Mammoth BSP rate hike to push up local debt yields

The Bangko Sentral ng Pilipinas’ (BSP) off-cycle, supersized interest rate hike will jack up the government’s domestic borrowing yields while lowering foreign debt servicing.

“For forthcoming issues [of T-bills and bonds], expect rates to move up,” National Treasurer Rosalia de Leon said on Friday. Bid rates from government securities eligible dealers or local lenders, including banks, had been on the rise due to jitters over the aggressive tightening from central banks to arrest high global inflation.

For outstanding locally issued government securities, De Leon said the BSP’s move to increase by 75 basis points the policy rate for bank lending to 3.25 percent last Thursday won’t affect debt servicing as these had fixed-term rates.

About 70 percent of the national government’s outstanding debts were denominated in pesos, De Leon noted. Out of the P12.5-trillion outstanding obligations as of end-May, P8.6 trillion were denominated in the domestic currency.

On the positive side, De Leon said the latest and surprise rate hike reduced pressures on the peso, thus easing foreign exchange risks in the country’s external debts. Note that the weaker peso in May, for example, added a total of P15.04 billion in currency adjustments to the outstanding foreign debt stock.

Former BSP Deputy Governor Diwa Guinigundo last Thursday said that “while the adjustment in the policy rate sends market signal to the right direction of interest rates, this should not necessarily immediately translate to higher debt servicing” as “all would depend on relative demand for government debt instruments and the need for public spending.”

“It’s timely for the BSP to focus on stabilizing inflation and the exchange rate because both would also affect market rates. Uncertainty as to the direction of policy when inflation is hitting historic highs and the peso is performing poorly could also push interest rates and consequently debt servicing costs,” Guinigundo said.

Budget documents had shown that the national government will settle this year a record-high P1.3 trillion in debts, of which P785.2-billion worth will be for principal amortization and P512.6 billion for interests.

The government will borrow a total of P2.2 trillion this year, of which three-fourths or P1.65 trillion shall be sourced locally through the issuance of treasury bills and bonds.

For the period 2023 to 2028, the Marcos Jr. administration plans to raise 80 percent of its borrowing requirements from the domestic debt market to reduce foreign exchange risks, Finance Secretary Benjamin Diokno said last week.