Bond investors are endorsing Philippine President Benigno Aquino’s view that his country has outgrown its label as the “Sick Man of Asia,” awarding it the same default risk as a nation rated two levels higher.
Credit-default swaps insuring the sovereign notes of Southeast Asia’s fastest growing economy have dropped 26 basis points this year to 87.8 basis points. That’s only 0.3 basis point more than Malaysia, even though its western neighbor has a A- rating from Standard & Poor’s, two levels higher than the BBB for the Philippines.
Aquino said last month that the Philippines was no longer the “Sick Man of Asia,” amid an increase in exports and remittances from overseas workers. S&P raised the country’s rating one rank on May 8, a year after elevating it to investment grade. Bangko Sentral ng Pilipinas Governor Amando Tetangco said May 13 others will follow “sooner rather than later.” Moody’s Investors Service and Fitch Ratings Ltd. upgraded the sovereign higher than junk last year.
“The debt dynamics in the Philippines are improving,” said Chua Hak Bin, a Singapore-based economist at Bank of America Corp. “There is a good chance Philippines will get a credit-rating upgrade from the other two international assessors.”
President Aquino said in an interview with Bloomberg Television on May 22 that he’s optimistic Moody’s or Fitch will follow with upgrades.
“We believe that the fruits of our labors are manifesting themselves,” he said.
Anti-corruption champion Aquino, who is increasing spending to a record to lure investments and boost growth, will end his six-year presidency on June 2016. Economic growth last year of 7.2 percent in the Philippines was the fastest in Southeast Asia. While expansion will slow to 6.3 percent in 2014, according to the median estimate of economists surveyed by Bloomberg, that’s still the highest in the area and compares with a predicted 5.2 percent for Malaysia.
When Standard & Poor’s raised Philippines to BBB from BBB- last month, it said that it now believes “the ongoing reforms to address shortcomings in structural, administrative, institutional, and governance areas will endure beyond the current administration.”
Malaysia is rated A3 by Moody’s and A- by S&P and Fitch, four steps higher than speculative-grade at all three rating companies. In contrast, the Philippines has a Baa3 score from Moody’s with a positive outlook, and a BBB- grade from Fitch. Both are three levels below Malaysia.
“Malaysia’s credit-default swaps should trade lower than Philippines given its higher credit rating,” said Wong Chee Seng, a currency strategist at AmBank Group in Kuala Lumpur said in a telephone interview on May 27. Improving perceptions of the Philippines credit risk stem in part from strength in the nation’s currency, he said.
The peso has gained 1.4 percent against the dollar this year, after dropping 7.6 percent in 2013 following a 6.9 percent increase in 2012.
Public debt to gross domestic product in the Philippines has fallen to 53.1 percent from 62.4 percent in 2007, according to Bank of America’s Chua. In Malaysia, the ratio climbed to 54.8 percent from 40.1 percent in the same period, he said.
Household debt in Malaysia is the highest in Asia outside Japan at 86.5 percent of GDP last quarter, raising expectations for the central bank to raise interest rates, according to a Bank of America report on June 4.
Monetary tightening could lead to debt-rating upgrades for Malaysia and to its credit-default swaps falling further below the Philippines, according to AmBank Group’s Wong.