Fitch downgrade, weak peso smudge PH bond appeal

MANILA, Philippines—The Bureau of the Treasury on Tuesday (July 13) sold only less than half of its bond offering, which fetched higher bid rates from investors as Fitch Ratings’ downgraded outlook for the Philippines and the weaker peso made it more expensive to borrow.

The Treasury offered P35 billion in new 20-year bonds but awarded just P16.79 billion despite strong demand with P63.07 billion in bids.

National Treasurer Rosalia de Leon said the coupon rate of 5.125 percent for the bonds maturing in July 2021 was “aligned with the movement in secondary levels with curve extension.”

De Leon conceded that the bond yield was “partially” affected by the peso’s weakness as well as the “negative” outlook assigned by Fitch, from “stable” previously, to the Philippines’ investment-grade credit rating of ‘BBB’.

She said the annual rate was more impacted by the bond’s duration plus liquidity premium.

Treasury data showed that the average yield was only 12.5-basis points (bps) higher than the BVAL reference rate. A similar T-bond tenor issued in early 2019 had a higher coupon of 6.75 percent amid high inflation back then, Treasury data showed.

In a report also on Tuesday, Rizal Commercial Banking Corp. (RCBC) chief economist Michael Ricafort said Fitch’s revised outlook for the Philippines “would lead to some adjustments on the risk premiums in the Philippines, in terms of some uptick in local interest rate/credit costs and some healthy profit-taking in the local financial markets.”

“But hopefully these would be minimal/negligible, since there is still a chance to prevent an actual downgrade of the credit rating from happening in the coming months, as the Philippines would remain in the investment grade universe, regardless of the outcome,” Ricafort said.

For Ricafort, the Philippines can avoid a credit-rating downgrade if it will speed-up mass vaccination to further reopen the economy in order to shore-up tax revenue collections to narrow the budget deficit, temper ballooning borrowings, and repay debt.

In a separate report also on Tuesday, UK-based Oxford Economics said the recent weakness in the Philippine peso—which breached the 50:$1 level last week—as well as the Thai baht mainly was the result of “COVID-19 setbacks and relatively unimpressive growth outlook in Asia-Pacific, compared to the strong growth we forecast for the US.”

TSB