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Philippines' investment-grade status hits bum note

Now that the Philippines has achieved investment-grade status by Fitch, investors might be disappointed with tighter spreads and limitations in the stock market.

Fitch has become the first rating agency to upgrade the Philippines to investment-grade status with a stable outlook, but commentators on the ground question how important the upgrade will be as investment grade has already been largely priced in. Before the upgrade was announced, local currency bonds in the Philippines were better priced then in Malaysia or in Thailand, with 10-year local currency debt priced at 3.5% compared with 4% in Malaysia and 5.54% in Thailand.

Corporates are also finding borrowing costs cheaper than before. Indeed, the Philippine Long Distance Telecommunication Company (PLDT) became the first company in the Philippines to reach investment grade, one of the very rare cases when a company has by-passed the rating of the sovereign.

Francisco Sebastian, president, First Metro Investment Corporation

In October, Moody’s upgraded PLDT again from Baa3 to Baa2, coinciding with the long-term foreign currency rating of the sovereign from Ba2 to Ba1. PLDT remains the leading player in the local telecoms sector, with more than 60% market share in the mobile, broadband and fixed-line businesses.

“Why would a company such as Hitachi, or any others for that matter, care much about whether or not we are investment grade?" asks Erramon Aboitiz, president and CEO of Aboitiz Equity Ventures. "They are more likely to make a risk assessment independently.”

Moreover, adds Brian Hong, senior managing director at CVC Capital Partners in Hong Kong, "because investment grade has already been priced in, there is a chance that gaining the accolade will actually be quite disappointing as funding costs may not really change”.

Although spreads might not change dramatically, gaining investment-grade status will put the Philippines on the investment map, opening up the country to funds from countries previously unable to step foot in non-investment grade countries.

“We have already had a lot of interest from Japanese funds who are currently restricted from investing here,” says a senior banker based in Manila. “Once we reach investment grade, the Japanese will pounce. There will be no stopping them.”

At the very least, if the Philippines reaches investment grade, spreads will remain tight, according to Antonio Paner, treasurer and head of financial markets group at the Bank of the Philippine Islands. “Without the stamp of approval by the international rating’s agencies, we could see them widen again.”

Since 2010, when president Benigno Aquino’s administration came into power, there has been a heavy handed push to tackle corruption that riddled the previous administration. The benefits of this have trickled down into the economy. Benchmark interest rates are at all time lows of 3.5%, foreign exchange is strong with the peso at 40.7 to the dollar and credit spreads on government bonds are as tight as they have ever been.

In 2012, GDP growth hit 6.6%, outpacing most of the country’s Asian neighbours and beating most predictions.

“The fact of the matter is that the government and the central bank have been over performing,” says Consuelo Garcia, country manager of the Philippines for ING.

“President Aquino’s approval ratings have reached 80% and each target that the central bank makes have either been hit or exceeded – all this despite external shocks in Europe and the US. We have never seen anything like this in the history of the Philippines.”

Fitch led the pack when it came to Turkey’s upgrade, leap-frogging the positive-outlook step and granting it investment grade before Standard and Poor’s (S&P) and Moody’s.

“Moody’s and S&P are a bit more cautious,” says Wick Veloso, country head of the Philippines at HSBC. "Fitch has been proactive and listening a bit more to what the market has been doing."

There are additional concerns that there will not be enough supply to quell the potential demand now that the Philippines has reached investment-grade status. Although stock exchange capacity has risen, it is still only trading at around $200 million per day.

“In a booming economy like that of the Philippines, there is an expectation that there will be myriad IPOs and increased M&A activity, but this is going a lot slower than expected,” says Francisco Sebastian, president, First Metro Investment Corporation.

“In a booming market, you want IPOs to come twice a day, not twice a week like we have in the Philippines. The reality is that there are not many big companies that can come to market and this could cause problems, especially with all the excess liquidity floating around.”


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