The Philippines on Thursday launched a $1-billion bond offering offshore, hoping it could take advantage of still relatively low interest rates before an anticipated market volatility leads to further spikes in yields.
The bond offering is meant mainly as a liability-management strategy, in that holders of previously issued Philippine bonds are invited to swap their securities with the new debt paper.
However, potential investors also have the option of simply buying the freshly issued bonds.
Whatever amount the government will raise from the “sale” portion of the bond offering will help meet the state’s total funding requirement for 2014.
Under this year’s fiscal program, the government plans to borrow P715 billion to plug an estimated budget deficit of P266.2 billion and the pay maturing obligations.
The government expects the bond-exchange offer to help reduce its overall borrowing cost because the government anticipates that the new bonds will fetch lower rates compared with previously issued ones.
The government claims investors who will swap their old bonds with the new ones, which have a maturity of 10 years, will enjoy better market liquidity.
Investment banks tapped to serve as arrangers of the deal are HSBC, Deutsche Bank, Standard Chartered Bank, JP Morgan, Citigroup, Morgan Stanley, Goldman Sachs and ANZ.
The bonds were rated at BBB- by debt watcher Fitch Ratings, in line with the Philippine sovereign debt’s “investment grade” status.
“A persistent current-account surplus, underpinned by remittance inflows, has led to the emergence of a net external creditor position in 2009,” Fitch said in a statement issued on Thursday.
As a result of the economy’s healthy growth and the robust current-account surplus the country enjoys, local asset markets were less under pressure than some of its peers in the context of market expectations related to the US central bank’s unwinding of its quantitative easing program, Fitch said.
Fitch noted the need for the government to expand its revenue base to make the domestic economy even more resilient to external shocks. The rating firm likewise cited the country’s fundamental structural weaknesses. These include relatively poor governance standards, lagging development—as illustrated by a low UN Human Development Index score—and a low average per capita income.
The bond offering on Thursday came a few days after National Treasurer Rosalia de Leon told reporters that the Philippine government was not keen on immediately offering bonds offshore.
De Leon said on Monday that the Philippines would allow neighboring countries to go ahead in selling bonds in the international market. She said the Philippine government wanted to first gauge the reception of foreign investors to other emerging-market assets before deciding whether doing the same would be prudent for the Philippines.
It turned out, however, that preparations for a bond offering were being done.
The government took the advice of pursuing the bond offering in January, as it did so in the previous years, despite uncertainties in the international market. This is amid a popular market opinion that volatility could worsen in the months ahead.
Finance executives said uncertainty as to whether the US Federal Reserve indeed would continue tapering its stimulus program could push interest rates on emerging-market assets.
The US Fed announced in December that starting January, its monthly bond purchases would be reduced from $85 billion to $75 billion. The cut in the stimulus funds came amid observations that the US economy was improving.
Given prospects of an improving US economy, demand for portfolio instruments is seen to shift from emerging-market assets to US treasuries.