The Philippines is aiming to cut its dependency on foreign-currency debt; a reliance some fear could threaten the country’s economic prospects.
Speaking at FinanceAsia and The Corporate Treasurer’s annual corporate funding event in Manila last week, Rosalia De Leon, treasurer of the Philippines in its department of finance, said the focus would change.
“This year and next year we will engage domestic liquidity for our funding needs,” she said, instead of tapping US dollar markets. The government can now obtain longer-term financing in pesos, at cheaper interest rates than in the past.
Government officials say they are aware of the need to do more to ensure the Philippines does not suffer a crisis. “We will push for reforms in our capital markets,” De Leon said, with the aim of enhancing liquidity and mitigating risks of instability.
Although the Philippines’ local-currency market is relatively small, it is growing quickly. Part of this growth is attributed to the administration of president Benigno Aquino cutting wasteful spending and streamlining tax collection, which improves the fiscal position and reduces borrowing costs.
However, De Leon says the government can do more to make these reforms permanent, including increased spending on infrastructure.
“We must seek inclusive economic growth,” said Diwa Guinigundo, deputy governor for monetary stability at Bangko Sentral ng Pilipinas (BSP), the country’s central bank. He acknowledges the country is not immune to a slowdown in China and India: the peso, the stock market and spreads on government debt have all been impacted, with the broad stock index losing 6.8% of its value so far this week. “However, this is a healthy correction that has defused the risk of an actual buildup of financial imbalances,” he says. “And it is temporary.”
Guinigundo notes that an eventual exit from quantitative easing in the West will only take place in the face of solid economic recovery and employment gains. That picture is good news for the Philippines, even if there is some short-term volatility in financial markets.
“Capital will go to markets with good prospects,” he says. The BSP’s intent this year is to minimize surges in capital flows that can create or pop bubbles. Earlier this year it raised capital charges for market risk on peso non-deliverable forwards, and banned funds from non-resident Filipinos from engaging in such trades.
The central bank stands ready to provide forex liquidity to swaps markets and allow certain big banks some forebearance in meeting their short-term obligations. And the central bank is prepared to raise interest rates if it needs to support the currency and ensure against a sharp rise in inflation.
This is new for the Philippines, which lacked resources to fight financial fires. “We now have the latitude to consider these options,” Guinigundo says.
