Phillippines

While attention has been focused on Europe's fiscal challenges, developments in the Philippines today is a good reminder of the global nature of problem. It experienced its second failed auction here at the start of 2010. Today it rejected all the offers for PHP8.5 bln (~$183 mln) 2016 bonds that had produced an average yield of 7.465%, which was about 10 bp above the prevailing rate in the secondary market. There are a couple of considerations behind the market's demand for higher interest rates: Expectations for rate hikes to check inflation. The Jan CPI figures are due later this week and are expected to have risen 0.6% for a 4.9% year-over-year rate. Although the Philippines was able to raise money in the international capital markets ($1.5 bln dollar offering in Jan and is reportedly working on a samurai issue), the record budget deficit may be difficult to smoothly fund. Pre-election spending may help boost the economy, but it also increases the deficit. On the other hand, there has been a relaxation of China's interbank market rates and this, coupled with the unchanged one-year bill rate for the second consecutive week, has eased some anxiety, though the Chinese stock market failed to sustain its early gains. The Shanghai Composite closed below its 200-day moving average last Friday and yesterday and was turned back from a test on it earlier today, which is also where an uptrend line drawn off the summer lows comes in. The risk is that the 12% decline since last month's high is not complete and this may weigh on other markets in the region.