Gov’t plans inflation-linked bonds

Funding option to cover part of 2013 deficit

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10:22 PM June 18th, 2013

By: Paolo G. Montecillo, June 18th, 2013 10:22 PM

The Philippine government is planning to issue inflation-linked peso bonds to fund part of its deficit this year, taking advantage of the slow rise in consumer prices to secure cheap funding.

National Treasurer Rosalia de Leon on Tuesday said the Philippines might join neighbors like Thailand and South Korea, which have both issued inflation-link bonds. “It’s an option for funding, (but) we’re still doing legwork,” De Leon said.

Inflation-linked bonds eliminate the risk of inflation eating up the returns of a particular issuance, making them more attractive to investors.

“The right time to issue inflation-linked bonds is when inflation is not a problem. This gives investors the confidence because they know that inflation will not (affect their returns),” HSBC Philippines chief executive Jose Arnulfo Veloso said in an interview.

Last week, the Bangko Sentral ng Pilipinas (BSP) revised its inflation outlook for the year lower to 3.1 percent from 3.2 percent. This was after inflation for the month of May settled at 2.6 percent, below the BSP’s 3-5 percent target for the year.

Veloso said long-term investors who were willing to have their money locked-in would be the main target for the inflation-linked paper. He said that since yields were adjusted to inflation, investors would be assured that their returns would not diminish over time.

Last March, Thailand raised $1.3 billion from the sale of 15-year inflation-linked bonds with a competitive 1.25-percent coupon rate.

This week, De Leon said the Treasury would meet with insurance companies, which favor long-term, low-risk investments, and other possible investors to drum up interest in the planned bond issuance.

In an interview with Bloomberg, De Leon added that the government also had plans to borrow as much as $2 billion overseas, half through a global bond issuance and the rest from multilateral lenders like the World Bank, to cover as much as a tenth of the state’s funding needs.

The plan to raise funds using new methods come after consecutive ratings upgrades for the Philippines given by Standard & Poor’s and Fitch Ratings, two of the three major international credit-rating firms.

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