Tight spreads in Philippine bond floats mark investor confidence on Duterte watch

July 11, 2018

Investors have demonstrated their high level of confidence in the Philippine economy under the Duterte administration with tight spreads of the country’s dollar- and renminbi-denominated bonds issued earlier this year, which the government expects to be replicated with its coming sale of yen-denominated debt securities in the Japanese market in the latter part of 2018, Finance Secretary Carlos Dominguez III said.

Tight spreads offer low interest rates, which indicate the issuer has less chances of defaulting on its bond sale, while higher spreads mean that investors view the bond as having bigger chances of its issuer defaulting, and thus, high interest rates are offered to attract buyers of such riskier investments.

Dominguez said another factor that has contributed to the tight spreads of bonds issued by the Philippines in the offshore market was the fact the government is selling securities to raise funds for its infrastructure investments, rather than to cover a ballooning budget deficit.

“We are funding our ‘Build, Build, Build’ program,” Dominguez said, referring to the government’s ambitious infrastructure modernization program consisting of 75 high-impact projects.  “This is for investment and not for covering our budget deficit because we’re spending too much. This is actually investment money that we are putting in.”

Dominguez said in 2016, when the Aquino administration sold bonds, their spread over the US treasuries was 103 basis points. When the Duterte administration announced that it was pushing a tax reform program in 2017, the spread went down to 67 basis points.

After President Rodrigo Duterte signed the Tax Reform for Acceleration and Inclusion (TRAIN) Act into law in December, the government’s issue of $2 billion-worth of 10-year dollar denominated bonds the following month recorded a spread of just 37.8 basis points (bps) over the US Treasuries, while its maiden "Panda" bond float of 1.46 billion renminbi in March had an even tighter spread of only 35 bps over the benchmark, the finance chief said.

Dominguez noted the country’s revenue agencies--the Bureaus of Internal Revenue (BIR) and of Customs (BOC)--have exceeded their collection targets following the implementation of TRAIN and after putting in place complementary reforms in tax administration.

From January to May this year, national government revenues rose by 19 percent year-on-year. Tax revenues also grew by 19 percent, with BIR collections improving by 16 percent and BOC collections growing by 31 percent over the same period last year.

Tax effort rose from 13.4 percent of gross domestic product (GDP) to 14.3 percent, which is the highest first-quarter tax effort that the Philippines has achieved in the past 25 years, Dominguez said.

He pointed out that the Philippines was the only country in the region to pass a tax reform law to provide steady revenue support for its infrastructure modernization program.

“Of course, we cannot fund ‘Build, Build, Build’ 100 percent so we are going to the debt market.  But when we go to the debt market, we are very confident that we are doing it on the basis that we have improved our own revenue (collection). And the market has rewarded us for that.”

The government plans to invest over $170 billion to modernize the country’s infrastructure over the medium term.

Apart from funding support from tax reform, the “Build, Build, Build” program will be financed through a mix of official development assistance (ODA) loans and grants, bond issuances, budgetary allocations, financing packages from multilateral institutions such as the World Bank, Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB), and partnerships with the private sector, Dominguez said.

Last June 19, five of Japan’s leading financial institutions gave their full backing to the Philippines’ first stand-alone yen-denominated "Samurai" bonds issue set in September or October this year.

In separate meetings with Dominguez in Tokyo, top officials of Japan’s five largest banks—the Mitsubishi UFJ Financial Group, Nomura Holdings Inc., Mizuho Bank Ltd., Sumitomo Mitsui Banking Corp. (SMBC), and Daiwa Securities Group Inc.—said they expect strong demand for the Philippines’ "Samurai" bond float.

The "Samurai" bond issue planned for the latter part of this year is the first one to be issued by the Philippine government without any guarantee from a Japanese institution.

In 2010, when the government raised funds through the float of Samurai bonds, the Japan Bank for International Cooperation (JBIC) guaranteed the bond issue through its Market Access Support Facility, which was established to assist Asia's developing countries in accessing international capital markets following the global financial crisis of 2008. DMS