Indonesia, Philippines - in better economic position than Europeans

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.

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.

Chinese Profits

Chinese industrial companies had their first January- February profit decline since 2009 as slowing exports and a government campaign to cool property prices damped earnings, a report showed today. Net income dropped 5.2 percent from a year earlier to 606 billion yuan ($96 billion), the National Bureau of Statistics said on its website.

In contrast, a report showed South Korean consumer confidence rose to the highest level in four months, buoyed by signs of improvement in the U.S. economy and progress in containing Europe's crisis. The sentiment index rose to 101 in March from February's 100, the Bank of Korea said.

The global economic outlook is improving, though "severe downside risks remain," International Monetary Fund Deputy Managing Director Naoyuki Shinohara said today in Bangkok, adding that emerging economies need to "stay vigilant for the spillover from advanced economies."

Asian economies will experience only a modest slowdown in growth as domestic demand remains resilient, supported by strong employment and high capacity utilization, he said. The Asian economy as a whole will expand by 5.9 percent this year, with growth accelerating to 6.4 percent in 2013, while the economy of the Association of Southeast Asian Nations will grow by 5 percent this year and 5.5 percent in 2013, he said.

French Confidence

Reports in Europe may show consumer confidence rose in March in Finland while holding steady in France, according to Bloomberg surveys. The Netherlands will report final GDP data for the fourth quarter after a preliminary estimate showed the economy contracted 0.7 percent from the previous three months. Turkey and Hungary may keep interest rates unchanged, Bloomberg surveys showed.

In the U.S., the Conference Board's release today may show its consumer confidence index was little changed at 70.1 this month after reaching a one-year high of 70.8 in February, a survey median showed.

Presidents Susilo Bambang Yudhoyono in Indonesia and Benigno Aquino in the Philippines have both won upgrades from Fitch Ratings and Moody's Investors Service in the past year as they pledged to contain their budget deficits, fight corruption and woo investment to spur economic growth. The two companies have brought Indonesia to investment grade, while the Philippines remains one step behind at Fitch and two steps below at Moody's.

Credit Default Swaps

Five-year credit-default swap contracts on Philippine debt traded at 141 basis points on March 26 and 161 for Indonesia, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market. The contracts insure debt against non-payment, and traders use them to speculate on credit quality. That compares with 370 basis points for Italy and 422 points for Spain.

"I'm hopeful that S&P will raise Indonesia's rating within this year, which will bring in foreign investors again," Ezra Nazula, Jakarta-based head of fixed income who helps manage 24 trillion rupiah ($2.6 billion) at PT Manulife Asset Management, said in a March 20 interview. "It will be a plus point for Indonesia if the government can show that they are willing to increase the fuel prices and reduce the subsidies' burden on the budget."

Raising Prices

Indonesia's plan to raise diesel and petrol prices to 6,000 rupiah per liter from 4,500 rupiah is subject to approval by lawmakers. The country must raise fuel prices to curb a subsidy bill that threatens to sap funds from pivotal health, education and road and port building programs, National Economic Committee Vice Chairman M. Chatib Basri said in an interview with Bloomberg Television in Hong Kong on March 23.

Ratings changes aren't necessarily accompanied by corresponding moves in bond prices. Instead of falling in value after S&P stripped the U.S. of the top AAA sovereign rating, Treasuries rallied and the government's borrowing costs fell to record lows. While stocks fell, wiping $2.5 trillion from the market value of global equities on the first trading day after S&P on Aug. 5 cut the U.S. by one level to AA+, the gain in benchmark 10-year government notes sent yields down almost a quarter percentage point, to 2.32 percent.

Asian Crisis

Still, a rating upgrade would endorse Indonesia's efforts to move its economy out of the shadows of the 1997-98 Asian financial crisis, when it needed a bailout from the IMF.

The nation's parliament approved a land-acquisition bill in December that will allow Yudhoyono's administration to accelerate road, port and airport projects. The government is also setting up a new financial market regulator that is due to start operating in January 2013, supervising capital markets, insurers, pension funds and other non-bank institutions.

In the Philippines, Aquino is seeking $16 billion of investments in projects including roads in the capital and airports in the provinces to upgrade the nation's infrastructure.

Indonesia's $707 billion economy has expanded more than 6 percent for five straight quarters, weathering a decline in global demand that has hurt growth across Asia. The Philippine economy grew 3.7 percent last quarter from a year earlier.