RP bonds emerge as top choice in Asia

The relatively high returns that Philippine sovereign dollar bonds offer make them a risk worth taking, despite the country’s burgeoning fiscal problems, according to fund manager Franklin Templeton Investments.

"We are getting paid for the risk in the Philippines," Michael Hasenstab, portfolio manager and analyst at Templeton’s International Bonds Department, told Reuters in an interview.

"It’s obviously a higher risk than Malaysia, a higher credit risk than Korea, but we are earning a significant carry," he said. Templeton is overweight in Philippine bonds.

Carry refers to the difference between the cost of financing the bonds and the returns obtained from the investment.

Hasenstab said Templeton’s returns from Philippine bonds in the 12 months to end-November were around 20 percent, compared with slightly above 10 percent for both Malaysia and Korea. Templeton Investments manages about $257 billion worth of assets worldwide, of which $88 billion are in fixed-income funds.

Philippine dollar bonds represented 6.9 percent of the $146.4 million invested in the Templeton Emerging Markets Bond Fund and three percent of the $183.8 million in the Templeton Global Bond Fund. Both the funds are co-managed by Hasenstab.

Malaysian and South Korean dollar bonds represented 4.55 percent and 4.50 percent of the Emerging Markets Bond Fund.

Investors still confident on Manila

Hasenstab said that while foreign investors were worried over the Philippines’ rapid fiscal deterioration, the fact it continues to successfully tap the international capital market shows investors think the risk is still worth taking.

Manila’s latest official projection for the 2002 deficit is 5.6 percent of gross domestic product, or about P223 billion. The deficit target was raised three times last year.

This year, the government is hoping to keep the deficit to within 4.7 percent of GDP as a result of a raft of tax reform measures and a crackdown on evaders.

Hasenstab said he was confident the reforms would work and the country’s financial team would manage the fiscal problems.

He also said a current account surplus would continue to keep foreign investors interested in the Philippines, despite the sizeable revisions to surpluses in 2000 and 2001.

Last week, the Philippines revised its current account data after finding it had understated imports. The 2000 surplus was revised down to $5.87 billion from $9.19 billion while the surplus in 2001 was lowered to $305 million from $4.025 billion.

"The positive side of that was the government aggressively restated what the number should be and didn’t try to hide it," Hasenstab said, adding while the revision did cause some price volatility, the benchmark 2025 issue was still trading at par.

Overweight Asia

Hasenstab said while emerging Europe outperformed Asia in terms of returns last year, Templeton would continue to be overweight in Asia given the region’s better ratings profile. Returns from Asian bond funds were around 15 percent in 2002, compared to over 20 percent for emerging Europe, he said.

"It’s important to look at Asia on a risk-adjusted basis. In general in Asia you are taking less credit risk as countries here tend to be higher rated, so the returns should be lower.

"So even low double-digit returns are quite good, given limited credit risk," he said.

Hasenstab said both his funds currently have minimal exposure to Asian corporate debt, largely because of a lack of liquidity and less attractive pricing against sovereign issues.

"We have to get compensated for both the sovereign risk and as well as the corporate risk, adding the two of them together."