Question: When is a mandate not a mandate?

Answer: when it comes from the Republic of the Philippines.


In a move that will do little to improve the sovereign's already battered reputation in the international debt markets, government departments sent out mixed signals this week about the prospect of a $300 million bond for the Department of Agriculture (DoA).

A public battle of wills between the DoA and Department of Finance (DoF) over the former's plans to fund 14 irrigation projects in the international debt markets has been fought through a series of contradictory press statements. A domestic press release issued by the DoA at the end of last week claiming that it had mandated Deutsche Bank for a euro-denominated deal was followed on Tuesday, by an international DoA press release issued through the German bank itself.

This latter statement finally prompted the DoF into action. In its own statement DoF undersecretary Joel Banares concluded that the Republic has not only finished its international financing activity for the year, but has no plans to issue Eurobonds for the DoA which has always been directly funded out of the national budget. In later press interviews, Banares went on to say that the department has yet to receive a proposal from the DoA, whose plans were first made aware to DoF officials through the local press.

DoA officials, however, remain undeterred. Assistant Secretary Tetchi Capellan says that the department forwarded its proposal last month and is confident of receiving DoF approval by the end of the year. However, despite stating in its own press release that, "If approved the bond float, to be managed by Deutsche Bank, could start soon," Capellan adds that no mandate has yet been awarded.

"We haven't given a mandate out yet," she comments. "We will only make a decision in the first quarter of 2001 after the DoF has approved the financing of the project."

The department is hopeful of securing a fully-underwritten deal and would like to issue in euros, because the sovereign's recent trackrecord in the dollar and yen markets has been less than stellar. The domestic market is also an option, although Capellan believes that the department has reached saturation point after issuing erap bonds to fund other projects in hand.

At issue are 14 projects totalling Ps13.6 billion ($324 milllion) with the largest comprising: the Ps3.26 billion Jalaur River Irrigation System and Rural Area Development project in Western Visayas; the Ps2.82 billion Balintingon Reservoir Multi-purpose Project in Central Luzon; the Ps2.25 billion Malitubog-Libungan Transbasin Irrigation Project in Maguindanao and North Cotabato and; the Ps1 billion Saug Reservoir Project in Davao del Norte.

Behind these are three other irrigation projects costing Ps900 million each including: the Banaoang Project in Ilocos Sur; the Kadingilan Project in Bukidnon and; the Tumauini Reservoir Project in Isabela. Other projects are the Ps285 million Mapanuepe River Lake Irrigation in Central Luzon; the Ps420 million Talakag Project in Central Mindanao; the Ps190.5 million North Lawis River Project in Central Luzon and; the Rizal River Project in Cagayan Valley, among others.

For local observers, all confusion is easily explained by the one key factor which dominates life within the present government - political manoeuvering. One of the major ambitions of the country's new Agriculture secretary Edgardo Angara is to build an efficient nationwide irrigation system that will form a backbone for boosted agricultural production. Accounting for 20% to 25% of GDP, agriculture is a major component of the Philippines economy and Angara is keen to increase public investment to transform it from a resource-dependent to a technology-dependent sector.

Should the irrigation projects be completed on schedule, market watchers speculate that Angara will have a strong platform from which to contest the Republic's next national elections in 2004. A former Senate president, Angara had initially planned to run against Estrada for president during the country's last national elections, but subsequently became his running mate.

However, after also losing the race for vice-president, Angara spent a year in the political wilderness under constitutional procedures which forbid defeated candidates from taking public office for a further year. He became Agriculture secretary in May.

In the international bond markets, the Philippines failure to control its public deficit, in tandem with growing nervousness about the re-emergence of crony politics, has led to a ballooning of spreads. The sovereign's benchmark 2010 paper, for example, is currently trading at 410bp over Treasuries.

And investors have heard it all before. Only a year ago, the Republic was evaluating whether to try and plug its budget deficit with a gambling backed bond. Bear Stearns and Lehman Brothers were mandated for a securitisation of receipts from the government-owned Philippines Amusement and Gaming Corp (Pagcor), but the deal came to nothing after rival investment banks argued that it would harm, rather than bolster the Republic's international standing.


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