Philippines tops up on local debt

Ahead of an election year and a likely US rate hike the Philippines is leaning on local debt and mulling a sukuk, says National Treasurer Roberto Tan.
Roberto Tan speaks at FinanceAsia's conference
Roberto Tan speaks at FinanceAsia's conference

The Philippines will continue to issue local debt to reduce foreign currency risk and is mulling issuing a sukuk said Philippines Treasurer Roberto Tan on Tuesday, as the nation prepares for an election year at home and as the US prepares to hike interest rates. 

The Philippines government has a relatively high but declining foreign currency exposure which leaves it vulnerable to volatile overseas financial markets.

The Treasury has improved the nation's debt structure in recent years mitigating currency and refinancing risks. The proportion of government debt denominated in foreign currency has fallen to 33% and the average maturity has lengthened to around 10 years from about seven years as of end-2009. The Treasury has also refinanced maturing debt at lower interest rates.

“We will continue to focus on domestic financing thereby diminishing our foreign exchange exposure,” Tan said at FinanceAsia’s Philippines Capital Markets Forum in Hong Kong. “When volatility starts to go haywire we can immediately switch to domestic financing where we are capable of issuing bonds to the longest term allowed, 35 years,” he said. 

Tan noted that better understanding and use of Islamic financing could only help ease religious tensions in the country. On January 25, 44 members of the Special Action Force, a unit of the Philippine National Police, died in a clash with insurgents in Mamasapano that also claimed the life of one of the FBI’s most-wanted terrorists Zulkifli Abdhir.

The Philippines will hold a presidential election next year. The incumbent president Benigno Aquino can’t stand again. Key issues for the current administration is maintaining political stability ahead of the election.

“The integration of Islamic practices in the Philippines provides a more open-minded view,” he said.

Tan said he was in talks with banks to hit on an acceptable structure. At the moment the stumbling block are terms such as having to sell and lease back property. Tan would also like to see how the sukuk works in practice first. “I’m asking the private sector first and then the government can think about it,” said Tan. 
Blue chips

It is not only the government looking to tap local debt markets. Once referred to as the sick man of Asia in a Japan External Trade Organization survey, the country is now enjoying an economic boom. Over the past five years the annual economic growth rate has averaged at about 6%, the fastest clip since the late seventies.

The country's largest blue-chips are investing at a rapid pace. One of the Philippines largest and oldest conglomerates Ayala Corp. plans a record P185 billion ($4.1 billion) of capital expenditure this year up from about P60 billion four years ago.

Ayala Corp.'s managing director John Eric Francia said that this tripling in spending requires funding from mostly local debt markets. He noted that three years ago it was easier to raise funds. Ayala Corp. raised debt with a maturity of 15 years, a relatively long tenor he said.

“With the expectation of increasing interest rates the sweet spot has come down to down to seven years and five years. This is one recognition of the changing market dynamics,” said Francia. 

Ayala Corp.’s average tenor is about 4.5 years and its funding mix is currently about 60:40 pesos to dollars matching the exposure of its operations he said.

If the bond market is starting to tighten, bank loans remain readily available. 

“If you go to the Philippines now you’ll find it is very liquid – it’s the bank running after you to give you more money,” said Jose Sio the executive vice president and chief financial officer of SM Investments at the conference.


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