The Philippines was finally given an investment grade rating last week, when Fitch upgraded the country to BBB- from BB+. That was just the latest credit boost for government officials who must now be used to constantly climbing up the rating scales while some of their bigger, more developed trading partners move in the opposite direction.
It is not hard to see why ratings analysts are impressed. The government is moving to bring in more revenues, inflation is low enough to allow for expansionary policy, and the regular flow of remittances from overseas workers helps ensure the current account surplus will keep growing.
Philippine policy markets, who have done a great job making themselves more attractive to foreign debt investors, should now make the most of that and push for the development of the countrys corporate bond market. But that will not be easy.
Too much money sloshing around
One of the strengths of the domestic financial system is also one of the things that could hold the growth back. There is just too much money held in the domestic banking system, and not enough places to put it. The imbalance between supply and demand means that foreign investors stand almost no chance of being price-setters, even if they head into the market en masse.
Philippine banks and corporations sold Ps526.1bn ($12.9bn) of bonds in their domestic market last year, according to data from the Asian Development Bank. It should come as little surprise that this figure pales in comparison to what was sold by the government, but it is worth taking a closer look at the numbers to see just how insignificant the countrys corporate bond market remains.
The sovereign, which until recently auctioned debt every week, sold around Ps3.6tr of bonds last year, leaving just 13% of the market to other issuers. That is well below the 17.2% that corporate bonds represent in Indonesia, and nowhere near the roughly 40% they make up in Malaysia, according to the ADB.
The limited issuance also means that the biggest issuers have an exaggerated affect on supply. The 10 biggest issuers sold more than half of all the corporate bonds issued in the Philippines last year.
There is some hope that things might get a bit easier for investors. In a recent series of interviews with corporations around Asia, analysts at Standard Chartered found that treasurers in the Philippines were even more bullish than they had expected. That could encourage a spike in supply, and help absorb some of the mountains of cash sitting in local banks.
But this would have to be done on a huge scale to tip the scales in favour of investors, and before that happens few foreign accounts will be encouraged to move outside of the government bond market and start getting exposure to banks and corporations in the country.
The Philippines is clearly heading in the right direction economically, and there are few better ways to ensure this move becomes sustainable and the benefits quickly get passed on to smaller companies than by pushing for the development of the bond market. That is not something financial regulators should lose sight of, but for now, they face an uphill struggle.