Philippines – Europe & Russian (FTA) Free trade deal eyed to boost

After a three-year lull, the Philippines and the European Commission are scheduled to restart exploratory discussions that could eventually lead to the signing of a free trade agreement between the country and the 27-member European Union.

Peter K.J. Berz, EC Deputy Head of Unit for Trade Relations with South Asia, Korea and the Association of Southeast Asian Nations, said in a briefing with a group of Southeast Asian journalists here that he was leading a delegation to the Philippines from the EC that would discuss trade and industry matters with the Department of Trade and Industry.

Possible measures to improve trade relations between the European bloc and the Philippines as well as increase investments by European companies in the Philippines are high on the agenda of the half-day meeting scheduled for December 12 in Makati City.

According to data from the EU, the European bloc has become the Philippines' largest single export market in the past five years, accounting for about 17 percent of total exports. Following the EU is Asean with a share of 17.2 percent followed by the United States (16.8 percent) and Japan (15.6 percent).

Philippine exports to the EU expanded by over 40 percent to 5.4 billion euros in 2010 from about 3.8 billion euros in 2009. Electronics top the list of exports, followed by transport equipment, garments and textiles and agricultural products.

Philippine imports from the EU, on the other hand, grew by more than 26 percent in 2010 to over 3.7 billion euros from 2.9 billion euros in 2009.

Total two-way trade totaled over 9.1 billion euros in 2010, making the EU the Philippines' fourth-largest trading partner, accounting for 13 percent of total trade. Traditionally, the Philippines has enjoyed a trade surplus with the EU, which in 2010 increased to over 1.6 billion euros.

Berz said that the Philippines, Vietnam, Thailand and Indonesia were the four members of the Asean that the EC—the executive arm of the EU—was considering exploring free trade relations with, as part of Europe's overall plan to expand its already significant presence in Asia.

The EU this year signed a free trade agreement with South Korea and it came into force in July. It was the first FTA to be entered into by the EU and an Asian country, and negotiations with Singapore and Malaysia are now in full swing to add to the list of trade deals between EU and fast-growing Asian nations.

The EC, which handles trade negotiations on behalf of the member-states of the EU, hopes to conclude the negotiations with Singapore by the middle of next year, to be followed by Malaysia at the end of 2012.

How soon the other four countries can sign similar trade agreements with Korea, Singapore and Malaysia will depend on the level of commitment and ambition of both countries, according to EU officials, considering that the new FTAs pushed by Europe cover more than just trade and industry to specifically include such concerns as sustainable development, environmental impact and even labor practices.

Laos, Cambodia and Brunei were not high on the priority list of countries with whom the EC wants to conduct trade negotiations with considering their small internal markets. Myanmar is also ranked low because of the fluid political and economic situation there.

Boosting Philippine-Russian Trade Relations

The growing trade relations between the Philippines and Russia have been boosted by the creation of the Russian-Philippine Business Council (RPBC) recently, reaffirming the two countries' commitment to strengthen economic and cultural ties.

The RPBC was formed after the Chamber of Commerce and Industry of the Russian Federation approved it through a Memorandum of Agreement (MoA) with the Philippine-Russian Business Assembly (PRBA), its counterpart in the Philippines.

Under the RPBC, the 68th Business Council created under the Chamber of Commerce of the Russian Federation, Filipino entrepreneurs will have more opportunities to do business with Russia, especially in tourism, transport, communications, food, telecommunications, energy, and power. The promotion of other business opportunities will be undertaken, giving priority to medium-sized enterprises.

The Philippines expects the stronger ties with Russia to widen the market for local products. Top exports to Russia from the Philippines include aircraft parts, desiccated coconut, carrageenan, lighters, personal care products, and banana chips.

It is also expected to boost Philippine exports of car parts, processed and frozen food items to Russia. This year, bilateral trade between the Philippines and Russia stands at over $713 million, and is expected to hit a record of over $1 billion by the end of 2011.

The creation of the RPBC is another fruitful result of the 35-year diplomatic relations between the Philippines and Russia. The two countries forged diplomatic relations on June 2, 1976. Over the years, bilateral ties have developed through cooperation in defense and security, trade and investment, energy, agriculture, education, culture, and tourism. To date, a total of 31 bilateral agreements have been signed.

Much optimism has been generated by the creation of the Russian-Philippine Business Council, as it is expected to provide impetus to more dynamic economic relations between the two countries. The alliance is expected to translate into more tourists, more trade, and more investments from Russia, as well as further open the Russian economy for more products from the Philippines.

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Philippines forex reserves rise to $76.3 Billion USD - market rebounds on easing inflation level

Philippine forex reserves rise to $76.3Billion USD

The Philippine gross international reserves (GIR) rose to ₱3.3 Trillion Peso or  $76.3 Billion U.S. dollars as of end- November, the local central bank reported Wednesday.

