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By Rosemarie Francisco and Karen Lema
MANILA, Oct 9 (Reuters) - The Philippines has long beenamong Asia's most aggressive sovereign borrowers. Now it isabout to become one of its most attractive to foreign investors,too.
Asia's largest issuer of sovereign debt in the global marketis set to return this month with a $1 billion global peso noteoffer, tapping a rush by investors for a piece of one ofSoutheast Asia's fastest-growing economies.
That debt issue and another $500 million of U.S. dollarbonds in the local market are likely to be priced by investorsat levels similar to investment-grade nations, such asneighbouring Indonesia, even though rating agencies still have a"junk bond" rating on Philippine debt.
Much of the enthusiasm for the Philippines -- not so longago considered the "sick man of Asia" -- reflects PresidentBenigno Aquino III's efforts to curb corruption, reduce thebudget deficit and increase spending on infrastructure.
The transition is not complete -- revenues as a percentageof gross domestic product remain very low at around 15 percentand the tax base is narrow, poor governance has hindereddevelopment, and half-term elections are due in about sevenmonths -- but investors are prepared to give Manila the benefitof the doubt for now.
The economy looks healthy, growing at an annual rate of 6.1percent in January to June, higher than Malaysia, Vietnam, SouthKorea, Thailand and Singapore.
"There's been a number of marked changes so it is impossiblefor the market to continue to ignore all those things," saidKenneth Akintewe, portfolio manager at Aberdeen Asset Managementin 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 soonfollow Indonesia with a credit-rating upgrade to investmentgrade after bringing down debt costs despite the euro zonecrisis and overall global market uncertainties. A dearth of Asiasovereign bond sales also helps, along with its reputation as aliquid sovereign issuer, say bankers.
The $500 million U.S. dollar bonds would be the second suchissue in about two years. The debt sales are expected to belaunched as soon as this week, after the government concludesroadshows in the Middle East and Hong Kong.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHIC-Philippine dlr bond GRAPHIC-Philippine CDS GRAPHIC-PH vs ID CDS INTERVIEW with Aquino FACTBOX on Philippine political risks ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> PHILIPPINE EXPOSURE
Since Aquino's election in May 2010, the Philippines hasraised $3.75 billion in global dollar bonds at around half thecoupon rates it committed to pay about a decade earlier.
It sold 25-year sovereign dollar bonds at a 5.0 percentcoupon in January and 10-year bonds at 4.0 percent in October2010, compared to 2002 when its sovereign coupons fetched morethan 9 percent.
Philippine sovereign bonds due 2021 aretrading in the market at a yield of 2.33 percent, lower than the2.78 percent yield on higher-rated Indonesian sovereign bondsdue 2021 .
The Philippines has also sold nearly 98 billion pesos ($2.35billion) in global peso bonds since September 2010, and remainsthe 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 realisegains from the peso's appreciation, while reducing thegovernment'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 itsdomestic debt profile. Long-term debt of at least 10 years nowmakes up 76 percent of total from just 27 percent nine yearsago.
The Philippines also completed a $3 billion dollar bond swapin 2010, its first dollar-denominated debt exchange in fouryears, and bought back $1.3 billion in foreign currency bonds inOctober last year.
All of this has helped to eliminate illiquid issues and makePhilippine dollar debt more attractive.
As a result, the Philippines has narrowed its public debt asa percentage of the economy to 57 percent from 79 percent in2005. Interest payments now account for around a fifth of statespending, compared to about a third in 2005.
"If you want an exposure to Asia, an emerging marketsovereign, 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 debtagainst default is quoted at 115/120 basispoints, tighter than higher-rated Indonesia's137/142 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 thatthis favourable trend will be sustained. The trend is there,they recognize that, now it is an issue of sustainability," saidJoey Cuyegkeng, economist at ING Bank in Manila.
All the three major credit rating firms have said thePhilippines must convince investors it has turned the corner inefforts to generate more state revenue.
In their latest assessments, both Standard & Poor's andFitch Ratings placed Philippine sovereign debt one notch belowinvestment grade. Moody's revised its rating outlook for thePhilippines to positive from stable and said an improvement ofits current rating depended on revenue reforms.
Last week, the Asian Development Bank raised its forecastfor Philippine GDP growth this year to 5.5 percent from 4.8percent, the only Southeast Asian country apart from Malaysia toget 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.
($1 = 41.6150 Philippine pesos)
(Additional reporting by Umesh Desai in Hong Kong.; Editing byJason Szep and John Mair)
Keywords: PHILIPPINES DEBT/