Let's start with 2002. Which transactions do you think worked best for you?
I'd say the ones of January and March (Editor's note a $$750 million 15 put 10 issue in January via CSFB and Morgan Stanley and a $1 billion seven year in March via HSBC, Deutsche Bank and JPMorgan). They both came towards the beginning of the year before there were too many surprises about the budget deficit. And although the March transaction was bigger, we thought the January deal had better execution. It came right at the beginning of the year and didn't compete against other sovereigns issuing at the same time (editor's note Malaysia). We got a great investor reception in a very short period of time.
And which ones didn't?
The deals of the last few months of 2002 were definitely the most difficult. There were lots of rumours about the Philippines at that time. There was speculation that the Finance Secretary was resigning and investors were worried about the budget deficit getting so huge. It was a struggle and difficult to gauge whether investors were still interested in the Philippines or not. However, we were still able to issue a 10-year bond so we were happy.
And what about this year?
We've done three transactions so far and they've come during a difficult period. There have been many surprises for us as well as investors. In this respect I'm thinking about all the commentary surrounding the current account issue. Then there's the budget deficit, which is still causing an overhang, not to mention wider geopolitical issues such as North Korea and Iraq. But we've still been able to raise about $1.5 billion if you include our last deal of 2002, which was a pre-funding exercise.
Which has been the most important?
The euro even though it wasn't very large (Editor's note Eu300 million). It showed us that we do have an alternative source of investors. We were also pleased with it because we were able to tighten the spread differential between dollars and euros, as well as extend the maturity out to seven years.
A lot of people criticized the timing because Europe was getting worse war jitters than Asia where you could have raised money.
With 20/20 vision it's always easy to say the timing was right or wrong. We timed that transaction opportunistically and a number of things have happened since then, which showed we did the right thing. On the one side, the curve has continued to widen.
On the other, raising so much money in the international markets has enabled us to fight off speculative rates in the domestic market. The 91-day rate went as high as 7.5% on the bid side. But finally two weeks ago after a number of rejections, we were able to auction off paper with a 6% coupon. The domestic market has calmed down because it's become clear we're not going to suck too much out of it.
So how much are you raising this year and what will be the domestic/international split?
Of the Ps202 billion deficit, 52% will be raised domestically and the offshore amount will be $3.6 billion. Some $2.4 billion represents commercial borrowings and as we've already raised $1.5 billion, we only have $900 million to go now. The other $1.2 billion comes from multilateral sources and typically these come through during the fourth quarter of each year.
But right from the outset, we were aware we couldn't wait. There's just too much market uncertainty. We also knew that Napocor needs $2 billion and other government entities like the BSP and PNOC have borrowing requirements too. So we want to stop borrowing until probably May/June time and let Napocor in particular come through. It hasn't done anything yet this year.
What's it planning to do?
The OPIC (Overseas Private Investment Corp) structured deal will come first although I don't know what the exact timing is. The approvals from the OPIC side have been granted and the deal just needs approval from the central bank. This process normally takes about two weeks.
How cost effective is it going to be?
It should be a lot cheaper than an ADB guaranteed deal. An OPIC guarantee will bring Napocor close to a triple-A rating, while the ADB was only able to lift it to BBB. Obviously the all-in saving depends on how much the guarantee fee costs. But Napocor is also planning to do a second ADB guaranteed transaction, though I don't know whether it will be in dollars or yen. I get the impression that they're more inclined towards dollars.
Did the ADB guaranteed funding of late 2002 count towards Napocor's 2003 funding requirements?
No, so with the new ADB and OPIC deals, they will have raised $500 million this year. It's been reported that they need $2 billion in 2003, but I think that's just a worse case scenario. It could be closer to $1.5 billion.
Do you think the sovereign will raise the remaining funds for Napocor and then on-lend the money like you've normally had to do in the past?
Our strategy is to let Napocor fund itself as much as possible. The market perceives oversupply from the Philippines and this means we have to work hard to give investors a true picture. Sometimes when there's all this talk of Napocor deals it confuses the market.
What's happening with the utility's privatization?
I'm hoping the privatization effort will start moving towards the end of this year or beginning of next year.
But then it's going to run right up against Presidential elections?
It's an unfortunate point and it's uncertain how the election will affect timing. Some investors might want to wait until afterwards before committing to asset purchases, but I hope we can move forwards. If there aren't asset sales, then Napocor's funding requirements will be very similar next year to this year.
Because Napocor needs so much this year, it's going to be difficult for you to pre-fund during the fourth quarter like you'd normally try to do.
