Banking giant HSBC issued a slightly bearish outlook on the Philippine bond market for 2017, seeing the Duterte administration’s higher financing need for its infrastructure projects unmatched by market interest in local government securities.
With revenue unlikely to show any sharp improvement soon, increased government bond supply will be unavoidable next year, when bond redemption is expected to decline, HSBC said in a report.
“We express a mildly bearish stance on the Philippines for 2017. The Philippines’ policy direction, following the country’s own presidential elections in May 2016, has already shifted towards more infrastructure spending,” it said in the report released Wednesday.
The bank noted that amid expectations for a rise in the government’s funding needs, Philippines government bond (RPGB) yields moved significantly higher with a steepening bias in the second half of 2016.
“A further rise in bond yields is possible, in our view. Even though RPGBs typically exhibit a low correlation to US Treasuries, RPGBs could also price in a greater term premium just like US Treasury yields as both markets share the same theme, which is fiscal stimulus,” it explained.
HSBC said that in the 2017 budget recently approved by the Senate, the government plans to spend 6 percent to 7 percent of gross domestic product (GDP) on infrastructure.
“Unlike the previous government’s slow budget execution, there are signs of swifter spending in the new administration. A tax reform plan has also been submitted to Congress to increase government revenue, but the timing of implementation is uncertain.”
The Department of Finance said on Monday the government will be spending P860.7 billion on large-scale infrastructure projects next year alone in keeping with its commitment to disperse growth and create enough jobs for Filipinos, especially in the countryside.
Given that revenue improvement is unlikely to materialize soon, the government may face immediate funding needs next year, adding that an increase in government bond supply in 2017 seems unavoidable, HSBC said.
“The Bureau of Treasury (BTr) is expected to issue P465 billion of Treasury bonds in 2017. This is 30 percent more than the total expected Treasury bond issuance in 2016,” it explained.
“Given that the bond redemption amount declines to P227 billion in 2017 from P310 billion in 2016, net bond supply is expected to increase sharply to P238 billion from P63 billion. The BTr has kept the monthly RPGB auction size at P25 so far in 2016, but there is a possibility that the BTr may increase its monthly issuance size,” it added.
It also sees the agency issuing more bonds via debt switch, as similarly seen in 2014 and 2015.
In addition, HSBC said funding needs from the private sector are also likely to grow, given the robust economic outlook.
The bank is projecting a 6.8 percent full-year growth for the economy before moderayint to 6.5 percent expansion in both 2017 and 2018.
Besides this, it noted that loan-to-deposit ratio (LDR) has been steadily rising, reaching 71.2 percent in August from 68.9 percent a year ago.
“A higher LDR could reduce commercial banks’ appetite for bonds,” it said.
Lastly, it said given that commercial banks’ average lending rate is 5.9 percent, they are likely to prefer giving loans rather than owning lower yielding bonds.
The local bond market grew by 1.6 percent to P4.8 trillion in the July to September quarter, from P4.723 trillion a year earlier, the Asian Development Bank’s “Asia Bond Monitor” released on Tuesday said.
However, the ADB pointed out there are several risks for emerging East Asian bond markets like the Philippines.
The risks to emerging East Asia’s bond market include the prospective interest rate hike by the Federal Reserve, the uncertainty over the direction of US economic policy, a “hard Brexit,” a general global risk aversion toward emerging markets, and the rise of protectionism and economic nationalism, the ADB said.