RemittancesGateway.org

Philippine Bonds Rally as Remittances Defy Forecasts

Friday, 28 August 2009 09:03

Source: Bloomberg
By: Clarissa Batino and Lilian Karunungan

Filipinos working abroad are sending more money home as remittances drop across emerging markets, a signal to Western Asset Management Co. and Kokusai Asset Management Co. that Philippine bonds will rise.

The payments, which account for 10 percent of the economy, totaled $8.5 billion in the first half of the year and increased 3.3 percent in June from a year earlier as more Filipinos went to work in the Middle East, according to the central bank. Remittances to Mexico slumped 15 percent in June. The global recession will reduce flows to developing nations by 7.3 percent this year, the World Bank said last month.

“International investors are positively surprised,” Rajeev de Mello, the Singapore-based head of Asian investments at Western Asset, which oversees $485 billion and is buying 10- year peso-denominated bonds, said in an interview. “What’s also positive is a very stable currency.”

Remittances from the 8.7 million migrant workers and immigrants abroad will climb 2 percent this year from a record $16.4 billion in 2008, JPMorgan Chase & Co. said this month, revising an earlier forecast for a 12 percent drop. The payments will help push the yield on 10-year debt down to 7.5 percent by year-end from 7.98 percent, according to Tokyo-based Kokusai, which oversees $61 billion and manages Asia’s biggest bond fund. Kokusai’s outlook suggests the debt would return 5.8 percent in local-currency terms in four months.

Western Asset predicts the peso will advance 3.9 percent to 47 per dollar by the end of 2009, compared with 48.81 as of 1:09 p.m. in Manila and the 47.90 median forecast of analysts surveyed by Bloomberg.

Moody’s Upgrade

Philippine peso bonds returned 6.1 percent so far this year, second only to Indonesia’s 14.7 percent among 10 Asian markets tracked by HSBC Holdings Plc indexes. The country’s local debt has a market value of $35 billion.

The rally halted in June when the government raised its 2009 budget deficit estimate for the third time this year, pushing the yield on the 7.875 percent bond due February 2019 to a three-month high of 8.2 percent. The advance resumed last month as Moody’s Investors Service upgraded its Philippine credit rating for the first time in 12 years, citing “stability” in the financial system and rising currency reserves. The rating was raised one level to Ba3 on July 23, on par with Indonesia, Turkey and Uruguay.

Oil Money

More Filipinos work in the Middle East, which is still “enjoying the benefits of oil price increases,” Manila-based central bank Deputy Governor Diwa Guinigundo said in an e-mail. Shipping companies, hurt by a slump in global trade, are hiring sailors from the country because they work for lower wages than Europeans, he said.

The Middle East employs 43 percent of the estimated 5 million Filipinos working in foreign countries, based on government data that exclude 3.7 million immigrants. About 262,000 work in maritime jobs abroad. The International Labour Organization recommends a monthly wage for seafarers of at least $545. The minimum wage in the Philippines is less than $8 a day.

“It was easier to find work overseas,” said Genevev Crisostomo, a 27-year-old from Manila working as a cashier at a gas station in Dubai operated by Emirates General Petroleum Corp. She applied in November and started work in January. “Filipinos were more than 50 percent of the workforce,” she said.

Yield Gap

De Mello at Western Asset, part of Baltimore-based Legg Mason Inc., said the yield premium on longer-dated Philippine debt makes it attractive for investors to buy the notes with borrowed money. The difference between two- and 10-year rates tripled to more than 3 percentage points this year, from less than 1 percentage point at the end of 2008. The gap is now the widest since February 2005, when lawmakers delayed approving President Gloria Arroyo’s proposals to raise taxes.

The government predicts its budget deficit will swell to a record 250 billion pesos ($5.1 billion) this year, having forecast a shortfall of 102 billion pesos at the start of 2009. Arroyo, who is barred from seeking reelection in May’s elections, plans to reduce the deficit to 233 billion pesos in 2010, according to Deputy Treasurer Christine Lacson-Sanchez.

“The market wants to know whether the government, in particular the new administration, will have the real means to consolidate the fiscal situation over the medium term, two to three years down the road,” said Anthony Chan, the Asia sovereign strategist in Hong Kong at AllianceBernstein L.P., which oversees $467 billion globally. He declined to discuss the firm’s investment holdings.

The Philippine economy expanded 1.5 percent last quarter, after growth slumped to a decade-low 0.6 percent in the previous three months, according to the government statistics board.

Foreign-exchange reserves climbed to a record $40.2 billion last month, buoyed by funds from overseas workers. Data on inflows from foreign workers in July is due on Sept. 15.

“Remittances are still robust and this trend will continue to provide crucial support,” said Shigemitsu Tsuruta, an emerging-market economist in Tokyo at Kokusai. The firm holds Philippine local-currency bonds with maturities ranging from three to 10 years, he said.