How long has it been since you last traveled, or at least had a staycation by yourself or with your family? Maybe it’s time to take a break and de-stress from the hustle and bustle of your work week.

You do not even have to go too far to have that relaxing, even once-in-a-long-while escapade. Just book into one of these high-end hotels; then get your car ready anytime soon (unless you prefer to book a Grab car). If you are aiming for an out-of-town escapade, though, two new hotels in Northern Luzon and in the Visayas are included here.

Bookmark this list so you may keep it handy the next time you yearn for a quick unwind:

1. Hotel Okura Manila

One of the most awaited hotels to open in the country, this newest addition to what is now Newport World Resorts in Pasay City has been fully operational by the first quarter of this year.

Notable for its Japanese-inspired aesthetic, Hotel Okura houses 190 rooms. The most striking one, the Hinoki-yu Room, features Hinoki (Japanese cypress) wooden bathtubs handcrafted by Japanese artisans from Nagiso Town, Nagano Prefecture. Further exuding luxury in this room are separate areas for bathtub and rainfall shower, a high-tech Japanese bidet, multimedia amenities, and a Nespresso machine.

The hotel’s topmost floor has leisure and recreational facilities such as a fitness center and a 20-meter pool overlooking Manila’s skyline. Food is offered by Yamazato, a Japanese fine-dining restaurant with private rooms, and Yawaragi, an all-day restaurant serving Western and Asian specialties as well as high tea and cocktails.

2. dusitD2 Waves Hotel

With La Union already an accessible go-to vacation spot, especially for Mega Manila residents, the rebranded dusitD2 Waves Hotel, sprawled along the clean coastline of a 7-hectare property in San Juan town, is a good choice for a luxurious stay.

Now carrying the grandeur of the Dusit International brand since 2020, dusitD2 Waves Hotel features eight floors with about 216 rooms, some of which are overlooking the West Philippine Sea. It also has an elegant Olympic-size swimming pool, a health and wellness spa, gym, two world-class restaurants and two bars. For a family-friendly venture, there is a mini cinema, a library, plus a function hall that can accommodate up to 1,000 people for special gatherings.

3. Admiral Hotel Manila - MGallery

In the nation’s capital, its hottest 5-star boutique hotel opened in May 2022.

Admiral Hotel Manila – MGallery is striking for its design that evoke Manila’s Golden Age by reinterpreting classic and contemporary Filipino-Spanish design and architecture elements. This is coupled with “thoughtful touches, warm gracious service, and extraordinary gastronomical and mixology experiences,” as Matthieu Busschaër, the hotel’s general manager, shared in the hotel’s website.

Admiral Hotel has 123 rooms and suites which start at a spacious 31 square meters (sqm), coupled with free WiFi, pool and gym access, and plentiful dining options. These options include the Admiral Club restaurant, featuring a Filipino and Hispanic fusion tapas bar and an interactive dining catwalk centerstage table; an old Shanghai-themed Ruby Wong’s Godown; and a rooftop Coconut Grove bar, perfect for catching sunset views from the Manila Bay.

4. Swissôtel Clark

A Swiss-inspired luxury hotel that has been operational since March awaits travelers in the fully integrated Hann Casino Resort at Clark, Pampanga.

Swissôtel Clark has 372 contemporary rooms and suites (plus Swiss Executive Lounge for suite-stayers) with floor-to-ceiling windows, generously sized marble bathrooms, lounge chairs, and the latest guestroom automation technology. Guests can relax in a resort-style infinity pool and spa accented by sweeping mountain views at Pürovel Spa & Sport, the only alpine spa in the Philippines.

There are also various dining options to choose from, with 10 specialty restaurants serving everything from Asian street food delicacies to authentic Italian cuisine. To name a few, there is the in-house Nasi for Kapampangan fare, Markt for Swiss food, Spice for pan-Asian favorites, and Bar 20 for post-midnight drinks.

5. Grand Hyatt Manila

Delivering its Hyatt’s superior service for over four years, Grand Hyatt Manila in Bonifacio Global City, Taguig is surely a great choice for an uncompromised hotel experience. With rooms adorned with honeyed wood paneling, maple hardwood floors, richly veined gray-white marble bathrooms, spacious walk-in closet, and huge floor-to-ceiling picturesque windows, staying in one of the hotel’s 461 elegantly appointed guestrooms and suites is something individuals seeking a taste of the high life will go back to.

This experience does not stop with accommodation. Various dining choices await at The Grand Kitchen, The Lounge, The Cellar, Pool House, No. 8 China House, Florentine, and Peak. Aside from bringing grill restaurant, speakeasy, whisky bar, and music lounge in a single spot, The Peak also takes guests through an immersive culinary journey with Le Petit Chef, the tiny clumsy chef from France, via fun and engaging 3D animation on one’s dining table.

