You must be very pleased with how your recent international dollar bond issue was received?
Our re-entry to the international bond market not only meant extra finance and a diversification of our sources of finance but also helped us regain our confidence. That's very important for us. We felt we had been well received by the market, which means we are on the right track.
During the sales process you doubled the size of the bond and lowered the eventual yield at which the bonds were sold.
It was good timing as well that helped us. Interest rates seem to be moving up now. We picked the right timing.
The bond issue was clearly helped by the strong economic numbers the republic has posted in recent years. You have lowered the budget deficit to below 2% of GDP in 2003. Tax receipts have risen to US$30 billion equivalent. Can you maintain these economic achievements in an election year? Is there a danger that some of the numbers could move the other way?
No I don't think the numbers will blow out. The strategy for this year is to come as close as possible to the budgeted numbers. We do not want to make any new initiatives. It is not possible. To go on with the overall plan towards fiscal consolidation is our priority. Next year of course the new government must be more proactive.
Given this bond was so successful and you have exited the IMF borrowing programme, will you be returning to the international bond markets more regularly?
We may or may not. In the next few years we will have to issue domestic and international bonds not just to finance the deficit but also to refinance our maturing debt. Our maturity profile demands this in 2007 and 2010. What we need to do is to find a good financing source. Whether we issue domestically or internationally depends on calculations of costs and it is up to the subsequent government whether they issue some percentage of the total financing need internationally or domestically. This year we need to raise Rp32 trillion, which is about $4 billion. Next year it will be about the same or slightly more and the year after that, it will be bigger. The decision to issue domestically or internationally depends on the situation. It is possible that from time to time we will come back to the international market.
Is it purely a decision based on the costs? Are there other considerations such as the issue of crowding out domestic issuers?
It is more than just costs. With the open domestic bond market we do not feel that we crowd out (domestic issuers). We even have foreign interests coming in to buy our domestic bonds. The consideration is more than just weighing the costs. Politically, the bottom line is that we do not want to be exposed too much to international debt. That is a political reality, given the history and given the mood - even though it is cheaper to borrow outside. Sometimes we get political resistance domestically (against borrowing outside). It is a fact and we need to take account of that.
Secondly there is our own exposure. We need to have a mental picture when it comes to the total international debt exposure of the government, (of what size) will have a negative impact on us, including costs. Now the government debt exposure is small: $1 billion from this new bond plus the $400 million from the 1996 bond. I think up to twice that is safe, but beyond that the government has to think carefully. If you are seen to be over exposed it can be difficult.
Indeed. Part of the success of the recent bond was its rarity value.
Yes. The experience of the Philippines gives us a clue that there comes a limit where the market sees that you seem to be over exposed. If that happens you have to pay more costs. We don't want to do that. The domestic bond market is still very promising for us. Interest rates have come down and everyone is there: banks, pension funds, insurance companies.
