Philippine pre-poll wars risk alienating investors

Seasoned investors expect a fair degree of volatility from the Philippines, but paralyzing political infighting before next May’s election threatens to push the country off the radar of acceptable risk.

The peso steadied yesterday after being pounded to its lowest close on record the previous day. But it still stands close to its all-time low of 55.75 to $1, making it harder for the government to pay ever-mounting debt and ramping up an already costly oil import bill.

Then there are doubts about the extent of export-led growth, questions over whether central bank reserves are as high as the officially stated $16 billion, the 73 percent annual slide in foreign investment in the second quarter, rampant graft and threats from Muslim militants.

What keeps many investors from shunning the Philippines entirely is the fact that it is the largest sovereign issuer in Asia outside Japan and pays a hefty yield premium.

"Everybody knows it’s rotten, but nobody wants to be the first one to sell," said a regional analyst at a European bank in Singapore, who asked not to be identified.

"Once the thing goes under — for me it’s not a question of if, it’s a question of when — everybody will head for the exits. There will be nobody else to take the other end of the market."

Chronically anemic tax collection has improved and the budget deficit has been held in check so far this year.

But the government must shell out 29 percent of its resources — rising to a proposed 32 percent next year — to service debt, much of which is denominated in foreign currencies.

According to Basis Point, Manila has $7.8 billion in overseas obligations maturing through 2008 and $12 billion after that.

Sentiment waning

"Definitely investor sentiment has deteriorated, one toward the Philippines and probably generally toward emerging markets in the last week or two," said James Blair, director of fixed income investment at Aberdeen Asset Management in Singapore.

"On the political side, we always expect it to be a bit of a circus. But it’s actually looking a little more cloudy than we probably thought."

Politics is a nasty business in the Philippines at the best of times, with personality power, character assassinations and big-money backroom deals all the more acute during election time.

Uncertainty after a foiled coup in July was just easing when President Arroyo announced her candidacy against potential rivals including tycoon Eduardo Cojuangco, film star Fernando Poe Jr. and Panfilo Lacson, a senator accused of multiple murder.

Investors know that little official business will get done as candidates jostle for votes over the next seven months.

But now a three-way war is looming between the government, legislature and judiciary after a rapid but well-backed campaign by opposition lawmakers to oust Hilario Davide Jr. as head of the Supreme Court. Davide denies allegations he misused public funds.

"The whole affair reinforced impressions that our institutions are constantly volatile and our politicians constantly irresponsible," political analyst Alex Magno wrote.

Earlier this month, the Philippines took advantage of warm investor sentiment towards emerging markets to prefund nearly half of its overseas borrowing needs for next year, raising $1.05 billion by reopening its existing 2014 and 2025 bonds.

The government may return to the market before the end of the year, but foreign investors may not be so welcoming this time.

The stock market is up nearly 34 percent this year, making it one of Asia’s better performers. But last week, foreigners were net sellers of $103 million worth of Philippine shares, according to investment bank Nomura.

Election looms, economy struggles

With the peso perilously near the all-time low of 55.75 per dollar it hit during the ouster of President Joseph Estrada in January 2001, the Bangko Sentral ng Pilipinas (BSP) blamed market "over-reaction" for the currency’s close at 55.50 on Monday.

"It will normalize," BSP governor Rafael Buenaventura said. "Exports are likely to recover in the last quarter."

That may be wishful thinking, predicated by hopes of recovery by the country’s key markets in the United States and Japan.

Electronics shipments, making up two-thirds of total exports, have been shrinking and there are questions about how long the Philippines can slug it out with cheaper producers like China. — Reuters