The November GIR is 500 million U.S. dollars higher than the GIR posted in October.

Foreign currency deposits, higher valuation on its gold reserves on back of rising gold prices and income from the central bank's investments abroad and net foreign exchange operations boosted the country's GIR.

These inflows were offset by outflows as the National Government and the central bank paid its maturing obligations.

November's GIR level could cover 11.2  months of imports of goods and payments of services and income; and is equivalent to 10. 7 times the country's short-term external debt based on original maturity and 6.5 times based on residual maturity.

The level of net international reserves (NIR), which includes revaluation of reserve assets and reserve-related liabilities, rose to 76.3 billion U.S. dollars in end-November.

Philippines market rebounds on easing inflation level

The Philippine stock market rebounded Wednesday (December 7, 2011) after the government reported a slower rise in consumer prices.

The rally in the stock price of heavyweight Philippine Long Distance Telephone Co. (PLDT) also pulled up the bellwether Philippine Stock Exchange index to close at 4,315.17, 0.75 percent higher or 32.40 points.

The broader all-share index meanwhile gained 0.16 percent or 5. 03 points to 2,991.24. Of the six counters, only the holding firm sector bucked the trend and fell 0.01 percent.

 Trading volume reached 2.16 billion shares worth ₱4.97 billion pesos ($114.57 million U.S. dollars) with 87 stocks advancing, 72 declining, and 50 unchanged.

Brokerage DBP-Daiwa Securities, Inc. said that it expected the composite index to rally on Wednesday following slower inflation growth of 4.8 percent in November, which signaled a cut in policy rates.

The 4.8 percent reported in November is slower than the 5.2 percent rise in inflation in October and was well within the central bank projection.

 The central bank hinted it may cut policy rates in the first quarter of 2012 in the wake of expectations that a prolonged crisis in the euro zone would dampen growth prospects for emerging economies including the Philippines.

 "We expect positive implication into the market given that a policy rate easing, in theory should have a direct positive impact on banks as it generates more lending activities which can trickle down to other sectors such as consumer and property," DBP-Daiwa Securities, Inc. said.

 The brokerage said investors are now slowly accumulating stocks as they gear for next year. DBP-Daiwa Securities said investors expect a "favorable" stock market as the country remains to be insulated from the Euro debt crisis because of its strong domestic- oriented businesses.

 Stocks in the 30-company index closed mixed. Stock price of PLDT jumped by 2.73 percent after its chairman Manuel Pangilinan said the company will meet its profit target this year.

 DBP-Daiwa Securities, Inc. said this also help lift the composite index on Wednesday.

 Other issues that gained include companies of Philippines' richest man Henry Sy, sr., namely SM Prime Holdings, Inc. and SM Development Corp.

 Globe Telecom, Inc., DMCI Holdings, Inc., and San Miguel Corp. were sold down.

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Philippines & Asia Surviving EU ‘Test’ Boosts Upgrade Chance

Philippine 500 and 1000 peso notes are arranged for a photograph at the central bank in Manila. Aviva Investors says the Philippines, rated Ba2, is most likely to win a credit-rating upgrade. Photographer: Edwin Tuyay/Bloomberg

Asian economies are withstanding Europe's debt crisis so well that some investors are positioning for credit-rating upgrades in the region.

Five-year credit-default swaps for China, South Korea, Indonesia, Malaysia, the Philippines and Thailand climbed an average 63 basis points to 161 this year, while contracts for 17 eurozone countries, excluding Greece, jumped 118 to 301. Moody's Investors Service is watching the trading in the swaps, which protect against non-payment, and how Asia copes with capital flows as it weighs rating changes, said Thomas Byrne, a senior vice president at Moody's in Singapore.

Asia's 10 biggest economies excluding Japan grew an average of 5.2 percent in the third quarter, triple the euro-zone's 1.4 percent rate, and their central banks hold $5.2 trillion in currency reserves, more than half the global total of $10.2 trillion. Threadneedle Asset Management and Manulife Asset Management say they favor Indonesian notes, ranked Ba1 by Moody's, one level below investment grade, while Aviva Investors says the Philippines, rated Ba2, is most likely to win an upgrade.

"If there's continued good policy performance, macroeconomic stability in these countries and they weather this distress coming from the euro zone, in general that would be a credit-positive development," Byrne said in an interview last month. "Whether there's an accumulation of credit-positive developments that will lead to a credit-rating upgrade, we'll be looking closely over the next months."

