PHL inclusion in bond index to boost investments, stem volatility

THE PHILIPPINES’ potential return to the emerging markets bond index of investment bank JPMorgan Chase & Co. will help boost foreign investment flows and reduce volatility, Metropolitan Bank & Trust Co. (Metrobank) said.

“The return of the Philippines to any potential bond index would translate to increased foreign investment flows. This is important because it could bring more foreign money into the Philippines. When a country is included in these indexes, investors who follow them closely often buy bonds from that country. For example, if the Philippines was given a 5% share in the index, we might expect investors to put about 5% of their funds into Philippine bonds,” Metrobank Chief Economist Nicholas Antonio T. Mapa said in a note on Wednesday.

“Given that investment houses that track the index would be required to hold a fixed percentage of Philippine investment products, this could suggest that investor flows would be less volatile and more “sticky.” These funds will be more likely to stay in place for a longer time,” Mr. Mapa added.

The Philippines is in talks with JPMorgan for the inclusion of its peso government bonds in the bank’s emerging-market debt gauge, Finance Secretary Ralph G. Recto told Bloomberg News last month.

Joining the benchmark is typically a breakout moment for emerging economies, as the move attracts fresh inflows of overseas capital into their debt markets. India acceded to the gauge in late June, having been placed on watch for eligibility three years before.

For officials in Manila, the talks mark a potential turnaround after its global peso notes dropped out of the index due to illiquidity in January 2024. The Philippines has different types of local currency notes.

Officials in Manila are also looking to resolve matters of taxation, National Treasurer Sharon P. Almanza said.

Mr. Mapa said the talks are a “positive sign, suggesting the Philippines might not only rejoin but possibly have an even more significant presence in the index.”

Rejoining the index could also provide support for the peso, he added.

“With funds “sticking around” for as long as the Philippines remains in the index, this could also translate to a stronger peso as trading volatility is minimized to some extent. Given all of the positive attributes of the Philippine economy such as relatively upbeat growth prospects and moderating inflation, we believe the potential return of the Philippines to a bond index simply acts as a validation of the attractiveness of the country as an investment destination,” Mr. Mapa said.

After trading at the P58 level against the dollar and hitting 18-month lows in May due to uncertainty over the timing of interest rate cuts here and abroad, the peso has since recovered, closing at the P56 level at end-August and even returning to the P55 mark earlier this month.

However, potential hurdles to the country’s inclusion in the index include tax issues and liquidity, Mr. Mapa said.

“Despite these challenges, there is reason to be hopeful. Philippine authorities are in regular and fruitful discussions with the administrators of these bond indices. When the index inclusion does happen, we will see new opportunities opening up for the economy and for investors,” he said. — AMCS with Bloomberg