MANILA, Philippines?The government?s swelling budget deficit has dampened the domestic market?s confidence on the country?s fiscal condition, which is why interest rates on treasury bills and bonds have been on the rise despite growing liquidity in the economy.

According to First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P), the effort of the Bangko Sentral ng Pilipinas to boost liquidity in the system by lowering key policy rates is not helping bring down cost of the government?s domestic borrowings.

In its debt offerings over the past weeks, the Bureau of the Treasury had been forced to partially or fully reject bids of T-bills and bonds because of the interest rates being sought by the market, which officials said was absurdly high.

When the BSP slashes its key policy rates, this encourages banks to withdraw some of their deposits to the central bank. Normally, funds pulled out from the central bank are used either for bank lending or additional investments in government securities.

But according to the Market Call?s latest issue?a monthly publication jointly undertaken by FMIC UA&P?although the domestic market is awash in cash, it continues to ask for higher yields from government securities because of the reported rise in the government?s budget deficit.

The government revised its deficit ceiling for this year to P250 billion, from an earlier P199.2 billion, because of expected shortfalls in tax collection. This year?s deficit will be a sharp rise from last year?s P68 billion.

?The Bureau of Treasury expected the yields [from government securities] to go down because of the 0.25-percent policy rate cut done by the BSP last May 28. However, the opposite was observed in the market. Yields were generally higher compared to the month of April,? according to Market Call.

The publication also said moves of private firms to sell corporate bonds competed with the government effort to borrow from the domestic capital market. It noted that there were about P32 billion worth of corporate bonds recently floated.

This is the reason why the government has decided to focus on the foreign capital market. Market call said the plan to issue Samurai bonds, or float sovereign bonds in the international capital market, was a wise move, because the government would incur lower costs for its borrowings.

The foreign capital market may prove to be more lenient than the domestic one, Market Call said.