Interest rates on government securities denominated in pesos are expected to remain low through 2014 as modest inflation and substantial liquidity in the local capital market may sustain robust appetite for the risk-free assets, according to the top official of the Bureau of the Treasury.
National Treasurer Rosalia de Leon projected that Philippine treasury bills and bonds would continue to hold out against market volatilities arising from the recovery of the US economy.
“Even in this period of market distress, it is still more fun to invest in the Philippines, ” De Leon quipped on Friday during a bond forum organized by Bloomberg.
This year, the Philippine government is enjoying extremely cheap borrowing costs, with T-bill and T-bond rates falling to historic lows. Because of the huge demand for the instruments, short-term rates now stand at below one percent.
De Leon said that while developments abroad would continue to affect the Philippines, demand for peso-denominated government securities should remain strong because of the country’s sound macroeconomic fundamentals and huge domestic liquidity.
While current volatilities cannot be overlooked, the government is optimistic that with the country’s strong fundamentals, prudent oversight of debt, and progressing capital market, investors will no longer turn to the Philippines simply to chase yields but to consider an economy that holds promise, De Leon said.
Citing data from the Bangko Sentral ng Pilipinas, De Leon said inflation would remain benign next year.
The BSP said that in 2014, inflation likely would remain closer to the lower end of the target range of 3 to 5 percent.
Also, a recent move by the BSP to bar retail funds from the special deposit account (SDA) will trigger massive withdrawals from the facility. As a result, the cash taken out of the SDA will go to the acquisition of government securities, she said. Over P1 trillion in funds are expected to be drawn from the SDA.
“With benign inflation and onshore liquidity, we do not expect to see significant rise in interest rates,” De Leon explained.
Also, the government will stick to the 2014 auction schedule for government securities, she said. The government will hold auctions for treasury bills and bonds each month.
Before, auctions for both bills and bonds were done on a weekly basis but on a smaller scale. De Leon said that the monthly auction recently set would only serve to boost demand.
De Leon said the government would continue to draw the bulk of its funding requirements from the domestic market to avoid excessive exposure to foreign exchange risks.
But she said the Philippine government would go back to the international capital market next year for the sale of $1 billion in sovereign bonds.