Emerging Asia’s Worst-Performing Bonds Look for Christmas Boost

(Bloomberg) -- Philippine bonds have been the worst performers in emerging Asia this year, but there’s still time for the central bank to deliver some Christmas cheer.

While policy makers are unlikely to back up November’s unexpected interest-rate cut with another reduction when they meet next week, they may turn to a different instrument to help reinvigorate the economy: the reserve requirement ratio. The so-called RRR is currently at 12%, more than three times that of Indonesia, Thailand and Malaysia, leaving plenty of room for another move lower.

The monetary authority may trim the reserve requirement ratio by as much as 200 basis points as soon as this month, which would help give banks about 200 billion pesos ($4.2 billion) of additional liquidity, according to Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila.

Such a move “would infuse more liquidity into the financial system and, in turn, help further reduce borrowing costs and financing costs, as the economy still needs all the support measures it can get to help sustain its recovery,” he said, adding that this will support local bonds.

The central bank last cut the RRR in March, lowering it by 200 basis points to help counter the economic impact of the coronavirus. At the time it flagged the possibility of a further reduction, saying it was looking to trim the gauge by as much as 400 basis points this year to encourage bank lending.

Read more: Best Days May Be Over for World-Beating Peso Bonds: SEAsia Rates

Philippine sovereign bonds could do with a dose of good news. They have returned just 1.6% this quarter, compared with 11% for debt in Indonesia, 6.5% in Thailand and 2.1% in Malaysia. Benchmark 10-year yields have climbed three basis this quarter to 3.01%, based on data from Philippine Dealing & Exchange Corp.

Inflated Inflation

One potential obstacle to further central bank easing may be the latest spike in inflation. Consumer prices jumped 3.3% in November from a year earlier, the biggest increase in 20 months and breaching BSP’s forecast range of 2.4% to 3.2%, data showed last week. The jump was probably due to the impact of a typhoon and is likely to be transitory, Governor Benjamin Diokno said.

Concern about the rising supply of local-currency bonds also appears to be easing. While domestic borrowing is likely to stay elevated next year, the central bank has agreed to provide the government with an additional contingency credit line of 282 billion pesos as part of the pandemic relief bill signed in September. The sovereign can also opt to sell more dollar bonds along the lines of its successful $2.75 billion issue in early December.

Philippine bonds have struggled in recent months following a stellar performance in the first half of the year. There’s a very real prospect though that the central bank may deliver another dose of good news that will help spice up returns into the festive season.

What to Watch

• The Philippines are scheduled to release remittances data for October on Tuesday, and also auction 30 billion pesos of seven-year bonds. The central bank will announce its policy decision Thursday after unexpectedly cutting interest rates last month
• Indonesia will announce an interest-rate decision Thursday

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

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