Recto gets to the bottom of the Philippines borrowing plans

The Philippines Undersecretary of Finance, Eric Recto, discusses taxes, bonds and fees.

There is a target in place to have a balanced budget by 2010. Do you think the necessary tax measures will get through the Congress to make that possible?

I'm optimistic we'll get some through at the very least, but hopefully all.

As a percentage of GDP is the deficit still on a declining trend?

We have arrested the decline and I suspect we will see some slight improvements, but not nearly enough to make a big dent.

What will the budget deficit be as a percentage of GDP next year versus this year?

This year was 4.2% and next year should be 3.6%.

President Arroyo recently used the term "fiscal crisis" to describe the situation in the Philippines. How should foreign investors interpret that?

I believe they took it with a grain of salt. Investors knew this was more of an attempt by the President to call people to arms and get them to start thinking that things can no longer continue as they have done.

Is there a danger of the Philippines going down the same path as Argentina?

Only in peoples' imaginations. There are too many differences in the structure of our debt that would make that a remote possibility.

What will change the mentality of tax evasion that seems to pervade the Philippines?

I personally think the best way to change people's mindsets about non-payment of taxes is to have them realize and understand what the penalties are. One penalty is the country will stagnate and degenerate into a basket case. Equally, we have to re-emphasise the other penalties and make sure we bring those who don't pay to court and suffer the penalty. We will have to be more active about bringing people to court.

On the revenue side, is there any chance of a stake being sold by the government in PAGCOR, the gaming business?

We are not counting on a sale in PAGCOR as being the solution to the problem. We are hoping to address the deficit situation through the sale of Napocor. That is the key.

What is the schedule for that sale?

The President has directed the Department of Energy that 70% of all Napocor's assets are privatized by the end of next year. And if the recent rate increase at Napocor is made permanent, that already decreases our borrowing requirement by about Ps35 billion.

How much does Napocor contribute to your borrowing annually?

This year we have had to raise about $1.5 billion for Napocor. Next year we are looking at $1.5 to $1.8 billion. But if this rate increase were permanent we would only have to raise $1 billion.

Excluding Napocor, how much will the sovereign raise this year and next year?

We are looking at raising $1.8 billion this year and between $2 to $2.2 billion next year.

What's your view of the country's credit rating trajectory?

At the very least it should be stable. It should not be downwards. The last downgrade we got was on the premise of the election outcome and the possibility of the movie actor winning and the attendant spending that surrounds elections. That didn't transpire and I would argue the agencies should look for reasons to reverse the downgrade of late last year.

Should the Philippines be doing taps of old issues or new issues?

We did one new issue this year in March, and the rest have been taps. In the last bond issue we had the major objective of trying to get a big chunk of money on the table to satisfy our requirements for the balance of the year. I still maintain the best way to have done that was through taps rather than new issues. I feel the new issue premium would have been too much for us to pay.

There is an inquiry in the Senate about the bond issue and that the method cost the Philippines extra money.

That can only be determined with the benefit of hindsight. A call had to be made and I made the call that this was the best way to do it.

The nation's Treasurer has resigned, how should investors interpret that?

The Treasurer had tendered her resignation late last year, and retendered it in June, so this resignation had been coming for a while.

The Philippines is one of the most active sovereign borrowers in the region and will continue to be so. It is therefore a benchmark in terms of paying underwriting fees, and has taken them to record low levels. Do you see the Philippines paying higher fees to get better service?

My philosophy is that if a bank chooses to take a dive on fees, I will not encourage the bank to change its fee structure. That's a tough thing for me to do. But am I sensitive to whether the banks will deliver what they say they will deliver? Yes.

Banks are able to make up for low fees through their ability to say they were part of the deal. They can use being part of our deal for their marketing purposes.

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