The news comes at an unexpected time, given the proximity to the May 14 mid-term elections, and following the surprisingly bad first-quarter fiscal results.
When Cruz was appointed to the job of treasurer under the administration of President Gloria Macapagal Arroyo in 2005, he instantly began cleaning up the countryÆs fiscal policies. His achievements include cutting the fiscal deficit, significantly reducing the countryÆs borrowing costs (by Ps40 billion a year), transforming the domestic bond market, and developing the yield curve û replacing fragmented, illiquid bonds with many maturities into liquid, deep benchmark bonds.
Cruz is a banker by trade and hired other bankers to work on his team. Together they developed a capital market in order to achieve economic progress in a country which previously had been operating from a highly inefficient capital structure.
Diversifying investors and building trust, Cruz took an active hand in the syndicating of bonds, broadening the geography and the quality of investors. He knew what investors needed and he delivered: informing them systematically on how the Philippines was managing its cash and how it executed its swaps and switches, and stubbornly adhering to the countryÆs funding targets. During his time, the Philippines was fundamentally transformed from an unreliable, unpredictable issuer into a transparent and steady borrower.
When entering office, CruzÆs fiscal management targets were to cut the fiscal deficit and balance the budget by 2008. Last yearÆs fiscal deficit target was Ps125 billion, with the actual result ringing in at Ps62 billion. CruzÆs tax policies played a crucial role. Tax increased from 12% of GDP to 15% during his time, with the landmark introduction of EVAT and RVAT.
Privatisation, on the other hand, a major forecast revenue generator, never quite kicked off, despite the large sale of PLDT shares earlier in the year. Historically problematic, contingent liabilities posed by the accumulated debt and on-going losses of government corporations, most prominently that of National Power Corp, now amount to an estimated 12% of GDP. The treasurer stated in a recent interview that the government has only ôsold a few plantsö.
Regarding debt, Cruz enhanced the countryÆs maturity profile, increased the duration, and moved to more domestic issuance. From a foreign to domestic ratio of 70:30, he reduced the reliance on foreign debt so that the mix now stands at 67% domestic bonds and 33% foreign currency bonds. Developing a proper yield curve, he issued six benchmark bonds (at maturities of two, three, four, five, seven and 10 years) of at least $1 billion to $1.5 billion per benchmark. Further, he cut the bid-ask spread from the usual 50bp-100bp in a thin and fragmented market, to a bid-ask spread of between 5bp-10bp in a more consolidated, deeper market. On the dollar curve, spreads tightened during his tenure by 350bp to 400bb, from 450bp over Treasuries.
Following Cruz's resignation, market watchers will be keeping a close eye on fiscal accounts, especially the net financing, as well as the national governmentÆs debt position should it be inconsistent with relative changes in the cash deficit position. The timing of the resignation is indeed unfavourable for the Philippines, and the news will add uncertainty to the legislative elections.
However, in CruzÆs own words: ôWhether I am in government or not, once the locomotive is in motion, no-one can stop it. No-one in his right mind is going to change something that is going well.ö
LetÆs hope heÆs right.