6. The Westin Manila Sonata Place

Located on the main street of the Ortigas Business District, this elegant hotel is slated to open later this year. Once it opens, you can choose from a wide range of room options out of its 300 luxurious rooms, from the Deluxe to the Presidential Suite. One thing is for sure: Every room features the signature Westin Heavenly Bed.

Guests will also get to indulge in three F&B venues, a swimming pool, a 24/7 fitness center, as well as an in-house Heavenly Spa by Westin.

7. Fili Urban Resort

Within the so-called “biggest lifestyle and entertainment destination outside Metro Manila” is a hotel that promises to redefine 5-star hospitality.

Fili Urban Resort is the first of three hotels that have opened in NUSTAR Resort and Casino, Cebu’s first integrated casino resort hotel. The hotel aims to give guests a distinct Filipino luxury experience, right from the reservation. For instance, guests can be picked up in limousines at the airport, then welcomed upon arrival at the hotel with the Fili signature drink.

The hotel, launched last May, features 379 rooms, a spa, pools, a hot tub, and gym. There are also butlers in every suite and villa of the hotel, as well as childcare and car rental service for a fee.

Making one is stay more exciting are shopping options in NUSTAR’s four-level 35,000-sqm mall, which will house VIP cinemas, high-fashion stores, and global and regional dining outlets.

Coupling amenities of the highest quality with top-notch services, these hotels are ready to give you fresh experiences of high-end living — a rewarding treat worth your hard-earned money.

Deutsche Bank, one of Europe’s banking behemoths, has, like the doomed Credit Suisse of Switzerland, faced numerous challenges in recent years.

Scandals, including its ties with Jeffrey Epstein, have hobbled the German bank. The US Fed has also warned the bank several times about the insufficiency of its anti-money laundering policies and procedures.

Investors are understandably worried about the possibility of it having liquidity issues amid external shocks.

But are they justified? Is Deutsche Bank like Credit Suisse?

Nein! if you ask Anna Cudia, Head of Markets Research at Metrobank’s Trust Banking Group.

More stable and liquid

“Deutsche Bank is actually not like Credit Suisse. Both of them are global systemically important banks, but the German bank is more stable and liquid,” said Cudia.

“Credit Suisse saw hefty withdrawals, with more than a quarter of where deposits were in 2021, and some units breaching liquidity rules. It also had a qualified opinion on the existence of material weaknesses in internal control over financial reporting. These are not experienced by Deutsche Bank,” she added.

Deutsche Bank is also twice the size of Credit Suisse. And in terms of their bottomline, Credit Suisse recorded a loss last year, while Deutsche Bank had a net profit.

In terms of other factors, however, they are virtually the same. They have healthy CET1, or Common Equity Tier 1, a measure of high-quality regulatory capital. Their NPLs, or non-performing loans, are all within healthy levels.

Idiosyncratic risks

“In terms of liquidity, however, we can see that Credit Suisse was in a bad spot given the recent outflows which started as early as October last year given its idiosyncratic risks. By end-2022, around a quarter of 2021 deposits had already been withdrawn from the Swiss bank. That’s how big the withdrawals were as early as last year,” said Cudia.

So, what’s really the trouble with banks?

“This is not a credit issue like the 2008 Global Financial Crisis. It’s really more of a crisis of confidence that’s putting banks into a liquidity crisis. Even with healthy capital ratios, no matter how strong a bank is, if there are deposit withdrawals all at the same time, a run, then it could be bad news for the banks. It’s so very fragile,” said Cudia.

For now, we have a good idea of what analysts think of the two banks, with a net sell recommendation of 27% for Credit Suisse and a net buy recommendation of 37% for Deutsche Bank.

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.

The Philippines’ external debt has reached its highest ever, from USD 106.43 trillion in 2021 (27% of gross domestic product) to USD 111.27 trillion (27.5%) in 2022. On its own, it appears worrisome but one thing about debt is that it must be understood in context. First, what was the debt used for, and second, how do the debt ratios compare versus the past and versus peers? Let’s take a look at these.

The Use

According to Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla, the increase in external debt was primarily driven by public and private sector spending on COVID-19 recovery measures, as well as to support economic growth. It’s a no-brainer that this kind of spending had to happen even if foreign debt had to be incurred.

The Past

Over the years, the external debt-to-GDP ratio dramatically shrunk (see figure 1) – it only went up during the pandemic when we needed more external financing to support the economy and fight COVID. Eventually, GDP recovered and just like external debt, nominal GDP has gone to its highest levels ever. These two, GDP and external debt, have to be taken together in context.

