Bangko Sentral okays $1-billion global bonds issue

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) yesterday granted approval in principle for the proposed $1-billion global bonds issue by the government, paving the way for finance officials to finalize the terms of the cash-raising exercise.

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved the proposed issue in principle with the final approval pending the finalization of the terms and features of the issue.

BSP Governor Amando M. Tetangco Jr. said the proposed issue was approved in principle for up to $1 billion worth of global bonds with the Republic of the Philippines (ROP) as the official issuer.

The proposal was for ROP (Republic of the Philippines) bonds but the possibility of issuing yen-denominated bonds in the Japanese market—known as Samurai bonds—has not been entirely ruled out.

The Monetary Board approval would serve as a stand-by authority but finance officials could still opt to issue Samurai bonds pending the conclusion of ongoing negotiations with Japanese officials.

Officials said negotiations are still ongoing between finance officials and the Japan Bank for International Cooperation (JBIC) which had previously agreed to guarantee the bond offer.

According to officials, the discussion was stalled on the question of guarantee fee although there were talks in the market earlier that the bond size might actually be increased to $1.5 billion.

JBIC has initially agreed to guarantee up to $1 billion of the Samurai bonds that would be issued in the Japanese market.

But if the terms would not be favorable, finance officials said the government might decide to just float plain vanilla bonds in the international market and generate funds that way.

“Discussions with JBIC are still ongoing,” the official said.

Officials said issuing Samurai bonds might be cheaper but with the JBIC guarantee, the government would have to pay for a guarantee fee which could generate savings of around 20 basis points.

“So we are trying to determine if it makes more sense going to the commercial market and borrow there or to issue Samurai bonds in the Japanese market,” the official said. “But the guarantee fee might offset that savings so it’s a balancing issue.”

Finance officials stressed that applying for the authority to issue ROP bonds did not mean the government is abandoning the possibility of issuing Samurai bonds which could still happen.

“We’re just exploring all available options,” the official said, adding that it might be too late if the government waited too long to secure BSP approval of its additional foreign borrowing this year.

But the market has bigger issues than the government’s ability to finance its deficit through borrowing. The bigger concern is its ability to raise revenues.

In its latest macroeconomic review, Citibank revised its fiscal outlook for the country, prompted by the combination of weak cyclical environment and its expected decline in tax collection for 2009.

Citi analyst Jun Trinidad said in the report that tax collections are expected to drop to about 12 to 13 percent of gross domestic product (GDP) this year, leading to a wider fiscal gap of P350 billion, roughly 4.5 percent of the GDP at best.

“At 12 percent, the low end of the range, the fiscal gap could expand to more than P400 billion or 5.3 percent of GDP,” Trinidad said.