• External headwinds hit PH bonds

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    THE local currency (LCY) bond market posted modest growth in the second quarter of 2015 from a year earlier, but took a hit compared with the previous quarter, the Asian Development Bank (ADB) said on Wednesday, citing concerns over softer growth, depreciating currencies and US interest rates.

    These factors are affecting the markets of emerging East Asia, the Manila-based multilateral lender noted.

    “Asian bond markets were buffeted by strong headwinds, including anticipation of the US Federal Reserve rate hike, which has led to an outflow of funds in some countries,” Shang-Jin Wei, ADB chief economist said.

    The Philippine LCY bond market grew by 3.3 percent to P4.645 trillion in the April to June from P4.497 billion a year earlier, according to the latest “Asia Bond Monitor” report.

    Government securities accounted for the majority of bonds outstanding, totaling P3.896 billion, while corporate bonds reached P749 billion during the quarter.

    However, the country’s bond market contracted by 0.8 percent from the P4.681 trillion in the first quarter.

    The report noted the outstanding fixed-income instruments issued by the Philippine government and government-controlled companies declined by 0.5 percent to P3.896 trillion as of end-June from end-March.

    “The decline was most notable among outstanding government-controlled issues, which fell 12.4 percent quarter-on-quarter due to the maturation of Power Sector Assets and Liabilities Management bonds worth P11.3 billion,” it said.

    A similar downtrend was noted for outstanding Treasury bills, which decreased by 1.1 percent to P275 billion from a quarter earlier, while outstanding Treasury bonds fell 0.2 percent quarter-on-quarter to P3.541 trillion, the report added.

    Meanwhile, the outstanding LCY corporate bonds decreased by 2 percent to P749 billion.
    Only three companies—Ayala Land, BDO Unibank, and South Luzon Tollway – tapped the domestic bond market in the second quarter of 2015, the report noted.

    On the other hand, only 51 companies are actively tapping the Philippine bond market.
    The top 30 issuers accounted for 89.9 percent of the total corporate bonds outstanding as of end-June.

    Real estate firm Ayala Land topped the list with total outstanding bonds worth P64.9 billion. Metrobank and holding company Ayala Corporation were second and third with outstanding amounts of P46.8 billion and P40 billion.

    Risks
    The bank said the size of emerging East Asia’s LCY bond market continues to grow in the quarter but said the expected rise in US interest rates and a strong dollar will continue to impact the region.

    Emerging East Asia’s total LCY bond market rose to $8.625 trillion as of end-June, with growth accelerating on both quarter-on-quarter and year-on-year in the second quarter of 2015 compared with the previous quarter.

    An improved US economic outlook could spur the Federal Reserve to raise interest rates as early as September, although the US central bank may take a more cautious approach given the recent weakness in developing economies and declining oil prices.

    “Outflows of funds could destabilize the region’s bond markets. Increased risk perception has led to a sell-off across emerging markets as a whole. The impending rise in US interest rates has also made emerging market bonds less attractive,” the report read.

    A further depreciation of the region’s currencies could weaken corporates with a large amount of foreign currency bonds outstanding, it said.

    “Most emerging East Asian currencies have weakened relative to the US dollar in 2015. If more funds were to flow out of the region, it would put further downward pressure on the region’s currencies,” it added.

    The ADB said the uncertainty in global bond markets points to a need for unflagging efforts to strengthen LCY bonds, which together with prudential regulations can improve a country’s resilience to foreign monetary and financial shocks.

    The Asia Bond Monitor provides market summaries of emerging East Asia which includes China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

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