That's correct. But what's positive about the situation right now is that there's very little debt coming due in 2004, only $500 million. On top of this, interest payments are normally about $1.5 billion.
It's possible our borrowing requirements will be lower in 2004 than 2003. We could be looking at offshore borrowings of $1 billion to $1.5 billion compared to $2.4 billion this year. It all depends on whether we just borrow for budgetary requirements or to fund interest payments as well. If we look at budgetary requirements alone, I'd say we need about $1 billion and if we borrow for interest payments, the overall figure will be closer to this year. Normally our strategy is to roll over interest and principal payments.
It's been reported that the next sovereign borrowing could be a longer dated transaction.
We had hoped to do a long dated deal and were thinking about re-opening either the 2025 or 2019 bonds. However, we're very cautious about this now and pretty lukewarm to the idea. Markets are incredibly volatile so it's definitely best to wait and see. We also want to make sure the market absorbs all the bad news before we move. I think we'll probably favour smaller deals from now on similar to our strategy in 2001.
You also seem to favour re-openings more and more these days. Are there any others you're looking at?
The ING deal of September 2002 was one of my favourite deals and one we'd like to re-open at some point so that we can bring it up to benchmark size. The execution was good on that deal and pricing favourable.
We'd also like to bring the recent euro deal up to benchmark size and are looking to re-open this too. At the moment we're watching its progress closely.
Do you have plans to tap the yen market?
I think we should become a regular issuer in yen. But we're fully aware that it's difficult for us to extend beyond five years and one of our key strategic aims is to extend maturities wherever possible. So it comes down to a toss up between a desire to diversify and desire to lengthen maturity.
If we do a yen deal with a guarantee then we might be able to get out to 10 years as we did with the Nexi deal last year. It's something we need to do a little more homework on.
You've also previously mentioned wanting to tap the Singapore dollar market.
We're getting mixed signals from banks. Some say there's a market and others not. But certainly if we did do a deal, it would be very small - around the $100 million mark.
Can you also explain the rationale behind the debt cap bill, which will limit debt to a certain percentage of GDP?
We hope it will instill discipline on government and focus on revenue generation. We certainly have to improve revenue collection. And while the two commissioners might not like it, I suggested that every time there's a shortfall, they should have to stand in front of Congress and explain why.
But the Bureau of Customs has improved a lot and been performing above target. As of March 11, it was Ps4.6 billion above its full three-month target. The Bureau of Internal Revenue (BIR), on the other hand, has recorded a shortfall of about Ps3.3 billion as of the same date.
This time last year I was starting to get worried because I could see shortfalls coming out of both bureaus. Now they're complementing each other. The Bureau of Treasury is also Ps4.5 billion more than target and other government departments about Ps2.5 billion more than target.
So on the revenue side, we've generated Ps8 billion more than expected.
On the expenditure side we also have things well under control. As of March 11, we had overshot by only Ps3 billion
How effective has the new BIR Commissioner been since he took over last summer?
He's concentrated on running after undeclared VAT and been sending out many letters demanding payment. So far he's collected as much as Ps6 billion. He also intends to improve the monitoring process and improve the computer systems. We had an informal discussion about this morning and he said about 60% of the tax base is now computerized.
And in terms of debt to GDP what do you think the cap should be?
The absolute threshold we'd be looking at would be a 100% debt to GDP ratio. What we're saying is that we are very realistic about the situation. We recognize there isn't much chance of bringing debt comfortably lower until we can achieve a balanced budget.
How did the bill come about?
It's been a joint effort between Congress and the Executive and initiated because of concerns that borrowings are becoming too huge. At the beginning, there were no hard numbers on what the cap should be, but everyone should recognize that it is just a target and one that depends on economic growth. If growth doesn't happen then the debt will become proportionally larger.
I also believe that debt management should come under the Bureau of Treasury. At the moment, everything is done on too much of an ad-hoc basis by us and the Department of Finance.
There's been a lot of focus on whether the rating agencies will downgrade you from BB+/Ba1. They are both in town over the next two months. What do think is likely to happen and how will you persuade them to keep the rating levels intact?
Well revenues are improving and expenditure is under control. We're trying to be very disciplined and keep expenditures tight without sacrificing growth. There's not that much we can do about the debt stock at the moment. Interest payments will continue to be huge for the foreseeable future.
So it could go either way with the rating agencies. But I've been very encouraged by the numbers we've achieved so far over the first two months. I hope they can be sustained and I think the agencies are giving us a chance. But the moment we slip, then that's the day when we shouldn't be surprised if we do get downgraded.
