Bankers said yesterday that the market would be in a holding pattern until there is a more definitive outcome in the discussions over the possibility of an open war between the US and Iraq.
In his State-of-the-Union address yesterday, US President George W. Bush said the US would present evidence against Iraq on Feb 6.
According to John McGowan, HSBC-Philippines treasurer, markets were not any clearer on how the situation would develop than before Bush gave his union address. "So we have to wait again and we expect no change until information is presented before the US Congress," he said.
"The uncertainty over the US-Iraq situation is at the back of everybody’s mind because of what it’s impact would be on oil prices," McGowan pointed out.
However, he said the spreads have narrowed down for the country’s most commonly traded dollar bonds. Those maturing in 2003 were now being traded at 498 basis points (bps) above US Treasuries, down from 514 bps. "One of the key reasons is that President Arroyo has announced that she’s not running," McGowan said. "Offshore investors read that as a sign that she will actually get some reforms done."
If Mrs. Arroyo decides to run, however, McGowan said yields could widen again because investors would be expecting more political obstacles to key reforms needed to steer the country forward.
McGowan said the market was also still watching the country’s fiscal position, picking up cues from both the absolute amount of the budget deficit and as a percentage of the gross domestic product.
"The government now looks at the deficit as a percentage of the GDP and this is good because that’s how every other country looks at it," he said.
"But its useless to deny the fact that people also look at the absolute amount. So both numbers will be watched and will have an influence on the market perception," he added.
McGowan said the deficit would still be the driving factor for investors and how the government is faring in terms of managing its fiscal deficit.
"If the government starts overshooting its target deficit again and depending on how far it would be from its target, the spreads would widen again," he said.
On the other hand, McGowan said domestic interest rates are likely to remain stable considering the amount of liquidity in the market and the continued relative stability of consumer prices.
"There is a chance that we’d go through the whole year and we won’t get to 5.5 percent inflation rate," he said, referring to the upper limit of the government’s projected range of 4.5 to 5.5 percent inflation for 2003.