Debt Management Strategy: The Case of the Philippines Bureau of the Treasury August 2013.
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Transcript of Debt Management Strategy: The Case of the Philippines Bureau of the Treasury August 2013.
Debt Management Strategy: The Case of the Philippines
Bureau of the Treasury
August 2013
22
Historical Background
Back in 2005…
Nominal Debt
Nominal Debt-to-GDP
Php 3,888.2 bn / U$73.2 bnRisk Indicators
FX Debt as % of Total
ATM External (Yrs)ATM Domestic (Yrs)ATM Total (Yrs)
ST FX Debt as % of GIR
Interest as % of Revenue
Interest as % of Expenditure
FX Risk
Refinancing Risk
Liquidity Risk
68.5%
44.3%
36.7%
31.1%
10.74.67.3
High indebtedness
High exposure to adverse currency swings
70% of domestic debt have tenor of <5 yrs
18.0%
Large IP posed heavy burden on socio-economic development
Ample FX cover
33
What we did?
Improving the Government Debt Portfolio through Prudent Issuance Policy
Ensuring debt sustainability requires long-term commitment to improving the government’s debt portfolio. To this end, the formulation of the National Government’s debt strategy is guided by the following objectives:
to meet the government’s financing requirement at minimal cost consistent with an acceptable level of risk;
to reduce National Government (NG) foreign currency denominated debt;
to reduce the inherent risk of the government’s debt portfolio; and
to further support the development of the domestic capital market.
44
Meeting the Financing Requirement
The Borrowing Framework
Decide on Financing Mix
Maximize Available ODA
Global Bond Issuance
Domestic Issuance Calendar
Financing Program
Budget Committee Debt Management Office
Decides on the level of deficit and the macro-economic
assumptions
The split b/w external & domestic sources of financing is decided based on cost-risk objectives and capital market development agenda
Due to its concessional nature, ODAs are priority sources of funding.
The residual external financing requirement is sourced through issuance of ROPs , Samurai,& GPN.
Domestic borrowing operation fills-in the rest. The mix of instruments takes into account cost-risk considerations & investor needs.
55
The Underlying Fiscal Framework
Fiscal Consolidation towards Debt Sustainability
Program
Deficit-to-GDP
GFCStimulusPackage
The government, in general, has embarked on a fiscal consolidation program to return the country back to the path of sustainability.
With the exception of 2009 and 2010, where the government deliberately increased its spending to cushion the impact of the GFC, the deficit levels have been below the 3% barrier.
66
Issuance Policy | Borrowing Mix
Heavy Bias Towards Domestic Sources of Financing
To minimize FX risk and help develop the domestic capital market, the borrowing program has been designed to take advantage of ample onshore liquidity.
Further, with the introduction of the GPN format, the Republic was able to gain access to foreign funds without compromising its debt portfolio’s FX position.
77
Issuance Policy | Innovative Instruments
The Innovative Global Peso Note (GPN)the first ever local-currency-linked bond in Asia
2021
REPUBLIC OF THE PHILIPPINES
receives U$ 1.0 B
pays 4.95% interest on P44.109 B nominal,but settles in U$ using prevailing USDPHP
rates at coupon dates
converts U$ 1.0 B proceed to P44.109 B
debt at USDPHP = 44.109
pays back U$ equiv of P44.109 B using
USDPHP rate on redemption date
The GPN enhances the government’s debt investor profile while paving the way for greater participation by offshore investors in the local capital markets.
Since the instrument is priced to mirror the net-of-tax yield of similar domestic benchmark bonds, it gives offshore investors a corridor to hold-on to peso debt w/o the frictional costs associated with participating in the domestic market .
Because the instrument is denominated in PHP, the government has no exposure to exchange rate fluctuations.
2011
88
Issuance Policy | Global Bond Issuances
Extending the Average Maturity of External Debt
20062006 20072007 20092009 20102010 2011201120082008 20122012
25-Yr
20-Yr
15-Yr
10-Yr
Global bond issuances have been concentrated on the long- to the very long-end of the yield curve to maintain comfortable level of average maturity.
