The Philippine central bank is allowing record Christmas remittances from overseas workers to give the peso shelter during a global selloff.
The currency gained 0.9 per cent against the dollar this quarter in Asia’s best performance, after an unprecedented US$19.9 billion of remittances in the first 10 months.
Philippine government bonds returned 0.2 per cent in the past month after Moody’s Investors Service raised the credit rating one level to Baa2, the second-lowest investment grade and surpassing Indonesia, whose debt lost 0.6 per cent, Bloomberg indexes show.
The central bank appears more inclined to let the peso appreciate, after the currency fell in December in the last three years, to keep inflation in check, according to HSBC Holdings Plc.
Moody’s attributed its decision to the Philippines favorable economic growth prospects and President Benigno Aquino’s success in reducing debt levels since taking office in 2010.
The ratings company noted that most of the nation’s current-account receipts come from manufacturing, services and cash sent home from overseas.
“Remittances are highly supportive for the Philippines and the current account,” Mark Capstick, a London-based asset manager at BNP Paribas Investment Partners, which oversees 497 billion euros (US$608 billion), said in a December 18 e-mail.
“Clearly, the investment rating upgrade from Moody’s will have further improved the country’s outlook for investors.”
Capstick said he’s positive on the peso due to the “stability the currency exhibits” in periods of risk and is holding Philippine bonds and non-deliverable forwards.
Oil, inflation
Remittances, which account for 10 per cent of gross domestic product, peak toward the last quarter as some 10.5 million Filipinos repatriate cash for Christmas and New Year.
While Philippine bonds offer the region’s lowest yields after accounting for consumer-price gains the central bank appears to be biased toward curbing peso weakness to meet its lower 2015 inflation target, according to HSBC.
Remittances are helping support the peso, Bangko Sentral Ng Pilipinas Governor Amando Tetangco said in a mobile-phone message.
The plunge in oil should cut inflation, according to Moody’s December 11 credit statement.
Price increases eased to an annualized 3.7 per cent in November, the least in a year and below 2014’s average of 4.3 per cent, data compiled by Bloomberg show. Inflation will average 4.2 per cent this year and three per cent in 2015, according to central bank forecasts.
The current-account surplus will total US$6.6 billion in 2014 and US$6.8 billion next year, Tetangco said in a November 21 briefing in Manila.
Real yields
Philippine 10-year notes offer a real yield of 0.7 per cent after accounting for consumer-price increases, compared with 1.7 per cent in Indonesia and 1.6 per cent for Thailand, data compiled by Bloomberg show. The central bank raised its benchmark rate twice this year to four per cent.
“The recent ratings upgrade by Moody’s highlights the positive structural growth story that we are seeing,” Dominic Bunning, a Hong-Kong based currency strategist at HSBC, the most-accurate forecaster for the peso in Bloomberg surveys in the four quarters ended September, said in a December 18 e-mail. “This means it is unlikely we will see significant outflows even if negative real rates will make it harder to attract inflows.”
The Philippine currency is still vulnerable to dollar strength as the Federal Reserve readies to raise interest rates, according to BDO Unibank Inc.
‘Still vulnerable’
Strategists forecast the peso will weaken 2.1 per cent to 45.50 a dollar next year, from 44.56 as of 10am in Manila, the median estimate in a Bloomberg survey shows.
“The Philippines, despite all of our good fundamentals, is still vulnerable to external factors and one of them is a rising dollar,” Jonathan Ravelas, chief market strategist at Manila-based BDO Unibank, said by phone December 19. “We still have a strong balance of payments and current-account surplus, which are good barometers of a strong currency.”
Aberdeen Asset Management Plc sees the peso as insulated from the global selloff by low overseas market participation. International investors hold 7.2 per cent of the sovereign securities, compared with 39.4 per cent in Indonesia and 28.6 per cent for Malaysia, according to a December 22 report by BNP Paribas SA.
The cost of insuring Philippine government bonds for five years using credit-default swaps fell eight basis points, or 0.08 percentage point, this quarter to 90, according to CMA prices. Similar contracts on Indonesian debt were at 160.
It’s a “rock star!” Edwin Gutierrez, who helps manage US$13.5 billion in emerging-market debt at Aberdeen in London and whose holding peso forwards, said in a December 17 e-mail, referring to the currency.
“It’s been a pleasant surprise. We have a core long on the Philippine peso and so have been enjoying its safe-haven status.” — Bloomberg