Moreover, our capacity to pay for it has improved as depicted in the external debt-to-GIR ratio (see figure 2). Gross international reserves (GIR) are assets held by central banks to back liabilities and help manage external shocks that impact their currencies (e.g., preventing their respective currencies from rapidly devaluing or depreciating). The Philippines’ GIR has been relatively increasing since the mid-2000s, thus improving this ratio.

So, a look at the external debt-to- GIR ratio of the past shows a dramatic shrinking of the debt burden relative to reserves, with the current upward ratio just a blip in the overall scheme of things. It must be remembered that not all external debt is due and demandable right now, with only a small portion due within a year (only around 15% of total external debt is short-term).

Definitely, the GIR is more than adequate at the moment.

The Peers

In comparison with its ASEAN peers, the Philippines’ external debt-to-GDP ratio is clearly the lowest as listed below. Its external debt-to-GIR ratio is also satisfactory and is second-best to Thailand, which means the country is in a better position compared to other ASEAN peers and is less prone to risks that go with foreign-denominated borrowings.

Source: Bloomberg

So, in summary, yes, the external debt grew, but so did the economy, recovering and growing as a direct result of the activities that the external debt helped finance in the first place. That’s the thing about debt – if it’s incurred for productive capacity and the resulting productivity itself pays for that debt, there’s no issue.

So, worried about external debt? Don’t be, things are working as planned.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee. 

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) surged by 2.05% (+132.45 points) week-on-week to 6,602.17, posting its first weekly gain after a seven-week losing streak.

The local bourse started the week in the red as investors remained cautious amid the troubled global banking sector ahead of the US Fed and Bangko Sentral ng Pilipinas (BSP) meetings.

The benchmark index rebounded on Tuesday and extended the rally midweek as market sentiment improved on easing worries after UBS rescued the embattled Credit Suisse. The market slightly declined on Thursday as the Fed and the BSP raised interest rates by 25 basis points (bps), as expected.

On Friday, the PSEi jumped back to the 6,600 level as the market digested the lower policy hike as well as the Fed’s signal for a rate hike pause to ease the recent turmoil in the financial markets.

Top index performers were Bank of the Philippine Islands (BPI) (+9.3%), Ayala Corporation (AC) (+9.2%), and AC Energy (ACEN) (+8.8%) while index laggards were DMCI Holdings Inc. (DMC) (-5.3%), Converge (CNVRG) (-2.3%), and Metro Pacific Investments Corporation (MPI) (-1.9%). The index breadth was positive with 20 gainers versus nine losers. The average daily turnover value was PHP 4.1 billion. Foreigners were net buyers by PHP 219.6 million.

WHAT TO EXPECT THIS WEEK

We expect the market to be buoyed by improved investor sentiment given: (i) the BSP hinted of a rate hike pause later this year; and (ii) the anticipated oil price rollback by as much as PHP 1.00-PHP 1.20/liter on diesel and PHP 0.60-PHP 0.75/liter on gasoline.

However, gains may be capped as the market continues to be wary of the global banking crisis amid the rise in Deutsche Bank’s credit-default swap insurance. Investors will continue to monitor the tail end of the earnings season and be on the lookout for market catalysts.

STOCK CALLS FOR THE WEEK

Philex Mining Corp. (PX) — BUY ON BREAKOUT

Year-to-date, Philex Mining Corp.’s (PX) share price rose by 8.9%, outperforming the PSE mining and oil sector, which is down by 1.2% in the same period. PX’s positive performance this year tracked the price of gold, which has rallied by 6.7% year-to-date (YTD).

Gold, which accounts for ~51.3% of PX’s total revenues, has outperformed this year, driven by risk aversion on concerns over the global banking sector. PX also tracked the outperformance of copper, which surged by 6.6% amid the Chinese economic reopening and short-term supply issues brought about by the protests in Peru, which accounts for 10% of the world’s copper supply.

Moving forward, copper prices are expected to be supported by the significant capital being invested in renewable energy. As for price action, PX broke above its 200-day moving average price (MA) for the first time since April 2022. Now, PX is looking to break above its resistance level of PHP 3.30, which could propel the stock to retest PHP 3.60/PHP 4.20. Accumulating once PX breaks above PHP 3.30 is advisable. Set cut loss below PHP 3.10. Take profit at around PHP 3.60/PHP 4.20.

Apex Mining Co., Inc. (APX) — BUY ON BREAKOUT

Year-to-date (YTD), Apex Mining Co, Inc.’s (APX) share price rose by 8.3%, outperforming the PSE mining and oil sector, which is down by 1.2% in the same period. APX’s positive performance this year tracked the price of gold, which has rallied by 6.7% YTD.

