Philippines left out of foreign investor return to East Asian bonds
MANILA, Philippines — Foreigners shunned Philippine debt in the second quarter, reflecting investor concerns that the coronavirus pandemic is yet to get under control and a sign the country is getting left out of the regional push for recovery.
“The share of foreign holdings in the Philippine bond market posted a quarterly decline of 2.0 percentage points, making it the largest drop in the region in Q2 2020 next to Indonesia,” the Asian Development Bank (ADB) said in its quarterly “Asia Bond Monitor” report.
“Investors reduced their risk exposure during the quarter, leading to continued fund outflows against the backdrop of rising uncertainty from the pandemic and a low-interest-rate environment…,” it explained.
Broken down, foreign investments are also declining in government securities, partly because the Duterte administration has resorted to funding its pandemic response through multilateral loans. “Foreign ownership of government bonds in the Philippines dropped to its lowest level since such data have been available,” ADB said.
While less foreign exposure is a conscious choice for government to protect itself from foreign currency swings, the Philippines’ failure to attract foreign players even to bonds offered onshore highlights a lost opportunity to catch up on foreign investments with its similarly-situated neighbors.
Coupled with persistent foreign selling in the equity markets, ADB said foreign selling in the local bond market may not have abated yet. From April to July, the Philippines was alone in the region where foreign net outflows totaling $2.3 billion was recorded despite a gradual easing of lockdowns from June.
This scenario was in contrast with other territories such as Thailand where foreigners have returned to funnel $800 million into bonds in the same three-month period. “The retreat of foreign funds was due to the heightened risk aversion caused by a weak economic performance and slow progress in the containment of COVID-19,” ADB said of the Philippines.
Region-wide weakness
More broadly, the absence of foreign bond inflows risks denting an expected rebound from the private sector. ADB said that together with Thailand and Indonesia, fewer bonds were issued by Philippine-based corporates in the second quarter, although a general weakness was felt across the region.
“Overall, growth in the region’s corporate bond segment during the review period was negatively affected by uncertainties surrounding the COVID-19 outbreak and investors’ risk-off sentiment,” the Manila-based lender said.
The good news is any plans to borrow in the future would be affordable as interest rates have fallen. With the central bank cutting benchmark rates to record-lows, ADB said yields in 10-year government debt papers dropped by 40 basis points from June 15 to September 11, the largest decline in the region.
Across East Asia, governments, faced with declining revenues due to shuttered businesses and tepid consumption, issued the most number of local currency bonds to borrow funds in the second quarter. Overall, the amount of domestic bonds grew 5% to $17.2 trillion as of June 3, 10.7% of which can be found in Southeast Asia, ADB said.
“Bond markets in emerging East Asia continued to expand to help meet the funding needs of both the public and private sectors in containing the COVID-19 pandemic and tackling its impact,” ADB said.
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