Towards the end of last week, the Republic of the Philippines completed its fourth major borrowing of the year - a $300 million five-year fixed rate deal via ING Bank. The deal was far more successful than most market participants had been expecting given current volatility and the Republic's widened spread levels. Indeed, because of a sharp decline in Treasury yields this year, it meant that the Republic was able to score a record low coupon - 7.5%. Here National Treasurer Sergio Edeza discusses the Republic's strategy for the remainder of the year and borrowing plans to deal with the expanding budget deficit.
Congratulations on the completion of your deal. So far this year, you've done two major dollar bonds, a re-opening of the 2009 bond and now this opportunistic Eurobond. Where do you now stand with regards to your 2002 fundraising requirements?
Edeza: This deal signifies the start of our pre-financing for 2003. So far this year, if you discount bi-lateral financing, we've raised around $2 billion. Offshore issuance has represented about 30% of our overall fundraising requirements. Next year, the situation will be reversed though. We expect offshore issuance to account for about 60% of the total and onshore about 40%. For 2003, we need to raise quite a lot of money. Again excluding bi-laterals, I expect offshore issuance to come to about $2.3 billion to $2.4 billion.
But I believe that you will also need to raise money for Napocor won't you and this will bring the total even higher?
As you'll be aware, Napocor is currently in the process of doing a bond deal with an ADB guarantee. The company was also going to do a second $600 million stand-alone issue but this has now been cancelled and it's been announced that the government will finance the group when it needs funds instead. Napocor officials have told me they'll need $1.1 billion in US dollar funding next year. That's the basic information we have at the moment, but it might change.
The ADB-guaranteed issue is contingent on the privatization bill being passed through parliament and signed off. How confident are you that this will be completed on schedule by the end of the month?
I am not directly privy to full information on this one, but from what I've been told it will be passed by parliament even though it has come during the recess period. So far, we've on-lent Napocor $750 million this year. But it's has been a bit confusing as there's been wrong information in the market claiming that Deutsche Bank recently did a $500 million deal. This was not a new financing at all, simply an on-lending of proceeds raised earlier this year from a bond deal for which they were one of the lead managers.
So what's your strategy towards the international markets for the rest of the year?
Our strategy will be much as it's been for 2002. We'll look at market opportunities as they arise. But we would like to pre-finance about half the total before the end of the year, so you might be seeing quite a number of issues from us in the near future.
What currencies do you think look interesting? Most of your issuance tends to be in dollars.
Dollar financing is obviously the key for us, but we would like to issue in other currencies too. The Yen market has never been that huge for us, but we hope to access it more in the future. My own position is that we should do about 50% in dollars and the balance in Euros or Singapore dollars.
You first thought about accessing the Singapore dollar market last year didn't you, but it never really seemed to come to much?
Yes we did examine it last year and it's a market we would like to tap. Rates in Singapore are very low and we would like to take advantage of any opportunities while we can. Should we decide to go ahead, it's a deal you'll see us bring out very quickly.
And what about in terms of maturity? Typically you tend to access the longer end of the curve, but the ING deal was five years, taking advantage of domestic demand at the shorter end.
We did the recent deal because we saw that we didn't have any existing maturities in 2007 and it filled out that part of the curve. But I think we're comfortable having raised $300 million and generally still feel that the 10-year sector offers us the most flexibility overall.
How happy are you with your spread levels at the moment?
I'd say that we're relatively happy with our spread levels because we think the market accepts the current situation the Philippines faces in relation to the budget deficit. Nevertheless, we were extremely happy and very grateful for the market's support of our latest deal.
We keep hearing about the budget deficit and the government overshooting its Ps130 billion annual target because of declining tax collections, which have now fallen to 12.7% of GDP. How serious is the situation becoming?
Well in terms of the budget deficit, we shouldn't have any financing problems because we've set up cash reserves to finance up to Ps170 billion to Ps180 billion if necessary. With the revenue figures, the Bureau of Internal Revenue should meet its targets following the change of commissioner. Our overall aim is to get the figure back to the levels of 1992 when I believe the ratio was about 16% of GDP. I think the measures submitted to the authorities are reasonable and will address the problem. All it needs is concerted legislative action.
