Business World
Introspective
THERE HAS been a fair amount of curiosity directed at the government's announcement that the national government's debt stock rose 9.8% in 2012, translating into a higher 51.4% ratio to GDP from 50.9% previously. The puzzlement stems from observations that given a primary surplus, a higher GDP growth vs. interest rate and the peso's appreciation, the debt ratio should have fallen markedly. So why did it increase?
A decomposition of the increase in the national government (NG) debt level from 2011-12 shows a significant buildup in cash based on available data up to November. To us, this reflects a familiar pattern among large local borrowers who have recently been taking advantage of favorable domestic credit conditions to lock in cheap financing for expected expenses in the near term. The treasury bureau raised a record P188 billion from the sale of retail treasury bonds last October, with the 25-year debt papers yielding a low 6.125%.
In informal exchanges through e-mail, National Treasurer Rosalia de Leon explained that the cash pile is intended for a number of upcoming operations. These include:
On-lending to the Power Sector Assets and Liabilities Management Corp. (PSALM), the corporation tasked to oversee government's exit from the power generation business under the Electric Power Industry Reform Act.
This is not unusual. The NG occasionally borrows on behalf of public corporations to keep borrowing costs for the entire public sector down. This was done last year with the Treasury extending P55 billion to PSALM, which contributed to the rise in the debt ratio. A direct government borrowing saves at least 25 bps compared to a PSALM one with a sovereign guarantee. For 2013, a similar amount is expected to be on-lent to PSALM.
Buying back $1.5 billion worth of high-coupon dollar denominated bonds. Retiring expensive, short-dated, foreign currency-denominated and illiquid debts has been a key component of government's debt management program to help reduce its debt servicing costs and lower currency and roll-over risks, including by lengthening the maturity and liquidity profile of government securities. However, these benefits come at the cost of somewhat elevating the reported debt stock, a cost that government is able to bear at this time given the fiscal space created under this Administration.
For example, in late 2012 government spent $1.46 billion buying back $1.2 billion worth of securities. The higher cost may be traced to the price premiums attached to the retired bonds which carried higher coupons relative to the then prevailing market interest rates. Because a portion of the payment was sourced locally with dollars bought from the BSP, the transaction additionally helped to reduce appreciation pressures on the peso.
The remainder is programmed to be contributed into the bond sinking fund for maturities in early 2013.
On the whole, we think that the rise in the debt ratio is not a cause for worry and should not prevent government from getting its much desired investment grade rating. Based on the Treasury's deposits with the BSP as of November, netting out the cash as is standard practice in debt analyses in private companies should see government's debt ratio last year drop below the 50% posted in 2011.
More importantly, government has a much improved debt profile since 2005 in terms of sourcing, currency and maturity as well as a sizeable drop in interest costs relative to revenues. Overall, these translate into more sustainable debt dynamics and reduced vulnerability to interest and exchange rate shocks.
This column was excerpted from a GlobalSource Market Brief with the same title written by Christine Tang and the columnist. Romeo Bernardo is a board director of the Institute for Development and Econometric Analysis. He was Undersecretary of Finance during the Aquino 1 and Ramos administrations.