Philippines Managing Successfully

Default swaps on Philippine bonds became cheaper than AAA- rated France last month, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. It costs 180 basis points to protect Philippine bonds, less than the 181 basis points for France. Contracts for China, Malaysia and Thailand are lower at 129, 130 and 176 respectively, all more than half Italy's 431. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Moody's has upgraded China once to Aa3 in the aftermath of the 2008 global financial crisis, the fourth-highest rating, and has raised Indonesia and the Philippines twice. Standard & Poor's said on Dec. 5 that Germany and France may be stripped of their AAA ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade. The firm also said that it may cut Italy's "A" rating, the sixth highest.

"Further rating upgrades will reward those emerging countries that manage this new stress test successfully, as they did just a couple of years back," said Agnes Belaisch, who helps manage $2.5 billion in emerging-market debt at Threadneedle Asset Management in London.

Strong Fundamentals

Indonesia, Southeast Asia's largest economy, grew more than 6 percent for a fourth straight quarter in the three months to September as consumer spending and government investment outweighed faltering global demand. Indonesia sold seven-year dollar sukuk, or bonds that comply with Islam's ban on interest, at a yield of 4 percent on Nov. 14, two percentage points less than the rate for five-year debt achieved by Italy. The 10-year yield on rupiah government non-Islamic bonds has fallen 157 basis points, or 1.57 percentage point, from a three-month high of 7.65 percent on Sept. 22.

"Indonesia's economic fundamentals continue to be strong," said Endre Pedersen, the Hong Kong-based managing director of fixed income at Manulife which has an Asian bond portfolio valued at $29 billion. "You might actually see upward momentum on the rating side."

Yield Premiums

Asia's developing economies will expand 8.2 percent in 2011 and 8 percent in 2012, according to estimates released in September by the International Monetary Fund. That compares with projections for the euro area of 1.6 percent this year and 1.1 percent next.

Investors demand an extra 234 basis points in yield over U.S. Treasuries to own the Philippines' 7.5 percent dollar bonds due in September 2024, according to prices from the Royal Bank of Scotland Group Plc. That compares with a spread of 545 basis points for Italy's 6.875 percent dollar notes due in September 2023, according to data compiled by Bloomberg.

The euro-zone slowdown could pose risks to Asian ratings should it lead to further cuts in global growth forecasts, Andrew Colquhoun, Fitch Ratings' head of Asia-Pacific Sovereigns in Hong Kong, said in an interview last month. Fitch has positive outlooks for Indonesia and South Korea, signaling the chance of an upgrade over the next 18 months.

Debt Ratios

The pace of upgrades for some Asian countries, such as Indonesia and Sri Lanka, may be delayed, not "entirely derailed or reversed," Agost Benard, associate director in Singapore for S&P, which has positive outlooks on Indonesia and Sri Lanka, said in an interview last month.

"If the economic uncertainties in Europe and the U.S. blow over and the world goes back to something like a normal growth trajectory and it turns out that Asian sovereigns didn't suffer, certainly that would be another proof of their resiliency," said Benard.

The odds of an upgrade in most Asian nations will be supported by "significantly lower" public-debt ratios than European governments, said Stewart Newnham, a strategist at Morgan Stanley in Hong Kong. There's a "strong case" for upgrades in Indonesia, China and the Philippines, he said.

The ratio of debt to gross domestic product stood at 143 percent for Greece at the end of 2010, 119 percent for Italy and 82 percent for France, according to data compiled by Bloomberg. Ratios for China, Indonesia, and the Philippines were 16 percent, 26 percent and 52 percent, the data show.

Resilience Intact

"The resilience that was demonstrated in 2009 and 2010 is largely intact," said Moody's Byrne. "Most governments have the fiscal headroom to enact fiscal stimulus measures if necessary because government debt levels aren't onerous. The credit trends in East Asia are stable to positive."

Asia's emerging sovereign debt markets are on course to acquire "safe-haven" status and may begin to supplant indebted developed nations, BlackRock Investment Institute wrote in an October report. The research unit of New York-based BlackRock Inc., which managed $372.8 billion in the region at the end of June, said such a status refers to assets that lure "dramatic capital inflows in times of stress."

Asian bonds are moving "from a tactical allocation to core position for global investors," Neeraj Seth, the head of Asian credit at BlackRock, said in an interview in Singapore.

Charles Macgregor, a Singapore-based senior vice president for Asian fixed income at Aviva, which manages the equivalent of $432 billion globally, said the Philippines is the most likely to be upgraded in Asia. Remittances sent home by Philippine citizens abroad climbed 4.1 percent from a year earlier to $14.8 billion in the first nine months of 2011.

"The repatriation of foreign-worker income is a very steady flow of funds, so that would hold them in good stead in the next year or two," said Macgregor, whose current mandate in Asia is to primarily invest in investment-grade securities.

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Kyoungwha Kim in Beijing at kkim19@bloomberg.net. To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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