Gold, which accounts for ~94.4% of APX’s revenues, has outperformed this year, driven by risk aversion on concerns over the global banking sector. As for price action, APX managed to stay above its immediate support around the 100-day MA and PHP 1.80. We think that once APX breaks above PHP 2.10, it will create a higher low and the stock can resume its bullish trend and possibly retest its 52-week high of PHP 2.20 and 4-year high of PHP 2.32. Accumulating once APX breaks above PHP 2.10 is advisable. Set cut loss below PHP 1.95. Take profit at around PHP 2.35/PHP 2.45.

International Container Terminal Services, Inc. (ICT) — BUY ON BREAKOUT

International Container Terminal Services, Inc. (ICT) reported full-year 2022 core net earnings of USD 634.5 million (+43% y-o-y), above consensus expectations, due to higher operating income, net foreign exchange gains, and equity share in the net profit of joint ventures.

ICT is cautiously optimistic about its volume growth this year amid the economic headwinds. Management mentioned that volume growth in January 2023 was better than their expectations, while volume in February 2023 normalized.

ICT added that given the higher inflation, it will remain committed to its cost reduction initiatives as this will be the key to maintaining ICT’s EBITDA margin. As for price action, ICT is facing resistance at PHP 220.00. We believe that a break above PHP 220.00 will result in the stock resuming its bullish trend. Accumulating once ICT breaks above PHP 220.00 is advisable. Set stop limit orders below PHP 203.00. Take profit at around PHP 250.00 to PHP 260.00.

PSEi TECHNICAL ANALYSIS

Resistance: 6,800

Support: 6,600 / 6,400

The 6,400 level proved to be a strong support for the market after bouncing from that level last week. The PSEi managed to close above 6,600 and is back hovering atop its 200-day moving average price (MA). It is crucial for the market to stay above 6,600 and the 200-day MA for the rebound to be sustainable. The key level to watch next is 6,800. A break above 6,740/6,800 will result in the reversal of the market’s short-term downtrend.

TRADING PLAN

Gradually accumulate once the PSEi trades back above 6,800.

KEY DATA RELEASES

Tuesday, March 28, 2023
– PH bank lending year-on-year for February 2023 (prior: 9.8%)

Wednesday, March 29, 2023
– Corporate Earnings: JG Summit Holdings, Inc. (JGS)

Thursday, March 30, 2023
– US GDP annualized quarter-on-quarter for 4Q 2022 (consensus estimate: 2.7%; 3Q 2022: 2.7%)
– US Core Personal Consumption Expenditure (PCE) q-o-q for 4Q 2022 (consensus estimate: 4.3%; 3Q 2022: 4.3%)
– Corporate Earnings: Monde Nissin Corp. (MONDE)

Friday, March 31, 2023
– PH Budget Balance for February 2023 (prior: PHP 45.7 billion)

Amid the global banking turmoil, the US Fed nonetheless hiked policy rates by 25 basis points (bps), signaling that fighting inflation is the top priority.

The BSP likewise raised benchmark rates by 25 bps due to mounting core inflation and the need to anchor inflation expectations.

See our report here for complete policy rate updates and outlook.

ANNA ISABELLE “BEA” LEJANO and INA CALABIO  are Research & Business Analytics Officers at Metrobank. MARC BAUTISTA is the bank’s Research and Business Analytics Head.

In our previous article titled Stay Calm, SVB isn’t another Lehman Brothers, we argued that Silicon Valley Bank’s (SVB) failure does not follow a similar path as Lehman Brothers did back in 2008.

The fall of SVB was an idiosyncratic stress event, driven by aggressive interest rate risk-taking and the mismanagement of this risk by a large but still niche bank. It still pays, however, to be reminded of Lehman Brothers’ cautionary tale that led to the biggest financial crisis since the Great Depression.

Lehman Brothers’ collapse nearly 15 years ago is deemed the biggest bankruptcy in US history that marked the beginning of the 2008 Global Financial Crisis. What foreshadowed the deepening of the great recession?

What went wrong?

Lehman Brothers, which started as a humble dry-goods store in 1844, grew to become a global financial firm that provided investment banking, trading, brokerage, and other services in the US and globally. It was the fourth-largest investment bank in the United States at the time, even deemed “too big to fail”, with record earnings of more than USD 4 billion on revenues of USD 60 billion in 2007 – the year before its demise.

Many reasons point to Lehman falling apart, but the main trigger was its heavy exposure to the US housing market. From 2003 to 2004, the firm invested in mortgage lenders, some of which specialized in sub-prime mortgages or housing loans to individuals with lower credit scores and incomplete documentation, under the guise of greater economic inclusivity.

These lenders provided the underlying housing loans for Lehman’s own mortgage-backed securities (MBS) – bonds that derived interest and principal payments from ordinary Americans’ mortgage payments.

