Remittance slump to hurt but not derail PHL debt
PHILIPPINE bond gains may be crimped by a surprising slump in remittances, but a raft of underlying positives should help the securities keep their place as the region’s best performers this year.
Money sent home by overseas workers tumbled 4.1 percent in August, the monetary authority said earlier this month, fueling concern this will reduce bank deposits and trim demand for the nation’s sovereign debt. At least initially, the slide appeared to add another negative for Philippine Treasuries, which have struggled to maintain their momentum following a stellar rally in the second quarter.
Philippine bonds have returned 17 percent for dollar- based investors this year, far outpacing second- placed Taiwan with 9 percent, according to data compiled by Bloomberg. No less than 15 percent of that was in the second quarter though, when the Central Bank cut its benchmark rate by a cumulative 100 basis points to combat the impact of the coronavirus. Since then, they have only returned about 2 percent.
All things considered, the latest blow from remittances appears unlikely to prove the tipping point for a broader decline.
Bangko Sentral ng Pilipinas bought P540 billion ($ 11 billion) of government promissory notes this month as part of measures to assist the state’s financing, reducing the need for additional debt issuance. The government may ask the Central Bank to help with next year’s spending too, Finance Secretary Carlos Dominguez III said in mid- October.
Although the Central Bank’s deficit financing has drawn some comparisons with Bank Indonesia’s debt- monetization program, there appears to be little concern in the wider market.
“The Philippine Central Bank’s advances to the government are not deemed as risky as the limits are explicitly tied to past government revenues instead of current funding needs, and the window for repayment is relatively short,” according to Justin Jimenez at Bloomberg Economics in Hong Kong.
Christmas is coming
The decline in remittances may also be tempered as the festive season approaches, said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila.
“Overseas Filipino worker remittances could still pick up towards the Christmas season, even some adversely affected OFWS could tap on their savings and some repatriated OFWS could tap on their separation or retirement pay,” he said.
Still, a protracted slowdown in remittances would see a consequential decline in bank deposits and reduce demand for bonds, he said.
Still, as far as the 2020 per formance is concerned, Philippine sovereign bonds are likely to hang on to their top spot, with the slump in remittances unlikely to result in any stomachchurning losses.