Gov’t eyes new round of foreign bond exchange

After its successful $1-billion bond exchange in the international market in January, the Philippines may consider a similar activity in the coming months to temper the impact of rising interest rates.

National Treasurer Rosalia de Leon said that increasing yields of treasury bills and bonds have raised the potential need for another initiative that would help sustain the government’s declining debt burden.

“We have to look into some liability management initiatives to lower our debt service,” De Leon told the Inquirer.

Bond exchange is a major liability-management strategy the Philippine government conducts to reduce the cost of servicing its outstanding debt.

In the international bond exchange in January, investors took $1 billion worth of freshly issued Philippine global bonds in exchange for sovereign debt instruments they bought previously.

The new bonds fetched a coupon rate of 4.2 percent, which the Bureau of the Treasury said was lower than the rates carried by the retired debt paper.

“We always have to look for options [to manage liabilities],” De Leon said.

Since the mid-2000s, the share of interest payments in the country’s national budget had been on a decline due partly to improving tax collection and debt-management strategies such as the bond exchange. From more than a third of the national budget, the share of interest payments had consistently dropped, settling at 17.2 percent last year.

For this year, the government has set a goal of further reducing the share of debt service in the national budget to just 15.6 percent.

De Leon admitted, however, that sustaining the decline would be more difficult this year than in the past few years because of rising interest rates and the depreciation of the peso.

After hitting record lows of less than 1 percent last year, treasury bill rates across all tenors have moved back to above 1 percent this year.

Based on estimates of the Bureau of the Treasury, interest payments of the government rises by P2 billion for every one peso depreciation of the local currency against the dollar.

Earlier this year, the peso broke into the 45-to-a-dollar territory following the outflow of portfolio capital away from emerging markets. It has strengthened back to the 44 level, closing at 44.655:$1 last Friday. The latest exchange rate, however, was still weaker than the 44.36:$1 on the last trading day of 2013.

De Leon also said the likely higher borrowing requirements of the government for this year posed another challenge to the goal of reducing the debt-service burden.