The bonds were popular with high net-worth individuals, institutional investors, and other banks because they offered premium yields and were tied to the US housing market, which continued to appreciate in value. Aggressive lending and MBS structuring activities continued well into 2006, despite the US housing market already peaking.

Lehman Brothers’ stock price peaked in February 2007 and began plummeting in September 2008.

By the end of 2007, Lehman had already acquired USD 111 billion worth of commercial or residential real estate-related assets and securities to which rating agencies and investors expressed concerns over illiquidity.

This left Lehman in a difficult position to bring in cash, hedge risks, or sell assets to reduce leverage in its balance sheet.

Subprime mortgage crisis

While Lehman was aggressively investing in real estate, the subprime mortgage crisis was already brewing. When house prices peaked in 2006, refinancing of mortgages and selling of mortgaged homes became a less feasible means of settling mortgage debt.

Sub-prime mortgages also started to fail in 2007 as borrowers could not keep up with the payments. This led to higher mortgage loss rates for lenders and investors. All of this, coupled with the expansion of mortgages to high-risk borrowers, turned the turmoil into a crisis that ultimately toppled Lehman.

Lehman Brothers invested heavily in high-risk real estate and subprime mortgages and could not raise enough cash when these markets turned south.

No saving by the Fed

Since Lehman Brothers was an investment bank, the US government could not nationalize it like it did with Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). No regulator like the Federal Deposit Insurance Corporation (FDIC) could take over. The US Federal Reserve also could not guarantee a loan, as it did with Bear Stearns, another beleaguered bank at that time.

US Treasury Secretary Hank Paulson urged then Lehman President Richard Fuld to find a buyer as Bear Stearns had done. Paulson initially rejected Bank of America’s proposal for the government to cover USD 65 billion to USD 70 billion in projected losses.

Federal Reserve of New York President Tim Geithner and the nation’s top bankers spent a weekend trying to find funding for Lehman Brothers. But before they could, Bank of America backed out of the deal. Barclays also announced the following day that its British regulators would not approve a Lehman Brothers deal.

Everyone spent the rest of the day preparing for Lehman’s bankruptcy. Lehman Brothers, with its USD 619 billion in debts, was the largest corporate bankruptcy filing in US history.

Impact of Lehman’s bankruptcy

Lehman’s bankruptcy sent financial markets reeling. The Dow Jones Industrial Average (DJIA) fell by as much as 504.48 points and continued to drop until March 5, 2009. Investors also fled to the relative safety of US Treasury bonds, sending prices up and yields down.

Investors knew that Lehman’s bankruptcy threatened the financial institutions that held its bonds. Investors lost confidence in the money market fund when it announced losses of USD 785 billion in Lehman’s commercial paper.

On September 17, 2008, the chaos spread, and investors withdrew USD 196 billion from their money market accounts. The next day, Paulson and Fed Chair Ben Bernanke asked congressional leaders for USD 700 billion, which would allow the Treasury Department to buy shares of troubled banks and bail them out.

Congress rejected the proposal and the Dow went down by 777.68 points. In October 2008, the US Senate voted in favor of a revised USD 700 billion bailout bill that contained a tax cut and extended federal protection for bank deposits.

Who saved Lehman?

Following the bankruptcy filing, Barclays and Nomura Holdings eventually acquired the bulk of Lehman’s investment banking and trading operations. Barclays additionally picked up Lehman’s New York headquarters building.

Lehman’s collapse was a major contributor to what eventually became the Global Financial Crisis (GFC) of 2008. Many still wonder why Lehman was allowed to fail, rather than being rescued by the US government like so many other banks. One may think of the sheer size of Lehman’s debt and the woeful inadequacy of its assets to cover such debt.

Lessons after Lehman

Greater scrutiny of the financial system followed after the failure of Lehman Brothers and the GFC. In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in order to subject banks to stress tests, particularly those that were “too big to fail.”

Internationally, banks agreed to set up the Basel-III framework, which required banks to meet higher capital buffers to absorb potential losses, before any profits could be redistributed to shareholders.

Banks were also required to build these capital buffers using their own reserves before they were allowed to source external funding. The crisis resulted in 8 million home foreclosures and a 40% average decline in housing prices.

While some form of subprime mortgage lending still exists today, lenders now require higher upfront down payments and interest rates to compensate them for the risk. Structuring and trading of MBS also continues, but with even stricter regulation and transparency requirements than before. The Fed itself is an active participant and provider of liquidity in the MBS market.

The purchase of Credit Suisse by its rival bank UBS—a deal facilitated by the Swiss government–was the culmination of years of struggles and desperate attempts to stay afloat by the 166-year-old bank. The buyout, while not a coincidence, comes at a time when several US banks have also been struggling.

