Investors see value in the Philippines' rocky political situation
Even as the political lifeblood of President Gloria Macapagal-Arroyo appeared to be draining away yesterday, and most foreign investors were bailing out of the Philippines' financial markets, some hardy bulls were buying the country's stocks and bonds.
On the Philippine Stock Exchange, the resignation of 11 cabinet ministers - top-ranking government officials headed by Finance Secretary Cesar Purisima - was greeted as a positive development.
Even though foreigners were net sellers of stocks, local investors responded by buying, pushing the Philippine Composite Index up 1.57 per cent on the day. Bellwether telecommunications stock PLDT was up an impressive 7.3 per cent.
'The stock market is pricing in a change of government,' said Jojo Gonzales, head of research at local brokerage Philippine Equity Partners.
Most market participants now expected Mrs Arroyo's resignation, followed by a peaceful transition of power to Vice-President Noli de Castro, Mr Gonzales explained.
For the most part, debt investors were less enthusiastic. The prices of Philippine dollar-denominated sovereign bonds slumped in international markets, as investors fretted that the political crisis could scupper progress towards fiscal reform.
Last week, the Supreme Court suspended newly passed legislation eliminating value-added tax exemptions and allowing the president to raise the VAT rate from 10 per cent to 12 per cent at the end of the year.
The law was seen as crucial to Mrs Arroyo's plan to end the Philippines' chronic budget deficits. According to Benard Agost, an associate director at credit rating agency Standard & Poor's, increasing VAT would raise an extra 130 billion pesos ($18 billion) in revenues next year.
'The fear now is that a new president would find it very tempting simply to ditch or substantially water down the VAT law to increase his popularity or to consolidate his political position,' Mr Agost said.
But with the benchmark Philippines US$2 billion bond due in 2030 trading at a yield spread of 5.25 per cent over US Treasury bonds - a level comparable with bonds of the Dominican Republic - some analysts and fund managers scented a bargain.
The Philippines is not in danger of defaulting on its debt, and the fiscal situation has improved markedly in the last couple of years, even without the VAT law suspended by the Supreme Court, argued one Hong Kong bond fund manager. 'At these spreads, the Philippines is outright cheap,' he said.
Joey Cuyegkeng, chief economist at ING Bank, also took a positive stance, advising investors to buy Philippine bonds on a six-month time horizon. He argued that even if Mrs Arroyo does stand down or is impeached, Mr de Castro, as her constitutional successor, would be likely to push ahead with reform.
'I expect fiscal consolidation progress to continue, albeit at a less aggressive level,' he said, predicting a return of 14 per cent over the next 12 months on the 2030 bond.
Even analysts at JP Morgan, which yesterday cut its recommendation on Philippine dollar bonds to underweight, recognised that some investors would see value in the rocky political situation.
'At the end of the day, at some price the bonds become attractive,' said David Fernandez, JP Morgan's head of research for emerging Asia.
'The paucity of liquid high-yield debt in Asia will keep people coming back.'