on Thursday, though wider than the 60bp at the end of April with investors focused on the election.

Much of the election campaign has focused on personalities, rather than differences in economic policy, a tacit acknowledgement by the candidates that the Philippines is on the right track.

"Everyone seems to be quite happy with what Aquino has achieved in the past few years, and are talking about continuing infrastructure development, reforms and anti-corruption measures," said Mr Huntjens.

"The current situation is optimal for bondholders, so the least change could be the best outcome."

Former interior minister Manuel "Mar" Roxas and Vice President Jejomar Binay are the two candidates who have talked most about the economy, though from opposite sides of the spectrum.

"For foreign investors, Mar Roxas will likely be preferred given his better defined economic platform and is expected to continue with President Aquino's policies," said Aberdeen's Ms Leong.

"While he talks of increasing spending to boost growth, he has, at least, acknowledged the necessity of fiscal and monetary policy management along with preserving the Philippines' current credit rating. On the flip side, Jejomar Binay poses the greater risk to undermining the current administration's PPP scheme as his campaign champions cuts in taxes and an increase in rural subsidies."

Mr Binay also faces allegations of corruption related to construction projects.


In the domestic market, five-year government bond yields are likely to rise in the near term from around 3.445 per cent currently - having tightened 60bp this year - on uncertainty over the outcome of the election.

Both government bonds and the peso have been underperforming peers over the past few weeks with investors becoming jittery.

"Philippine bond yields will likely rise in the near term with potential rise in risk premium ahead of May 9 and the election tally, which continues for a few weeks," said Euben Paracuelles, South-East Asia economist at Nomura.

"If Duterte wins, the initial reaction of investors will likely be negative. Duterte has been making controversial comments recently and there is lack of clarity on his economic agenda."

Of course, a lot depends on the new policies that the incoming president will announce.

"If these policies fall short, it could derail the current sweet spot of high GDP growth/low inflation enjoyed by the Philippines in recent years," said Eugene Yuming Leow, rates strategist at DBS Bank.

"This could be reflected in a sell-off in PHP (Philippines peso) assets as a larger risk premium gets priced in. For bonds, a knee-jerk higher in PHP yields could occur if the market views the election outcome unfavourably."