One of the most salient and controversial implications of the UBS’s takeover of Credit Suisse is the write down of the latter’s high-risk bonds, called Additional Tier 1 (AT1) bonds, to zero. In effect, this means that Credit Suisse’s AT1 bonds are now worthless.

Now, as markets reel from recent developments in the financial sector, our regular investors ask: should we be worried about our Asian bank bonds?

What are AT1s?

AT1s are issued by banks as hybrid instruments—they have features of a high-yield bond but are also convertible to equity. Therefore, all AT1s are a form of contingent convertible or “CoCo” bonds. They are normally perpetual, with coupons fully discretionary and non-cumulative, and are subordinate—ranked beneath Tier 2 capital, which is below senior debt.

CoCos were introduced after the 2008 global financial crisis to increase banks’ buffers and avoid future government bail-outs.

This reform was a response to the risk of moral hazard, as the global financial crisis revealed that financial institutions tended to engage in risky investments with the notion that they’re “too big to fail” and that authorities would come to their aid, no matter how costly, when things go south.

Liquidity troubles, such as when a bank’s capital falls below a certain threshold, would trigger either a full or partial conversion of the CoCo bonds into equity at a discounted value, or in the case of Credit Suisse–a full write-off to zero to augment core capital. CoCos, in effect, serve as a loss absorption mechanism that cuts the bank’s debt.

A buyout and a bail-in

Whereas Credit Suisse’s AT1 bondholders effectively get nothing, no losses are imposed on the troubled bank’s senior bondholders as these securities are now an obligation of UBS.

More notably, Credit Suisse shareholders were offered CHF 0.76 for each share turning into UBS stock.

While this is way below latest market value (shares of Credit Suisse closed at CHF 1.86 on March 17; Credit Suisse’s biggest shareholder Saudi National Bank invested USD 1.5 billion at CHF 3.82 per share last year), this is still more than what shareholders typically receive relative to bondholders.

In a normal treatment for repayment, bondholders are expected to be better protected as they are usually prioritized over shareholders.

However, it is worth noting that, as stated in the prospectus of Credit Suisse’s AT1 bonds, the write-down was warranted by a Viability Event that stemmed from the Swiss authorities’ provision of a liquidity boost to the tune of CHF 40 billion.

According to CreditSights, this hefty liquidity support will be used by UBS to cover future losses from restructuring costs and from winding down Credit Suisse’s Investment Bank.

(Note: Credit Suisse also has Tier 2 CoCos, with a similar Viability Event clause, which have not been written down and are now presumed to be an obligation of rescuer UBS, according to CreditSights. Unlike the AT1s, this Tier 2 CoCo is dated, set to mature August 2023, and has must-pay coupons.)

Buyer beware

Following the Swiss regulators’ treatment of the USD 17.5-billion write-down, overall sentiment for AT1 bonds soured, the size of which is a staggering USD 275 billion in the global market.

We saw financials underperform and take most of the widening move seen in credits. Senior bonds and Tier 2’s of Asian banks traded as much as 30-50 bps wider yesterday. The broad risk-off sentiment also led Asian investment grade corporate papers wider by 10-40 bps. Selling activity was also apparent in Asian sovereign bond but spreads eventually decompressed by 15-20 bps on the day as bottom fishing emerged to support the market.

We note that even though bank bonds, including those issued by Philippine banks, have widened as much as 40-80 bps since the Silicon Valley Bank (SVB) fallout, most Asian bank senior bonds are flat or even lower in terms of overall yield, mostly due to a significant fall in US Treasury yields recently.

As expected, the most pressing queries from our regular bond investors are surrounding the knock-on effects on banks in Asia.

Resilience here

We see limited impact on Asian banks that we cover, as they maintain relatively well-diversified deposit structures and good capitalization levels and are therefore fairly insulated from the plights of SVB and Credit Suisse.

We share CreditSights’ view that within Asia, authorities are more supportive of their financial institutions, most notably in Korea, Japan and in China where their biggest banks have the government as shareholder.

The domestic banks in our coverage are systemically important financial institutions that are required to comply with Basel III liquidity standards. The strong capital position of the Philippines’ banking industry has allowed it to adopt minimum core capital and buffer requirements that are not only above Basel III requirements, but are also some of the highest among the Asian banks.

While we favor senior notes of systemically important banks in Asia, especially those that are required to be compliant to Basel III standards (unlike SVB) and consistently profitable recently (unlike Credit Suisse), we recommend maintaining a more defensive stance on financials, especially as we await further guidance on the path of interest rates—both from the US Fed and the BSP this week.

