Weakening peso to push up gov’t loan expenses

The cost of the government’s foreign debt servicing is expected to rise as the peso continues to depreciate against the US dollar.

Based on the Bureau of the Treasury’s estimates, the government’s expenses for interest payments increases by P2 billion for every unit depreciation of the peso against the greenback.

Since the last trading day of 2013, when the exchange rate closed at 44.36:$1, the peso has weakened further by 1.4 percent.

The peso closed at 45:$1 last Friday. It was the first time since 2010 that the peso finished in the 45-to-a-dollar level.

Latest data on the country’s debt payments showed that, in the first 11 months of 2013, the government spent P296.69 billion to pay the interest on its outstanding obligations.

Of the amount, P98.87 billion was used to settle the interest on foreign loans, the Treasury reported.

While a depreciating peso has its benefits, it also has a downside—it increases the value of foreign borrowings in local currency terms.

“Interest payments alone rise by about P2 billion for every peso worth of currency depreciation,” National Treasurer Rosalia de Leon told reporters.

De Leon, however, shrugged off concerns that the substantial weakening of the peso would lead to a drastic rise in debt servicing and cause a disruption on the government’s effort to further improve its fiscal situation.

She said the impact of the weakening peso on debt servicing would be eased by several factors brought about by the government’s liability management strategies.

“The weakening of the peso has an adverse impact on debt servicing, but there will be offsetting factors,” the official said. “One is our move in the past to retire certain obligations.”

Because the government has been prepaying some of its foreign debts, the government’s maturing liabilities have started to decline, De Leon explained.

She also said the bond exchanges of the government also helped trim its maturing liabilities.

The latest bond exchange was held earlier this month.

The government exchanged $1 billion worth of freshly issued 10-year bonds with previously issued ones held by portfolio investors across the globe.

De Leon said the move resulted in savings for the government. This is because the coupon rate of the newly issued bonds—4.2 percent—is lower than the yields carried by the old bonds.

Bondholders who undertook the exchange, in turn, would benefit in terms of liquidity.

De Leon said the new bonds, given their substantial volume, could be traded more easily in the secondary market.

De Leon said the government would continue to pursue opportunities to reduce the costs of its borrowing and debt servicing expenses.