Private enterprises in the country prepaid more foreign loans in the first semester of this year than a year ago to take advantage of the savings on payment costs brought about by the peso strengthening.
During the period, private companies settled $530.9 million in foreign currency-denominated obligations that have yet to mature. This was up by nearly 9 percent from $488.8 billion in the same period last year, data from the Bangko Sentral ng Pilipinas showed.
Economists deemed the prepayment of foreign currency-denominated obligations a prudent move given the appreciation of the peso. A stronger local currency makes foreign currency-denominated debts cheaper in peso terms.
The peso, which now hovers in the 42-to-a-dollar territory, has appreciated by more than 3 percent since the start of the year.
The government and other public entities did not prepay foreign obligations this year, although it employed the same strategy last year.
Central bank data showed that total prepayments made by government entities in the first semester of last year amounted to $59.6 million.
Monetary officials said the government should prepay some of the debts owed to foreign creditors, particularly those whose terms allowed prepayment, while the peso remained strong to save on settlement cost.
Official data showed that as of end-May, the government had P4.78 billion in outstanding debt, of which P2.04 billion represented obligations to various foreign creditors.
The government’s foreign debts include those lent by developmental institutions, led by the Japan Bank for International Cooperation, Asian Development Bank and the World Bank, as well as money raised from the sale of bonds to portfolio investors.
The Bureau of the Treasury (BTr) earlier acknowledged the benefit of prepaying debts, but noted that not all of the country’s foreign currency-denominated obligations could be prepaid. This is because the terms of certain loans, especially bonds, do not allow prepayment.
In the case of loans from developmental institutions, the BTr said these were normally concessional in nature, and were thus cheaper than commercial loans. Given this, it said, prepaying the debts would lead to very minimal savings.
Monetary officials, however, said prepaying foreign debts at a time when the peso was rising would not only result in savings on payment cost, it would also help temper the strengthening of the peso against the US dollar or other foreign currencies.
Although a rising peso has its benefits, such as the ability to reduce the cost of imported goods in the local currency’s terms, it also has certain disadvantages. For instance, it makes Philippine-made goods more expensive in dollar terms and, therefore, less competitive in the export market.
The BSP said it had adopted a policy of allowing a flexible exchange rate, but added that a sharp and sudden volatility, whether appreciation or depreciation, should be avoided because unpredictability of the exchange rate was disruptive to business.