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MANILA, Philippines—Spreads on debt paper issued from the Philippines widened in the third quarter of 2013 as uncertainties in the global financial markets dampened investor appetite for emerging market assets.
Government economic officials said the increase in the cost of borrowing for Philippine public and private entities was due mainly to external factors, noting that the country’s macroeconomic fundamentals remained encouraging.
A report by the Bangko Sentral ng Pilipinas showed that the “EMBI + Philippine” spreads averaged 169 basis points in the third quarter of 2013, up from 164 basis points in the same period in 2012. This was also up from 147 basis points in the second quarter of 2013.
The emerging market bond index (EMBI) spreads represent the additional yield investors seek when buying debt instruments from emerging markets instead of US treasuries. EMBI + Philippine spreads show the yield investors want to get when investing in Philippine debt paper instead of US treasuries.
In its latest “Report on Economic and Financial Developments,” the BSP said the widening of the country’s debt spreads reflected “the heightened risk aversion toward emerging market debt instruments.”
The report also showed that spreads on Philippine credit default swaps (CDS), which served as insurance against default, widened in the third quarter of 2013 to 124 basis points from 103 basis points in the second quarter. This was, however, narrower than the 138 basis points recorded in the third quarter of 2012.
Risk aversion toward emerging market instruments stemmed mainly from the expected easing of the stimulus program of the US Federal Reserve.
Under its stimulus program, the US Fed spends billions of dollars monthly to buy bond. Although proceeds are primarily meant to pump-prime the US economy, a portion of the liquidity goes to emerging markets in the form of portfolio investments.
The easing of the stimulus program, therefore, was feared to reduce demand for emerging market assets.
The easing of the stimulus program did not happen until last month. The US Fed cut the amount of its monthly bond purchases from $85 billion to $75 billion.
The easing of the stimulus program is expected to continue this year.
Monetary officials, however, expressed confidence that the impact on the cost of borrowing for the Philippines would be manageable.