PATTY MEMBREBE is a Financial Markets Analyst at Metrobank – Institutional Investors Coverage Division, under the Market Strategy and Advisory Section. She communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. She holds an AB Economics degree from Ateneo de Manila University and is currently pursuing graduate studies. In her free time, she enjoys watching indie films and attending gigs to support local indie music.

WHAT HAPPENED LAST WEEK

Peso government securities (GS) tracked the move of global bond yields as the market monitored a potential global financial crisis stemming from the Silicon Valley Bank (SVB) and Credit Suisse fallout. With US yields moving close to 20 basis points (bps) a day on average, local bonds also saw extreme volatility throughout the week.

Yields gapped lower after investors priced in a potential for a no-hike scenario in this month’s Federal Open Market Committee (FOMC) meeting and multiple cuts before the year ends. Clients immediately became better buyers to start the week, with yields gapping lower by as much as 20 bps last Monday.

On Tuesday, the Bureau of the Treasury (BTr) fully awarded the reissuance of the 13-year Fixed Rate Treasury Note (FXTN) 25-7 at an average of 6.167% and a high of 6.20%, in line with market expectations. A retracement across all tenors eventually ensued after the 13-year auction as investors took profit from the rally seen early in the week. Some de-risked ahead of the US inflation release and the European Central Bank (ECB) meeting.

Before the week ended, local yields traded in the same range and g

Markets underestimated Fed hawkishness as the risk rally that started in January saw a complete reversal in February.

It started when US non-farm payrolls for January exceeded expectations, adding 517,000 new jobs versus 189,000 forecast. The unemployment rate also fell to a 53-year low of 3.4% with two job openings for every unemployed individual, further highlighting the strong labor market.

US inflation indices also surprised everyone by coming out higher than expected. The consumer price index (CPI) grew by 6.4% year-on-year versus 6.2% forecast while the Fed’s preferred inflation gauge, the core personal consumption expenditure (PCE) increased 4.7% year-on-year versus 3.9% forecast. Other economic data releases in retail sales and purchasing managers index (PMI) showed robust business activity, despite elevated interest rates.

However, US dollar may see another challenge to its strength as the bank runs on Silicon Valley Bank (SVB) and other smaller financial institutions in March have investors thinking that the Fed may have tightened too much. European currencies such as the euro and pound sterling are also adversely affected by struggling Credit Suisse.

Month-on-month change of major currency pairs – Feb 2023

It did not help that Japan’s 4Q 2022 gross domestic product (GDP) grew at a much weaker 0.6% versus 2% forecast, as the return of tourists was not able to offset a slowdown in capital expenditure and exports. The Bank of Japan (BOJ) also maintained the status quo of loose monetary policy and incoming BOJ Governor Kazuo Ueda has not made any opposing comments, despite initial hawkish impressions. USD/JPY went from a low of 128.68 in the first couple of days to trending upward all the way back above the 136.17 by February 24.

But with the Japanese yen, traditionally a safe haven currency, Japan could still see flows coming in from troubled banks in the US and Europe.

European Central Bank (ECB) President Christine Lagarde reiterated that the central bank will likely hike by 50 basis points (bps) in March to a 3% deposit rate, even as Euro zone inflation slowed from 9.2% in December to 8.6% in January. However, the EUR/USD still fell from a high of 1.0990 on the first day of the month all the way down to 1.0548 as US dollar strength dominated. The euro’s only reprieve is that the European Union (EU) has been able to completely replace Russian oil imports with supply from US, Norway and Qatar, tempering domestic demand for US dollars.

The pound sterling was still able to put up a fight as United Kingdom (UK) 4Q 2022 GDP grew by 0.4% amidst recession fears. GBP/USD traded from a high of 1.2376 down to a low of 1.1944 on February 24, but bounced back to 1.2022 by the end of the month. January UK inflation also remained elevated at 10.1% which could necessitate further rate hikes by the Bank of England (BOE).

However, both currencies are at risk should issues surrounding Credit Suisse’s stability negatively affect confidence in the European banking system. Immediately after SVB’s closure, Credit Suisse and the Swiss National Bank quickly initiated talks to reassure the public that the bank will not fail.

Optimism on China’s reopening waned as the giant did not have its explosive start and impact on commodity markets as anticipated. West Texas Intermediate (WTI) Crude Oil decreased slightly, from an average price of USD 78.16/barrel in January to USD 76.86/barrel in February. Gold and copper prices also decreased by coming from a sustained rally in January.

Canada CPI continued its descent with the January figure slowing to 5.9% year-on-year, reaffirming the Bank of Canada’s (BOC) decision to pause its hiking cycle at 4.5%. USD/CAD started the month at 1.3291 and has climbed to 1.3647 by the end, driven by a hawkish Fed in contrast with a dovish BOC.

