Philippines faces offshore funding dilemma

The Philippines is on the cusp of an investment grade rating, and has used the bullishness over its future to secure increasingly tight pricing on its international bonds. But the government is now in a quandary over how to raise more funds offshore without putting upward pressure on the peso, writes Jun Ebias.

  • 26 Sep 2012
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The Philippines began the year with a bang, re-opening the international bond market to Asian borrowers in January by issuing $1.5bn of 25 year bonds that received a whopping $12.5bn of demand.

That allowed the government to price the deal 25bp tighter than initial price guidance and pay a mere 5bp premium over its outstanding bonds.

The deal left the sovereign with just $750m more to borrow overseas by the end of the year. But government officials face a dilemma over how to raise the funds after the peso rose to record levels this year.

If the sovereign decides to issue global bonds, swapping the proceeds into its domestic currency could exacerbate the peso’s strength against the dollar, which is now threatening the country’s exports already suffering from declining demand overseas.

The sovereign is considering turning to domestic investors, says finance undersecretary Rosalia de Leon. That way the government can fund its requirements without further fuelling the peso’s strength. But the move to fund in the domestic market has its own risks.

"If there is an opportunity to borrow in the domestic market, we might raise the remaining $750m locally," says de Leon. "But we have to be mindful that this won’t lead to an uptick in domestic interest rates."



Rating hopes drive offshore demand

One thing is clear: wherever the government decides to fund, finding demand will not be a problem, say bankers and analysts, as demand for the country’s stocks and bonds, especially from offshore investors, has been rising.

The country’s stock market surged to record highs this year, while bonds have also gone up in the secondary market. This lifted the country’s foreign exchange reserves, which hit a record high of $79.3bn at the end of July, exceeding the central bank’s $78bn year-end target.

An expanding economy and optimism that the Philippines’ debt rating will be raised to investment grade are igniting investor appetite for the country’s stocks and debt, says Jonathan Ravelas, chief market strategist at BDO Unibank in Manila.

"While the quest for an investment grade rating continues, investors are already anticipating this," says Ravelas.

Foreign fund inflows bolstered the peso to a four year high of Ps41.56/$ on July 18, he says, adding that the currency will weaken slightly by the end of this year to Ps41.70.

De Leon is hoping that the rating upgrade will happen as early as next year, especially since the government has been adopting measures to bolster tax collection, narrow the budget deficit and lower its debt.

"We are working closely with Congress for the passage of key legislations that will improve our tax collections," says de Leon. The government is seeking changes in the taxes on cigarettes and alcohol products.

De Leon is right to be optimistic. Standard & Poor’s raised the country’s debt rating to BB+ in July, moving it one notch away from investment grade.

That followed a similar move by Fitch last June and a decision by Moody’s to give the country’s Ba2 rating a positive outlook in May.

The government also continues to go after tax cheats, expand the tax base by limiting incentives given to some businesses and industries, and imposing higher fees on public services to increase tax collection.

As a result, the country’s budget deficit fell from around 3.9% of GDP to 2% at the end of 2011. Its debt-to-GDP ratio has also fallen from as high as 74.4% in 2004 to 50.9% at the end of last year.

Amid rating hopes, the government remains prudent in its borrowing. Next year, it plans to raise Ps757.8bn from domestic and offshore debt, slightly higher than this year’s Ps727.4bn, she says. The details of next year’s borrowing plans have not yet been hammered out, she adds.

The country is certainly not abandoning the global bond market, despite the rise of the peso.

It is constantly in touch with investment bankers and in discussions with the central bank on how best to address this quandary that it faces for funding the rest of this year’s budget.

"We have to consider the concerns of the central bank," says de Leon. "The central bank is worried about the heavy inflows. So we have to discuss our borrowing programme with them to make sure that it won’t raise their cost of stabilising the peso."

The Philippines is one borrower that is spoilt for choice, and now faces a difficult decision over which market to fund in. That is a certainly a problem for government officials, but it is a problem that most borrowers would love to have.
  • 26 Sep 2012

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