Philippines & Asia Surviving EU ‘Test’ Boosts Upgrade Chance

Philippine 500 and 1000 peso notes are arranged for a photograph at the central bank in Manila. Aviva Investors says the Philippines, rated Ba2, is most likely to win a credit-rating upgrade. Photographer: Edwin Tuyay/Bloomberg

Asian economies are withstanding Europe's debt crisis so well that some investors are positioning for credit-rating upgrades in the region.

Five-year credit-default swaps for China, South Korea, Indonesia, Malaysia, the Philippines and Thailand climbed an average 63 basis points to 161 this year, while contracts for 17 eurozone countries, excluding Greece, jumped 118 to 301. Moody's Investors Service is watching the trading in the swaps, which protect against non-payment, and how Asia copes with capital flows as it weighs rating changes, said Thomas Byrne, a senior vice president at Moody's in Singapore.

Asia's 10 biggest economies excluding Japan grew an average of 5.2 percent in the third quarter, triple the euro-zone's 1.4 percent rate, and their central banks hold $5.2 trillion in currency reserves, more than half the global total of $10.2 trillion. Threadneedle Asset Management and Manulife Asset Management say they favor Indonesian notes, ranked Ba1 by Moody's, one level below investment grade, while Aviva Investors says the Philippines, rated Ba2, is most likely to win an upgrade.

"If there's continued good policy performance, macroeconomic stability in these countries and they weather this distress coming from the euro zone, in general that would be a credit-positive development," Byrne said in an interview last month. "Whether there's an accumulation of credit-positive developments that will lead to a credit-rating upgrade, we'll be looking closely over the next months."

Philippines Managing Successfully

Default swaps on Philippine bonds became cheaper than AAA- rated France last month, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. It costs 180 basis points to protect Philippine bonds, less than the 181 basis points for France. Contracts for China, Malaysia and Thailand are lower at 129, 130 and 176 respectively, all more than half Italy's 431. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Moody's has upgraded China once to Aa3 in the aftermath of the 2008 global financial crisis, the fourth-highest rating, and has raised Indonesia and the Philippines twice. Standard & Poor's said on Dec. 5 that Germany and France may be stripped of their AAA ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade. The firm also said that it may cut Italy's "A" rating, the sixth highest.

"Further rating upgrades will reward those emerging countries that manage this new stress test successfully, as they did just a couple of years back," said Agnes Belaisch, who helps manage $2.5 billion in emerging-market debt at Threadneedle Asset Management in London.

Strong Fundamentals

Indonesia, Southeast Asia's largest economy, grew more than 6 percent for a fourth straight quarter in the three months to September as consumer spending and government investment outweighed faltering global demand. Indonesia sold seven-year dollar sukuk, or bonds that comply with Islam's ban on interest, at a yield of 4 percent on Nov. 14, two percentage points less than the rate for five-year debt achieved by Italy. The 10-year yield on rupiah government non-Islamic bonds has fallen 157 basis points, or 1.57 percentage point, from a three-month high of 7.65 percent on Sept. 22.

"Indonesia's economic fundamentals continue to be strong," said Endre Pedersen, the Hong Kong-based managing director of fixed income at Manulife which has an Asian bond portfolio valued at $29 billion. "You might actually see upward momentum on the rating side."

Yield Premiums

Asia's developing economies will expand 8.2 percent in 2011 and 8 percent in 2012, according to estimates released in September by the International Monetary Fund. That compares with projections for the euro area of 1.6 percent this year and 1.1 percent next.

Investors demand an extra 234 basis points in yield over U.S. Treasuries to own the Philippines' 7.5 percent dollar bonds due in September 2024, according to prices from the Royal Bank of Scotland Group Plc. That compares with a spread of 545 basis points for Italy's 6.875 percent dollar notes due in September 2023, according to data compiled by Bloomberg.

The euro-zone slowdown could pose risks to Asian ratings should it lead to further cuts in global growth forecasts, Andrew Colquhoun, Fitch Ratings' head of Asia-Pacific Sovereigns in Hong Kong, said in an interview last month. Fitch has positive outlooks for Indonesia and South Korea, signaling the chance of an upgrade over the next 18 months.

Debt Ratios

The pace of upgrades for some Asian countries, such as Indonesia and Sri Lanka, may be delayed, not "entirely derailed or reversed," Agost Benard, associate director in Singapore for S&P, which has positive outlooks on Indonesia and Sri Lanka, said in an interview last month.

"If the economic uncertainties in Europe and the U.S. blow over and the world goes back to something like a normal growth trajectory and it turns out that Asian sovereigns didn't suffer, certainly that would be another proof of their resiliency," said Benard.

The odds of an upgrade in most Asian nations will be supported by "significantly lower" public-debt ratios than European governments, said Stewart Newnham, a strategist at Morgan Stanley in Hong Kong. There's a "strong case" for upgrades in Indonesia, China and the Philippines, he said.

The ratio of debt to gross domestic product stood at 143 percent for Greece at the end of 2010, 119 percent for Italy and 82 percent for France, according to data compiled by Bloomberg. Ratios for China, Indonesia, and the Philippines were 16 percent, 26 percent and 52 percent, the data show.

Resilience Intact

"The resilience that was demonstrated in 2009 and 2010 is largely intact," said Moody's Byrne. "Most governments have the fiscal headroom to enact fiscal stimulus measures if necessary because government debt levels aren't onerous. The credit trends in East Asia are stable to positive."

Asia's emerging sovereign debt markets are on course to acquire "safe-haven" status and may begin to supplant indebted developed nations, BlackRock Investment Institute wrote in an October report. The research unit of New York-based BlackRock Inc., which managed $372.8 billion in the region at the end of June, said such a status refers to assets that lure "dramatic capital inflows in times of stress."

Asian bonds are moving "from a tactical allocation to core position for global investors," Neeraj Seth, the head of Asian credit at BlackRock, said in an interview in Singapore.

Charles Macgregor, a Singapore-based senior vice president for Asian fixed income at Aviva, which manages the equivalent of $432 billion globally, said the Philippines is the most likely to be upgraded in Asia. Remittances sent home by Philippine citizens abroad climbed 4.1 percent from a year earlier to $14.8 billion in the first nine months of 2011.

"The repatriation of foreign-worker income is a very steady flow of funds, so that would hold them in good stead in the next year or two," said Macgregor, whose current mandate in Asia is to primarily invest in investment-grade securities.

To contact the reporters on this story: Lilian Karunungan in Singapore at; Kyoungwha Kim in Beijing at To contact the editor responsible for this story: Sandy Hendry at

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