With 4Q 2022 inflation for both Australia and New Zealand well above 7%, the Reserve Bank of Australia (RBA) hiked 25 bps to 3.35% while the Reserve Bank of New Zealand (RBNZ) hiked an even greater 50 bps to 4.75%. AUD/USD fell from 0.7137 down to 0.6726 and NZD/USD fell from 0.6506 down to 0.6185. AUD underperformed the most also because of weakness in the Australian job market.

China was still in a slow start, especially since the nation was coming from its Lunar New Year holidays.

Relations between the US and China soured after a Chinese-operated balloon off the southeastern US coast was shot down after being suspected over spying on US military sites. China claimed the balloon was just a weather-monitoring device that accidentally drifted into US airspace.

The offshore yuan started the month at 6.7195 and ended it at 6.9810. With record low 4Q 2022 GDP growth of 2.9% and January inflation at 2.1%, the People’s Bank of China (PBOC) is in no hurry to be hawkish and might instead consider more growth-centered policy.

The above forecasts are the foreign exchange traders’ personal opinions and may not reflect the official views of the bank.

Our FX traders’ personal views have altered slightly to account for greater US dollar strength than originally anticipated. A strong labor market and sticky inflation will have markets continuously on the lookout for the Fed’s terminal rate. The higher and longer US rates are projected to be, the greater the demand for US dollars and USD-denominated assets. But with the issues surrounding SVB and US regional banks, it remains to be seen whether the USD can hold onto its strength or whether the Fed can remain hawkish for longer.

Earl Andrew “EA” Aguirre is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

Recall that towards the end of last year, economists, analysts, and government officials were projecting inflation to peak in December, as this is usually the time of heightened consumption because of the holidays and the seasonal increase in OFW remittances. Inflation then reached 8.1%, which was the highest in 14 years, driven mainly by food & non-alcoholic beverages.

Unexpected peak

However, January’s whopping 8.7% inflation figure shocked many Filipinos, among them analysts who had a median estimate of 7.6% according to a BusinessWorld poll. This print also went beyond BSP’s projections of 7.5% to 8.3% at the time. What drove it this time?

Unexpectedly, the primary driver was housing, electricity, and other utilities as landlords adjusted rental rates to reflect the economic reopening and as energy prices rose, while the main contributor remains to be food & non-alcoholic beverages.

Also, the upsurge in said month’s inflation also continued to showcase the impact of second-round effects as core inflation continued to accelerate.

Another surprise in February

Though only inching down from the previous month’s reading, the February inflation rate of 8.6% was welcome news, as some were even expecting inflation to reach the 9% level during said month. Even BSP forecasted a range of 8.5% to 9.3%, and analysts’ median estimate was at 8.9% based on a BusinessWorld poll.

Transport-related prices were the driver for this deceleration which stemmed from a decline in gasoline and diesel prices.

Though some might have breathed sighs of relief, note that core inflation has still risen, jumping from 7.4% in January to 7.8% in February. Core inflation excludes volatile commodities such as food and energy, and so the upsurge in its numbers may manifest the persistent impact of second-round effects.

Sign of deceleration on the way?

Metrobank Research is expecting that inflation has already peaked last January 2023, barring any new supply and price shocks, and owing to base effects and moderating consumption amid high interest rates. The inflation trajectory for the remainder of the year is projected to be on a downward trend already, mirroring the inflation trend in 2022 (see below) but in reverse and starting from a higher level.

However, do not expect inflation to go down drastically – prices will most likely remain sticky and deceleration will happen at a gradual pace due to the second-order effects of inflation. Metrobank Research forecasts inflation, on average, to be at a range of 6% to 7% for the full-year 2023.

Upside risks

Upside risks to the call would be heightened second-round effects as inflation continues to be broad-based. A new bill seeking to increase the minimum wage across different regions for the private sector, on top of the continued tranches of wage hikes that started last June 2022 nationwide, could exacerbate second-order effects.

This could result in a wage-price spiral, which is a phenomenon where additional wages will be passed on to consumer prices by businesses, hence the term “spiral”.

China rebounding substantially owing to its zero-COVID exit late last year would also further aggravate inflation, reflected in higher prices of key commodities such as oil.

Downside risks

The expected slowdown in global economic growth, especially in the US and Europe, due to high interest rates could dampen inflationary pressures. Likewise, the lower-than-forecasted GDP print of China could also mean that global demand for goods would not rebound significantly and would not worsen price pressures.

So yes, we are expecting that deceleration is in sight, but let’s hope no more new supply shocks, geopolitical and external events, and other unforeseen circumstances come our way for a more smooth-sailing ride toward price stability.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.