BSP clears path for gov’t to borrow P500B

The Bangko Sentral ng Pilipinas (BSP) has given the government the authority to borrow P500 billion from the domestic capital market, given the low interest rates and high market liquidity in the country.

As a result, the government may now sell medium- to long-term bonds, such as those with tenors of 7 to 25 years, for a total amount not exceeding P500 billion whenever necessary.

BSP Deputy Governor Diwa Guinigundo said the central bank’s Monetary Board already approved the government’s borrowing plan last Thursday.

Members of the board consider it practical for the government to tap the domestic capital market to secure funds for public expenditure programs, given the current favorable market conditions, Guinigundo said.

He cited the low domestic interest rates and significant market liquidity that would make it easy for the government to raise funds at an affordable cost.

“It makes sense for the government to borrow from the domestic market. This will not only help fund the government’s [expenditure requirements] but also help deepen the country’s domestic capital market as it creates long-term demand for funds,” Guinigundo said Friday at the sidelines of a reception for bankers hosted by the BSP and held at the regulator’s headquarters in Manila.

Guinigundo also said borrowing the P500 billion from the domestic rather than the foreign capital market would shield the country from foreign-exchange risks, and would not exert undue pressures on the peso.

A borrower, in this case the national government, is exposed to foreign exchange risk when borrowing offshore. Loans that are taken out abroad and denominated in foreign currencies, like the US dollar, tend to bloat the government’s debt in peso terms whenever the peso depreciates.

Any foreign borrowing results in an inflow of foreign currencies, affecting the peso’s exchange rate in the process. A sharp appreciation of the peso may hurt the export sector as it makes Philippine-made goods more expensive and thus less competitive in the international market.

Nonetheless, there are instances when foreign borrowing makes sense.

Economists have cited examples where interest rates offshore are low compared with domestic ones, and if the country has insufficient reserves of dollars, which are used to pay for a country’s foreign debt and import requirements.

The P500 billion that the government may tap from the domestic market may be used to partly fund costs of expenditure programs in excess of revenue collections for this year and the next. It may also be used to pay off its obligations maturing within the short term.

For this year, the government estimates expenditures to exceed revenue collection by P286 billion.