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Philippine Bonds Gain as Rice Prices Fall

AInvestWednesday, Oct 9, 2024 8:46 pm ET
1min read
Philippine sovereign bonds have been on a bullish run this year, with investors reaping returns of over 6%. This trend is expected to continue, as falling rice prices are set to cool inflation and bolster the case for more interest rate cuts. India's decision to ease rice export curbs has been an unexpected boon for the Philippines, opening up space for the Bangko Sentral ng Pilipinas (BSP) to adopt an aggressive easing path, which would further put downward pressure on bond yields.

Rice accounts for 9% of the Philippines' consumer price inflation basket, making it a significant factor in the country's inflation rate. With India's move, rice prices have plummeted, the most in 16 years. This development is expected to help the Philippines achieve its inflation target of 2% to 4% more easily, allowing the BSP to consider more aggressive rate cuts. The central bank is already planning a 25 basis-point cut for its October 16 policy meeting, with some central bank watchers not ruling out a larger cut next week.

The fall in rice prices is also expected to have a positive impact on the Philippine peso's exchange rate and the country's trade balance. Increased availability of rice will help ease retail prices and make rice more accessible to the general population. This, in turn, is likely to boost consumer confidence and support domestic demand, which could lead to a stronger peso and a more balanced trade balance.

The expected lower yields on Philippine 10-year notes are likely to further fuel the appetite of foreign and domestic investors for Philippine government bonds. The medium-term outlook points to lower yields, driven by the BSP's easing cycle and the positive impact of falling rice prices on inflation. However, short-term volatility may still be influenced by both local and US economic data.

The potential aggressive easing path by the BSP is expected to have a positive impact on the Philippine economy's growth prospects and fiscal sustainability. Lower interest rates make borrowing cheaper for both the government and private sector, encouraging investment and consumption. This, in turn, is likely to support economic growth and help the government achieve its fiscal targets.

In conclusion, the relaxation of India's rice export curbs has been a welcome development for the Philippines, as it has helped to cool inflation and support the case for more interest rate cuts. This, in turn, is expected to boost the performance of Philippine sovereign bonds, strengthen the peso, and support the country's economic growth prospects. As the BSP continues to monitor inflation and adjust monetary policy accordingly, investors are likely to remain bullish on Philippine government bonds.
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