Morning Brief: 10 November 2010

PH ranks 4th in global remittances The Philippines remains one of the world’s biggest recipients of remittances in 2010 and is seen to witness a further surge in money from Filipino migrant workers over the next two years, according to the latest “Migration and Remittances Factbook” by the World Bank. Based on the country rankings shown in the report, remittances to the Philippines were the fourth-biggest worldwide. Remittances to the Philippines were estimated to reach $21.3 billion for the entire 2010, registering a 23-percent growth from the $17.3 billion recorded last year. Official and latest documents from the Bangko Sentral ng Pilipinas showed that in January to August, remittances reached $12.2 billion. The World Bank estimates, however, showed that some $9.1 billion would be sent to the Philippines from September to December this year. The estimated remittances to the Philippines followed the estimates for India ($55 billion), China ($51 billion) and Mexico ($22.6 billion), which were the top 3 biggest recipients of remittances. Landing in fifth place was France, which was estimated to receive $15.9 billion in remittances this year. Total remittances to all developing countries were expected to reach $325 billion this year, up 6 percent from last year’s $307 billion and rebounding from the contraction registered in recession-marred 2009. Remittances to the Philippines boost growth of the domestic economy as these largely fuel household consumption. Estimates by the World Bank said remittances to the country were equivalent to about 12 percent of gross domestic product. Remittances continued to grow this year due to higher demand for Filipino workers in more countries and in more sectors. “The diversified destination of Filipino migrants contributed to steady growth in 2010 despite the crisis,” the World Bank said. The developmental institution has projected that remittances to the Philippines would grow further next year, consistent with the likely rise in overall remittances to developing countries. According to the World Bank, remittances to developing countries could surge 6.2 percent in 2011 and 8.1 percent in 2012. P60B in bonds eyed in swap THE PHILIPPINES may exchange up to P60 billion worth of 10- and 25-year bonds at a local debt swap it is set to launch this month as part of its liability management program, Finance officials said on Tuesday. The Treasury may award a mandate to banks for the program this week, Deputy Treasurer Eduardo S. Mendiola told reporters. The domestic debt swap may be launched in two weeks, Finance Secretary Cesar Purisima told a Senate hearing earlier on Tuesday. National Treasurer Roberto B. Tan said Malacañang has not yet issued the authority to issue new bonds. “[We are also awaiting] the Monetary Board opinion on the impact of the [swap],” he added. Manila had earlier indicated it might issue 20- and 25-year bonds at its debt swap, but depending on the demand, the government may opt to issue 10-year and 25-year bonds. Mr. Mendiola said the government was not keen on raising fresh funds from the debt issue. The Philippines, Asia’s largest sovereign issuer of foreign currency debt, has been capitalizing on investor appetite for higher returns offered by emerging markets to lengthen the maturity profile of its outstanding debt. In September, it completed a $3 billion dollar bond swap, and raised $200 million from the issue of new 10-year dollar bonds. Citigroup, HSBC and UBS were joint deal managers for the dollar bond swap. Earlier that month, Manila sold $1 billion of 10-year local currency bonds in global markets, the first such issue by an Asian country. The government also wants to create benchmarks of long-tenored papers as it pursues its public-private partnership (PPP) scheme to address infrastructure gaps and spur growth. The government is planning on issuing “infrastructure bonds” and wants to encourage private firms undertaking PPP projects to issue their own debt papers as well. “[The government is slated] to sell more 25-year Treasury bonds after the bond swap,” Mr. Mendiola said, adding “the Treasury will build up on programs for the 25-year bonds.” “We will probably sell more 25 year T-bonds to push for long-term maturities, but since the year is about to end we will come up with the programs next year,” he said. The government remains confident of meeting its 2010 budget deficit target of P325 billion, equivalent to 3.9% of GDP, a record in peso terms, despite persistent revenue weakness. The Bureau of Internal Revenue (BIR), the country’s main tax agency accounting for around two-thirds of state revenue, was unlikely to meet a full-year 2010 revenue target of P860 billion, said BIR Deputy Commissioner Nelson Aspe. “Without any extraordinary luck, we will end with P830 billion, plus or minus, by December 31,” he told reporters. But Mr. Aspe said the BIR was close to hitting its October collection target of P62.5 billion. Final figures will be announced next week. The Philippines, which is targeting growth of 5% to 6% this year, has said it would increase revenues by cracking down on corruption in collection agencies and through better enforcement of existing laws before looking at hiking tax rates. Swap rates slide on BSP move HONG KONG -- Philippine short-dated swap rates struck record lows yesterday, with the central bank’s sudden move to absorb dollars causing an interbank funding squeeze that has rippled across currency and interest rate markets. A dollar funding crunch has worsened since the country’s central bank stopped supplying dollars through its $22-billion forward book that is used to sterilize FX intervention, traders said. The funding shortage has prompted market players betting on a stronger peso to shift positions into the forwards market, sparking the move that has then spilled into the swaps market because the floating rates in the contracts are determined by currency forwards. The peso has dropped and swap rates have plunged, with traders believing the Bangko Sentral ng Pilipinas (BSP) was trying to squeeze in the market as a way of warding off potential inflows after the Federal Reserve’s latest round of quantitative easing. The peso shed 12.5 centavos to close at P43.37 per dollar yesterday. Traders also said there was talk the central bank could take action to limit onshore trade in non-deliverable forwards as a means of limiting inflows and speculation in the peso. Analysts were surprised and considered it a policy move by the central bank. FX strategists at Standard Chartered took profits on their long peso call and said market players may cut more long FX positions on the “apparent policy change.” Asian countries are grappling with a wave of money heading to the fast-growing region and have taken isolated measures to limit the impact of the expected wave of inflows, with US interest rates set to stay near zero for many months. Last month Manila relaxed outward investment rules to encourage outflows, while South Korea has started inspecting foreign bank trading books and has warned of taking new measures in to limit trade in currency forwards. Thailand reimposed a withholding tax on offshore purchases of local bonds. “This move from the authorities demonstrate they are getting concerned about heavy inflows and we may see them taking more steps if this doesn’t have the desired effect,” said an interest rate trader at a Manila-based bank. Several analysts said the BSP had stopped rolling over its forward book. By doing so, the central bank exacerbated a dollar shortage as market players have built up hefty short positions in dollar/peso, especially in the past month. Local banks have scrambled to buy dollars in the cash market to meet funding commitment, while foreign investors have shifted dollar/peso short positions into the forwards market, traders said. The washout of positions forced the peso to give back some of its recent gains and dimmed the relative allure of peso assets. One-month forwards plunged nearly 200 points while spot peso weakened by about 1.5% since last week. The downward pressure on the forwards spilled into the IRS market. One-year swap rates were down 10 basis points on the day and have dropped 135 basis points (bps) in the past week to 2.05% -- way below the central bank’s 4% policy rate. Government bonds have been caught in the move as well. Two-year bond yields fell 10 basis points and are down 35 basis points (bps) in the past week. The severity of the move means two-year swap rates are a full 230 bps below bond yields. Short-dated bond yields have also dropped since data last week showed inflation slowing to a one-year low, stirring doubts about when the BSP would start lifting rates. The latest move may also have been a “test case” by authorities for dealing with any sudden surge of inflows, said Citigroup analyst Jun Trinidad said in a note. But he also said that the BSP was unlikely to stay out of the forwards market for long because that would result in releasing about P400 billion pesos into the interbank market in the next few months. Traders said the BSP action is likely a one-off, and foreign investors are unlikely to be deterred from building long peso positions on an upbeat economic outlook. www.bworldonline.com

