Tuesday, 25 September 2018

Philippines makes stylish start to 2014

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Signs of progress are obvious in the newly investment-grade nation, says Jonathan Rogers

Jonathan Rogers


Jonathan Rogers, IFR Asia Columnist

I RANG IN the New Year on a beach in Boracay in the Philippines. I’m sure there were worse settings than this small island with its famous white sand, although the place has changed from the sleepy paradise I first visited in the mid-1990s. That seems to square with the upward economic progress since then in a country that had been perennially dubbed the “sick man of Asia.”

Progress for Boracay has meant the construction of a shopping mall, a golf course and the invasion of McDonalds’ golden arches. It’s a shame really, and I preferred the old Boracay, but there you go. That’s progress.

I have no idea what the island’s GDP is. But judging by the legions of Russian, mainland Chinese and South Korean tourists spending with abandon, you’d have to imagine it has made a decent contribution to the Philippines’ recent emergence as an investment-grade sovereign credit. Moody’s set the seal on this credential when it bumped up the country in May, following earlier upgrades by Fitch and Standard & Poor’s.

Mercifully, the island was spared the worst of the brunt of typhoon Haiyan, which wiped out the city of Tacloban on the nearby mainland, but the destruction of the crown jewel of the country’s tourism industry in another super typhoon doesn’t bear thinking about.

And although the Philippines is on course to meet its GDP target growth of 6%–7% for 2013, despite the ravages of Haiyan – the most powerful storm to hit land – there must surely be the inclusion of a hefty natural disaster premium in calculating the country’s long-term credit risk rating. If you buy the global warming argument and that events such as Haiyan are therefore certain to become more frequent, you might be less sanguine about booking long-term Philippines risk.

INTERESTINGLY, THE FILIPINOS I spoke to about the country’s powerhouse economic performance were especially sceptical, complaining that the “masa”, or ordinary Filipinos, were failing to feel its effects in their levels of prosperity. That might not apply in Boracay, but certainly Manila remains a pollution-ridden and traffic-clogged sprawl with oases of prosperity amid the chaos, principally in vast shopping malls and upscale residential developments.

Another thing also hasn’t changed. Politics and power in the Philippines remain very much the family businesses they have always been. Influence remains the hegemony of a few dozen families, whose names inspire a mixture of awe, possibly reverence, and even a sense that their participation alone is needed to lend legitimacy to any initiative.

Who can say whether this “system” has been crucial to the Philippines’ recent growth surge, or whether it crimps potential output? Ferdinand Marcos spent 20 years in power from 1965 attempting to ameliorate the influence of the big families. We will never know the true effect of the experiment, however, since Marcos stole tens of billions from state assets over that period and sent it offshore. And the truth is that the bulk of that money has never been repatriated.

Whatever the conjecture, one thing’s for sure: Philippines politics is guaranteed to be colourful, and that means the recent period of political stability the country has enjoyed under President Benigno Aquino does not necessarily represent the new status quo. It’s worth remembering that former president Gloria Macapagal Arroyo remains under house arrest on corruption charges. Equally it’s worth noting that another former president, Joseph Estrada, who was also previously under house arrest for corruption, was last year elected to the powerful post of Mayor of Manila.

The country [could] find itself led by president Manny Pacquiao, arguably the world’s greatest boxer and one who hasn’t yet hung up his professional gloves

WITH SUCH PRECEDENTS, and knowing the fondness of Filipino voters for showbiz and sporting fame, it’s not inconceivable that when Aquino’s term is up in 2016 the country will find itself led by president Manny Pacquiao, arguably the world’s greatest boxer and one who hasn’t yet hung up his professional gloves despite sitting in the Philippines senate. That would be an interesting scenario and one I would love to have an advanced analysis about from the ratings agencies.

All of which brings me to last week’s super-slick US$1.5bn 10-year SEC-registered bond from the Philippines, which cemented the reputations of the country’s debt officials as some of the most efficient in the international capital markets. The sovereign priced in its now habitual, quick-fire manner, and comfortably through its secondary curve while at the same time bringing innovation in the form of an accelerated tender offer for six of its outstanding dollar bonds, allowing same-day settlement for the new and tendered paper.

The new bonds rallied in secondary, confirming the pricing was on the mark, so cigars all round for everyone. I probably wouldn’t mind holding the paper on a hedged basis, on the assumption that the northward drift of US Treasury yields will be measured and not force a blowout of Asian credit spreads. But I reckon I wouldn’t look beyond a two-year hold. Around that time Philippines politics will start to get very interesting indeed and I, for one, will be seeking to avoid a knockout punch. 

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