EUR 6.25% 2016EUR 6.25% 2016
USD 7.5% 2024USD 7.5% 2024
USD 7.75% 2031USD 7.75% 2031 USD 6.375% 2032USD 6.375% 2032 USD 6.375% 2034USD 6.375% 2034
JPY 2.32% 2020JPY 2.32% 2020
USD 4.0% 2021USD 4.0% 2021
USD 5.0% 2037USD 5.0% 2037
GPN 4.95% 2021GPN 4.95% 2021
GPN 6.25% 2036GPN 6.25% 2036
GPN 3.9% 2022GPN 3.9% 2022USD 8.375% 2019USD 8.375% 2019
USD 5.5% 2026USD 5.5% 2026
99
Issuance Policy | Domestic Bond Issuances
Extending the Average Maturity of Domestic Debt
The decline in borrowing costs across all points in the yield curve provided the perfect backdrop to stretch out portfolio maturities without raising average interest.
59.3% of the domestic issuances in 2011-2012 have a tenor of ≥10 yrs, in stark contrast to 8.4% in 2005.
The extension of the yield curve was also done to provide benchmark for long-term financing in support of the country’s PPP initiative.
1010
What we did?
Debt Portfolio Optimization through Proactive Liability Management
In complement to prudent issuance policy, the Republic also delved actively in liability management transactions to minimize portfolio risks and/ cut down costs. These include exercises like:
switching high coupon bonds with low coupon new issuances;
redeeming foreign currency debt with peso debt; bond exchanges that aim to extend maturities; and
consolidation of benchmark bonds
1111
Proactive Liability Management
U$3.02 billion Global Bond
Exchange Offer
U$3.02 billion Global Bond
Exchange Offer
Redenomination via U$1.5 billion tender
offer and P30.8 billion 10-year GPN issuance
Redenomination via U$1.5 billion tender
offer and P30.8 billion 10-year GPN issuance
U$1.3 billion Global Bond Tender
Offer
U$1.3 billion Global Bond Tender
Offer
P199.5 billion Domestic Bond Exchange, Cash
Tender and New 25-year Issue
P199.5 billion Domestic Bond Exchange, Cash
Tender and New 25-year Issue
2010 2011 2012
Quantitative Easing (QE2) EU Debt Crisis, “flight to safety”
Deleveraging in Europe – leveraging in EM Asia, Fiscal Cliff
P323.5 billion Domestic Bond
Swap, New Long 10-year and 20-year
Benchmark Bonds
P323.5 billion Domestic Bond
Swap, New Long 10-year and 20-year
Benchmark Bonds
Landmark issuance of U$500 million
10.5-year Onshore Dollar Bond
Landmark issuance of U$500 million
10.5-year Onshore Dollar Bond
Declining interest rates Declining interest rates Declining interest rates,Surge in capital inflows
The Republic has continuously sought out opportunities to advance its portfolio profile even amidst challenging external environment.
1212
Managing the Debt Portfolio
The Global Bond Exchange of 2010lengthening the maturity of the external debt portfolio
In September 2010, the Republic got back some of its high coupon old debt in exchange for U$1.5 bn of new ROP 2021 and U$767 mn of the re-opened ROP 2034.
The transaction helped mitigate refinancing risk by extending the maturity of the global bond portfolio by 9 years. It also reduced annual debt service cost by about US$69.6 million.
1313
Managing the Debt Portfolio
Domestic Bond Exchange ProgramTaking advantage of declining interest rate environment to manage refinancing risk
Similarly, the republic has also executed bond exchanges in the domestic market in 2006, 2007, 2009, 2010, and 2011 to smoothen its debt maturity profile, extend the maturity of existing Peso liabilities, and establish liquid benchmarks at the long end of the yield curve.
The transactions also achieved cashflow and debt service relief, allowing the government to channel more resources to its infrastructure and socio-economic projects.
1414
Managing the Debt Portfolio
Synthetic Buyback | Tender Offering of 2011Riding market jitters to buyback expensive dollar debt
Riding the wave of global risk aversion, the Philippines executed a Global Cash Tender Offer targeting a significant portion of its high coupon foreign debt.
Approximately U$1.3 bn of ROP and EUR bonds were bought back using investible funds from the Bureau of the Treasury’s managed fund and proceeds of a U$50 mn tap of the ROP 2034, thereby transferring the ownership of these bonds to government and hence effectively retiring them.
1515
Managing the Debt Portfolio
Redenomination of 2012Issuance of cheaper PHP debt to buyback expensive FX debt
non-PHP denominated
91%
PHP denominated
9%
non-PHP denominated
88%
PHP denominated
12%
Prior to the transaction After the transaction
In Nov 2012, the Republic executed a series of transactions that bought back U$1.168 bn of high coupon foreign currency bonds using a mix of proceeds from the issuance of a 10 Yr GPN (72%) and assets from the Government’s investible funds(28%).