U.S. Stocks Decline as Financial, Consumer Companies Slip U.S. stocks fell as financial and raw raw-materials companies dragged benchmark gauges to the biggest decline in three weeks, wiping out an early advance led by energy producers. Bank of America Corp., Wells Fargo & Co. and Morgan Stanley lost at least 2.6 percent, pacing a drop in financial shares. Freeport-McMoRan Copper & Gold Inc. slid 2.5 percent. Dean Foods Co. plunged 18 percent after reporting earnings that missed estimates and its chief financial officer quit. Atlas Energy Inc. soared 34 percent after agreeing to be bought by Chevron Corp. The Standard & Poor’s 500 Index slipped 0.8 percent to 1,213.40 at 4 p.m. in New York, the most since Oct. 19. The Dow declined 60.09 points, or 0.5 percent, to 11,346.75. U.S. stocks rallied last week as the Federal Reserve announced a $600 billion bond-purchase plan to boost economic growth, a tactic known as quantitative easing. U.S. 30-year Bond Yield Reaches Highest Since June Before Sale Treasuries fell, with the yield on 30-year bonds rising to the highest level in five months, after the government’s sale of $24 billion in 10-year notes drew the lowest demand since February. Yields on 30-year bonds climbed for a fifth day on speculation tomorrow’s sale of $16 billion of the securities may receive tepid demand with the Federal Reserve focusing its purchases of Treasuries among shorter-maturity debt. The bid-to- cover ratio for the 10-year note sale, which gauges demand by comparing total bids with the amount of securities offered, was 2.8, compared with an average of 3.14 for the past 10 sales. “It’s the law of unintended consequences,” said Theodore Ake, head of Treasury trading at Societe Generale in New York. “By the Fed telling us what they are going to do, they cause everyone to buy early and now there are no shorts in the market. When we get supply, it rolls right through them. There are not enough shorts in the market to absorb the supply.” The yield on 30-year bonds rose 13 basis points, or 0.13 percent, to 4.25 at 5:05 p.m. in New York, the highest since June 4. The price of the 3.875 percent securities maturing in August 2040 fell 2 2/32, or $20.63 per $1,000 of face value, to 93 23/32.

Oil Drops From Two-Year High Amid Forecasts U.S. Stockpiles of Crude Rose Crude oil fell from the highest level in two years as the dollar strengthened against the euro, curbing the appeal of commodities as an alternate investment, and equities declined. Oil dropped for the first time in seven days as the euro slipped amid concern some governments in Europe may struggle to pay their debt. The Standard & Poor’s 500 Index decreased, led by financial and consumer companies. “The dollar’s stronger today, so certainly that’s helping to keep a lid on prices,” said Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania. Crude for December delivery fell 34 cents, or 0.4 percent, to settle at $86.72 a barrel on the New York Mercantile Exchange. Earlier, it touched $87.63, the highest price since Oct. 9, 2008, on an intraday basis. Futures have risen 9.2 percent in the past year.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001