Remittance Slump to Hurt But Not Derail Philippine Debt

(Bloomberg) -- Philippine bond gains may be crimped by a surprising slump in remittances, but a raft of underlying positives should help the securities keep their place as the region’s best performers this year.

Money sent home by overseas workers tumbled 4.1% in August, the monetary authority said earlier this month, fueling concern this will reduce bank deposits and trim demand for the nation’s sovereign debt. At least initially, the slide appeared to add another negative for Philippine Treasuries, which have struggled to maintain their momentum following a stellar rally in the second quarter.

Philippine bonds have returned 17% for dollar-based investors this year, far outpacing second-placed Taiwan with 9%, according to data compiled by Bloomberg. No less than 15% of that was in the second quarter though, when the central bank cut its benchmark rate by a cumulative 100 basis points to combat the impact of the coronavirus. Since then, they have only returned about 2%.

All things considered, the latest blow from remittances appears unlikely to prove the tipping point for a broader decline.

Bangko Sentral ng Pilipinas bought 540 billion pesos ($11 billion) of government promissory notes this month as part of measures to assist the state’s financing, reducing the need for additional debt issuance. The government may ask the central bank to help with next year’s spending too, Finance Secretary Carlos Dominguez said in mid-October.

Although the central bank’s deficit financing has drawn some comparisons with Bank Indonesia’s debt-monetization program, there appears to be little concern in the wider market.

“The Philippine central bank’s advances to the government are not deemed as risky as the limits are explicitly tied to past government revenues instead of current funding needs, and the window for repayment is relatively short,” according to Justin Jimenez at Bloomberg Economics in Hong Kong.

A narrowing budget deficit is also a bond positive. The shortfall shrank by 22% in September from a year earlier, the Bureau of the Treasury said Friday, even though the nation is still likely to see a record deficit for the year as a whole.

Christmas is Coming

The decline in remittances may also be tempered as the festive season approaches, said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila.

“Overseas Filipino worker remittances could still pick up towards the Christmas season, even some adversely affected OFWs could tap on their savings and some repatriated OFWs could tap on their separation or retirement pay,” he said.

Still, a protracted slowdown in remittances would see a consequential decline in bank deposits and reduce demand for bonds, he said.

Still, as far as the 2020 performance is concerned, Philippine sovereign bonds are likely to hang on to their top spot, with the slump in remittances unlikely to result in any stomach-churning losses.

What to Watch

• Thailand’s parliament will meet for two days starting Monday to discuss the demands of pro-democracy protesters. The nation will auction 12 billion baht ($383 million) of bonds maturing in 2042 (LB426A) on Wednesday, and release September current-account data on Friday
• Malaysia will publish trade figures on Wednesday after the August numbers showed exports unexpectedly fell

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

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