The Philippines has long been among Asia's most aggressive sovereign borrowers. Now it is about to become one of its most attractive to foreign investors, too.
Asia's largest issuer of sovereign debt in the global market is set to return this month with a $1 billion global peso note offer, tapping a rush by investors for a piece of one of Southeast Asia's fastest-growing economies.
That debt issue and another $500 million of U.S. dollar bonds in the local market are likely to be priced by investors at levels similar to investment-grade nations, such as neighboring Indonesia, even though rating agencies still have a "junk bond" rating on Philippine debt.
Much of the enthusiasm for the Philippines — not so long ago considered the "sick man of Asia" — reflects President Benigno Aquino III's efforts to curb corruption, reduce the budget deficit and increase spending on infrastructure.
The transition is not complete — revenues as a percentage of gross domestic product remain very low at around 15 percent and the tax base is narrow, poor governance has hindered development, and half-term elections are due in about seven months — but investors are prepared to give Manila the benefit of the doubt for now.
The economy looks healthy, growing at an annual rate of 6.1 percent in January to June, higher than Malaysia, Vietnam, South Korea, Thailand and Singapore.
"There's been a number of marked changes so it is impossible for the market to continue to ignore all those things," said Kenneth Akintewe, portfolio manager at Aberdeen Asset Management in Singapore, which oversees $6.5 billion in assets.
"It has been one of the better growth stories in Asia."
The pricing also reflects expectations the country will soon follow Indonesia with a credit-rating upgrade to investment grade after bringing down debt costs despite the euro zone crisis and overall global market uncertainties. A dearth of Asia sovereign bond sales also helps, along with its reputation as a liquid sovereign issuer, say bankers.
The $500 million U.S. dollar bonds would be the second such issue in about two years. The debt sales are expected to be launched as soon as this week, after the government concludes roadshows in the Middle East and Hong Kong.
Since Aquino's election in May 2010, the Philippines has raised $3.75 billion in global dollar bonds at around half the coupon rates it committed to pay about a decade earlier.
It sold 25-year sovereign dollar bonds at a 5.0 percent coupon in January and 10-year bonds at 4.0 percent in October 2010, compared to 2002 when its sovereign coupons fetched more than 9 percent.
Philippine sovereign bonds due 2021 are trading in the market at a yield of 2.33 percent, lower than the 2.78 percent yield on higher-rated Indonesian sovereign bonds due 2021.
The Philippines has also sold nearly 98 billion pesos ($2.35 billion) in global peso bonds since September 2010, and remains the only Asian sovereign to offer debt in a synthetic format, issuing in local currency but settling in U.S. dollars.
The global peso notes allow foreign investors to realize gains from the peso's appreciation, while reducing the government's foreign currency exposure.
The Philippines has also moved to lengthen its debt profile, creating more liquid instruments and cutting debt costs.
It has launched at least six local bond swaps since 2006, including two during Aquino's watch, allowing it to stretch its domestic debt profile. Long-term debt of at least 10 years now makes up 76 percent of total from just 27 percent nine years ago.
The Philippines also completed a $3 billion dollar bond swap in 2010, its first dollar-denominated debt exchange in four years, and bought back $1.3 billion in foreign currency bonds in October last year.
All of this has helped to eliminate illiquid issues and make Philippine dollar debt more attractive.
As a result, the Philippines has narrowed its public debt as a percentage of the economy to 57 percent from 79 percent in 2005. Interest payments now account for around a fifth of state spending, compared to about a third in 2005.
"If you want an exposure to Asia, an emerging market sovereign, then it is the Philippines," said Noel Reyes, Managing Director, at ING Bank in Manila.
Credit default swaps (CDS) also point to growing optimism. The cost of insuring the Philippines five-year sovereign debt against default is quoted at 115/120 basis points, tighter than higher-rated Indonesia's 137/142 basis points.
Analysts expect an credit-rating upgrade within six months.
"The capital markets are trading us like investment grade. But for the credit rating agencies, they want to make sure that this favorable trend will be sustained. The trend is there, they recognize that, now it is an issue of sustainability," said Joey Cuyegkeng, economist at ING Bank in Manila.
All the three major credit rating firms have said the Philippines must convince investors it has turned the corner in efforts to generate more state revenue.
In their latest assessments, both Standard & Poor's and Fitch Ratings placed Philippine sovereign debt one notch below investment grade. Moody's revised its rating outlook for the Philippines to positive from stable and said an improvement of its current rating depended on revenue reforms.
Last week, the Asian Development Bankraised its forecast for Philippine GDP growth this year to 5.5 percent from 4.8 percent, the only Southeast Asian country apart from Malaysia to get an improved growth estimate.
The optimism has breathed life into its stock market, pushing it up nearly 25 percent to record highs this year, helped by strong foreign fund inflows which have lifted the peso, Asia's best performer this year.