And despite early year drawbacks due to the delays in EVAT implementation, the threat of surging oil prices and political snags, Philippine assets rallied strongly in 4Q05 to close the year on a high note.
The Philippine peso appreciated 5.2 percent against the dollar in 4Q05, finishing the year up by 5.7 percent to become the best performing currency in Asia and No. 5 in the world.
Philippine bonds were among Asia’s best in 2005, outperforming most other debt securities with similar ratings (BB- by S&P). The Philippines 8.875-percent dollar bond due in 2015, for example, was up 10.5 percent in 2005, while the longer-dated 10.625 percent dollar bond due in 2025 was up 18.6 percent for the year.
Meanwhile, Philippine equities (as measured by the benchmark Phisix) surged 7.9 percent in 4Q05 in local currency terms and 13.9 percent in dollar terms. On a full year basis, Philippine equities were up 21.6 percent in dollar terms, outperforming both the MSCI Asia Pacific ex-Japan (+21 percent) and MSCI World indices in 2005 (+10 percent).
It is also the second straight year that Philippine equities placed third best in the region, following Korea’s 57.8 percent and India’s 37.3-percent gains last year. In 2004, it placed next to Indonesia and Australia which placed first and second, respectively.
As to be expected, petrodollar countries topped the list for best performing stock markets in the world. Eight out of the top 10 came from the Middle East as high oil prices in 2005 have boosted profits in their major industries which are all energy-related.
Stock markets in developed countries, likewise, performed well in 2005 with the exception of the US. In US-dollar terms, however, only Canada, Japan and Germany posted double digit returns.
The Japanese stock market, which was the toast of the investing world last year after a decade-long hibernation, was up 24.7 percent in $ terms in 2005. Note, however, that the Philippine stock market was not far off with a 21.6-percent gain in $ terms.
The yields on Treasury bills fell across the board during the first auction of the year. The 91-day Treasury bill rate fetched 4.961 percent from 5.146 percent last week. The 182-day Treasury bill rate improved to 6.807 percent from 7.206 percent the previous week, while the yield on the 364-day Tbill declined to 7.611 percent from 7.969 percent. Aggregate tenders reached P23.05 billion or nearly seven times the amount offered.
Last week also marked the successful sale of the $2.1-billion bond issue by the Philippine government which was believed to be more than three times oversubscribed. The issue was split into USD1.5 billion of a USD 25-year tranch at 7.875 percent and EUR500 million of a Euro 10-year tranche at 6.375 percent. This issue was a major improvement from last year when a 25-year dollar bond was priced at 9.5 percent.
We think that the timing of the bond issue was impeccable. Not only did it take advantage of the current favorable conditions in emerging market bonds, but by already raising two-thirds of its planned international borrowings for the year, it gives our economic managers some leeway down the road (in case global conditions are not as favorable).
Nevertheless, we continue to be long-term bullish on Philippine assets on the basis of improving fiscal and macro fundamentals.
If 2005 signaled the fiscal turning point for the country, we believe that 2006 will be a defining year. Things to watch for are the December 2005 fiscal data and the 2005 GDP data. These statistics, including the successful implementation of the 2nd phase of EVAT on Feb. 1, will set the tone for a possible upgrade in Philippine credit rating this year.
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