The transaction was able to achieve: 1) interest savings of U$73.9 mn per annum; 2) maturity extension through the GPN leg; and 3) redenomination of about 3% of the external debt portfolio to PHP.
1616
Managing the Debt Portfolio
Liquidity Management | Onshore Dollar Bond (ODB)comprehensive balance sheet approach to managing the country’s risk exposure
The landmark issuance of the 10.5-Year Fixed Rate Onshore Dollar Bonds (ODB) was envisioned to:
(i)take advantage of the excess liquidity of US$ in the local banking system;
(ii)increase domestic borrowing vs. external to balance international markets in period of volatility; and
(iii)develop a new, alternative and domestic U$ Fund source, proceeds of which can be used to pay off high coupon dollar debt.
1717
The share of foreign currency denominated debt to total National Government debt has been gradually declining over the years.
*includes MRTBs and ODB
*
Reduced External Debt Component
Exposure to adverse foreign exchange movements has been mitigated
Where we are now . . .
1818
Where we are now . . .
Lengthening of Debt Maturities
Reduced rollover risk and increased debt carrying capacity
Average maturity of both domestic and external liabilities have been stretched- out enabling the government to channel more funds to finance urgent programs necessary for economic development.
1919
Ability to Service Debt
Where we are now . . .
2020
Burden of Debt is Falling
Where we are now . . .
2121
Sufficient Liquidity to Service Foreign Debt
Where we are now . . .
2222
Where we are now . . .
Debt Sustainability has Improved Significantly
2323
Nominal Debt-to-GDP
FX Debt as % of Total
ATM External (Yrs)ATM Domestic (Yrs)ATM Total (Yrs)
ST FX Debt as % of GIR
Interest as % of Revenue
Interest as % of Expenditure
FX Risk
Refinancing Risk
Liquidity Risk
68.5%
44.3%
36.7%
31.1%
10.74.6
7.3
18.0%
Where we are now . . .
51.5%
34.6%
20.4%
17.6%
11.510.4
10.9
3.1%
2005 2012
2424
“In addition to lower headline deficits, the
Philippine government’s debt profile has
improved: average tenors have
lengthened, while debt servicing costs
have decreased. The government is less
reliant on external financing than many
of its ratings peers
”
“The upgrade on the Philippines reflects a
strengthening external profile, moderating
inflation, and the government's declining
reliance on foreign currency debt
”Ju
l-00
Jul-0
1
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2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
S&P
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Moody's
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
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Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Fitch
Baa3
Ba1
Ba2
Ba3
B1
B
B-
Fitch: Upgraded to BBB- (March 27, 2013)/Outlook: Stable
Fitch: Upgraded to BBB- (March 27, 2013)/Outlook: Stable
S&P: Upgraded to BBB- (May 2, 2013)/Outlook: Positive
S&P: Upgraded to BBB- (May 2, 2013)/Outlook: Positive
Moody’s: Upgraded to Ba2 (June 15, 2011)/Outlook: Stable (May 29, 2012)
Moody’s: Upgraded to Ba2 (June 15, 2011)/Outlook: Stable (May 29, 2012)
BBB-
BB+
BB
BB-
B+
B
B-
BBB-
BB+
BB
BB-
B+
B
B-
Source: Moody’s, S&P and Fitch.
Credit ratings are moving in the right direction
“The sovereign has taken advantage of
generally favourable funding conditions to
lengthen the average maturity of GG
debt to 10.7 years by end-2012 from 6.6
years at end-2008. The foreign currency
share of GG debt has fallen to 47% from
53% over the same period
”
2525
High market confidence in Philippine debt
50 bps
100 bps
150 bps
200 bps
250 bps
300 bps
350 bps
400 bps
450 bps
Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12
Spread
(bps)
CountryRatings
(Moody’s/S&P/Fitch)CDS level as of
10 Oct 2012
Brazil Baa2/BBB/BBB 114.92
Peru Baa3/BBB/BBB 107.67
India Baa3/BBB-/BBB- 311.15
Indonesia Baa3/BB+/BBB- 144.07
Philippines Ba2/BB+/BB+ 117.44
Turkey Ba1/BB/BB+ 159.89
Source: Bloomberg.(1) Long-term issuer default rating.
Philippines’ CDS levels are performing better than some higher rated peers
Thank You
2727
Medium Term Debt Management Targets
Appendix