Credit-default protection on the Philippines widened by over 20 basis points last week amid growing economic concerns. "[President] Gloria Macapagal-Arroyo is having some difficulties passing new tax measures," said one credit trader at a bulge bracket house, noting that economic reform efforts, such as implementing new income tax measures have waned in recent weeks due to opposition from lawmakers.
Five-year protection widened to 510-520 basis points in middle of last week from 480-500bps on Monday. The credit has widened by a total of around 80bps since the start of the month. Another trader said investors have also been unloading underlying bond positions as they look to close their books before year-end.
"The biggest issue is the fiscal deficit. While some progress has been made the government's ability to service debt is still slowly deteriorating as reforms have been limited," said Agost Bernard, associate director of sovereign ratings at Standard & Poor's in Singapore. The sovereign credit is rated BB with a stable outlook by S&P and Ba2 by Moody's Investors Service. "It's being closely watched, more so than other countries in the region because of its substantial external exposure," added Bernard. The country's offshore borrowing totals some USD56 billion and its need to import oil makes it vulnerable to global interest rate rises and oil price shocks, explained Bernard.
Some domestic accounts in the Philippines have been using their U.S. dollar funds to sell credit-protection in anticipation that spreads will tighten, noted dealers. "There's been decent interest," noted one trader.
