Buying Asian not Club Med bonds

March 28, 2012


One of the great regrets of my time as a currency strategist was that even though I travelled extensively around Asia and the world I never got to Jakarta. It was simply the case that the guys at the firm I was at felt the risk assessment wouldn’t allow it.

But I’m sure the road to Jakarta is one well travelled now as Bankers seek to get to know one of Asia’s bigger economies and Australia’s biggest and closest Asian neighbor.

This is particularly because Indonesia and indeed the Philippines are emerging economies doing well and making solid forward progress.

So this morning I thought I would highlight this article from my Bloomberg iPhone app which highlights just how far these two nations have come in the past decade.

Indonesia and the Philippines, able to raise funds at a lower cost than Italy, may be poised to get the highest credit ratings since the 1997 Asian financial crisis as the nations step up efforts to boost investment.

Officials from Standard & Poor’s, the only company to grade Indonesia’s debt as junk, are visiting the largest economy in Southeast Asia this week after raising the nation’s bonds to BB+ a year ago, according to the Finance Ministry. Philippine Finance Secretary Cesar Purisima said March 23 that he’s confident about getting a rating upgrade after meeting with S&P last week.

“Asian economies, including the Philippines and Indonesia, have finally shaken the effects of the Asian financial crisis,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “This period thus marks the return to high rates of growth.”

Emerging markets, with budget deficits at 1.7 percent of gross domestic product in Indonesia and 3.8 percent in the Philippines in 2009 compared with the Euro area’s 6.4 percent, are winning rating boosts even as developed markets from Europe to the U.S. get downgrades. Borrowing costs for the two Southeast Asian nations have fallen 0.6 of a percentage point this year as plans to boost investment in roads and rail systems support growth prospects amid faltering global demand.

Investors are already rerating or should I say have rerated the bonds of Indonesia and the Philippines as the quote below shows – so in many ways S&P are just validating this move.

Yields Narrow

The extra yield investors demand to own Indonesia’s dollar bonds instead of U.S. Treasuries has narrowed 61 basis points this year, or 0.61 percentage point, to 1.89 percentage points as of March 26, while that for the Philippines (JPSSEMPH) has fallen by 62 points to 1.76 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Indexes. They compare with the additional yield of 3.16 percentage points to buy emerging-market dollar-denominated debt instead of U.S. securities.

Indonesia’s dollar bonds due May 2021 are trading at 3.79 percent while Philippine dollar debt due January 2021 is trading at 3.44 percent, compared with 6.25 percent for Italy’s dollar notes due September 2023 and 4.12 percent for Russia’s dollar notes due April 2020, according to prices from Royal Bank of Scotland Group Plc. and compiled by Bloomberg. S&P rates Russia two steps above Indonesia and three levels higher than the Philippines.

Ratings upgrades could underscore confidence in the Southeast Asian economies’ resilience as a slowdown in China’s growth adds to the threat to Asian expansion, which has already been crimped by Europe’s debt crisis.

There are a couple of points here worth noting and which are relevant to readers and investors in developed markets like Australia and the US.

Firstly the axis of interest and economic power, as we all know, has shifted to Asia. But it’s not just about China and I think opportunities to invest in these nations will continue to grow through time.

The other thing worth noting is the comment by Frederic Neumann above that these nations are finally shaking off the effects of the Asian crisis.

For those who have forgotten, that crisis was in 1997 – 15 years ago.

So anyone thinking that the European or indeed US economic malaise has any chance of finishing soon need to think again. 5 more years of economic perhaps market instability, hopefully with a positive direction, seems like a given for the developed world.

All the while the Asian Tigers will be gradually, slowly and sustainably moving forward.

Selamat pagi

Gregory McKenna

Sent via WordPress via my iPhone

Usual disclaimer folks – this is not advice and I have not taken your personal circumstances into account.

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