Philippine bonds have been outperforming the average Asian asset class during the January-September 2002 period. HSBC Asia Pacific Head of Research John Woods says the 12.4% return on Philippine bonds during the period has been a modest achievement. Philippine sovereign bonds have a fairly attractive ‘BBB+’ average rating, adjusted for risk. On the average, Asian bonds in the international capital market yielded 12.1%.

Asian Benchmarks
Since September 1999, The Hongkong and Shanghai Banking Corporation (HSBC) has been tracking the performance of US dollar-denominated sovereign fixed rate, straight bonds for Asia ex-Japan. HSBC’s Zhang Zhi Ming originated the Asian Dollar Bond Index (ADBI). The ADBI benchmark has already grown into a composite of 85 bond issues from 76 bond issues. Around 30% of issues in ADBI are actively traded. Sub-indices represent mainland China, Hong Kong SAR, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand.

Reflecting the bank’s further commitment to guide investors and develop the Asian debt market, HSBC launched a companion Asian Local Bond Index (ALBI) only last 26 March. ALBI measures return of liquid, local currency bond markets in mainland China, Hong Kong SAR, India, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. ADBI and ALBI are maintained by the Treasury and Capital Markets division of the Hongkong and Shanghai Banking Corporation Limited.

Philippine Bond Market
For the Philippines, HSBC’s Treasury and Capital Markets Group has already arranged three bond issuances since it was organized in 1999. For four years now, HSBC Philippines has been named “Best at Treasury and Risk Management in Asia” by Euromoney, the well-respected global finance magazine. For three straight years, Euromoney also acclaimed it “Best Foreign Exchange Bank in the Philippines.” In 1999, HSBC packaged a 25-year sovereign bond issue. Last year, HSBC arranged an P11.8 billion fixed rate notes issue and a US$220.4 million currency swap, for which it earned an award for “Most Innovative Bond Deal” and runner-up “Best Domestic Currency Bond Deal” from FinanceAsia, as well as “Best Synthetic Bond Issue” by The Asset. Just last April, FinanceAsia gave HSBC Philippines a “Deal of the Month” award for the Republic of the Philippines Global Bond due 2009.

Consing: HSBC hatches innnovative bond deals for the Philippines

Rafael Consing, Head of Investment Banking for HSBC Philippines, says HSBC has the ability to apply international best practices to market operations. Proof of this is the technology directly adopted from Hong Kong in packaging the recent sovereign bond issue. Ranging from the short-tenors to the 25-year Republic of the Philippine bonds, the Philippine bond market, notes HSBC’s John Woods “has the most developed sovereign yield in Asia.” The drawback, however, is that these bonds are easy to sell. Investors flock to fixed income securities to get fairly high yields but with low volatility of capital gains. Bonds provide a consistent and stable return for local investors as well as banks.

Philippine, as well as Thai and Malaysian bonds are “fairly liquid” issues. Woods says the greater the liquidity, the greater the ability to reflect risks. Domestic risks associated with the fiscal deficit push up selling spreads by 15 basis points. As an Asian bond, Philippine issues are not immune to exogenous shocks, such as the fallout from Brazil. Volatility or spikes, however, are eventually smoothed away. Investor attitude toward Philippine bonds vary. Issues under the 10-year curve are firmly held by local investors. Those above the 10-year curve are held by US investors. Thus, “the longer end tends to be sold by foreign investors.”

Prospects
Till yearend, HSBC’s outlook on Philippine bonds in the international capital market remain cautious. There is a confluence of deteriorating risk factors in the first quarter – the risk of default by Brazil, a military event in Iraq, and the likelihood of a double-dip recession in the United States. Clearly the domestic challenge for the Philippines is to meet its target fiscal deficit of 4% of GDP. Woods says, “the Philippine story is bottoming [out].”