Core -- By Benjamin E. Diokno

Win-win move

Posted on September 08, 2011

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the national government has to option to borrow dollars from the BSP and pay these loans in pesos. This makes a lot of sense. With a hefty gross international reserves (GIR), continuing threat of peso appreciation owing to the unmitigated inflow of hot money into the system, and with peso borrowing costs by the Treasury hitting an all-time low, it’s a monumental policy mistake not to take on Mr. Tetangco’s offer.

A big threat to the economy and to a great majority of Filipinos is the continuing appreciation of the peso. In particular, the peso appreciation hurts the families of overseas Filipino workers, the workers in the export industry, import-substituting industry, and BPOs.

But they are not the only losers with every peso appreciation. The BSP is the biggest loser. Mr. Tetangco estimates that the level of the GIR by end of the year would hit a new record level of $74 billion to $75 billion. This is because hot money continues to flood emerging market economies including the Philippines as a result of the economic uncertainties in the the US and the debt crisis in Europe.

But for every peso appreciation, BSP stands to lose P75 billion. Isn’t that awful? Hence, Mr. Tetangco is not offering the government out of the goodness of his heart; he’s doing it because it’s the prudential thing to do. It’s a win-win solution to our economic woes: it helps BSP in its war against peso appreciation and, at the same time, it helps the government pay for its foreign debt without incurring serious foreign exchange risks.

The $75 billion reserves is huge. It is more than 11 months worth of imports (where three months is acceptable) and easily 11 times the country’s short-term external debt.

But keeping that $75-billion GIR idle has enormous opportunity loss. Do the math. With a GIR of $75 billion, an annual inflow of $18 to $20 billion in remittances from overseas Filipinos, and total public debt of $41.6, then why should we have to borrow from abroad to service our foreign debt?

For 2011 and 2012, the national government has to worry about interest payments and amortization of its foreign debt. The interest payments alone will amount to $2.2 billion on 2011 and $2.1 billion in 2012.

Some of these debts carry high interest rates and other charges, ranging from 4 to 10.6% per annum or several times larger than the London Inter Bank Offered Rate (LIBOR) of 0.83813% (8 August 2011).

These foreign debts, meant purely for budgetary support, are as follows (loan amount, interest rates and other charges, year of loan maturity):

• $1.5 billion 9.5% GB(Global Bond) 2030

• $1.5 billion 7.75% GB 2031

• $1.5 billion 8.375% GB 2019

• $1.28 billion 8.375% GB 2011

• JPY100 billion 2.32%

• $1 billion 10.625% GB 2025

• Eur350 million 9.125% DUE 2010

• GB$1 billion 8.0% DUE 2016

• $1.0 billion 6.375% GB 2032

• $ 1 billion 6.375% GB 2034

• GB 8.25% 2014 RE OPEN

• $774 million 7.50% GB 2024

• $690 million 8.75% GB 2016

• $850 million 6.375% GB 2034

• GB$750 8.25% 2014

• $750 million 9.375% GB 2017

These are loans with more than $50 million in interest payments in 2010. First, the high interest rates for loans incurred by the previous administration given today’s borrowing costs, are revolting. Today, the LIBOR rate is 0.838% while the US Treasury bill rate is from 0.10 to 0.90%, or less than 1%. The sooner we pay or pre-pay these expensive loans, the better.

Second, the strategy should not be to extend the maturity of these costly loans, it should be to expedite the payment.

With record-low peso borrowing costs -- 91-day Treasury bill fetched a rate of 0.438% -- it is a good strategy for the national government to borrow in pesos, use the peso proceeds to purchase dollars from BSP, and then pay its dollar debt.

And to the extent possible, the national government may even pre-pay the more expensive dollar debt.

It also makes sense to stop incurring foreign loans altogether. Say goodbye to Euro loan, Samurai loan, and Yankee loan. Finance authorities should make a policy pronouncement that the Government of the Philippines will not avail itself of its $500 million of programmed overseas debt authority. Instead, it will simply tap the domestic market for its borrowing requirements.

In hindsight, it was not even necessary for the Philippine government to borrow from the World Bank and the Asian Development Bank to finance its conditional cash transfer (CCT) program. Floating five-year Treasury bonds would have been a better way of financing the program.

By not bringing in dollars from loan proceeds into an economy already awash with dollars, the appreciation of the peso could be mitigated.

The Philippine economy has changed so much since the days when it was foreign-exchanged scarce. But new conditions call for new thinking and new solutions. Countries with large gross international reserves don’t need hot money, it’s destabilizing. The Swiss and the Japanese monetary authorities know this and they’re doing something about it.

Philippine government authorities may or may not know it, but if they do, they’re not doing anything about it. Not yet. But the offer by BSP governor Tetangco to the government to borrow from the huge dollar reserves in BSP’s vault to pay for its foreign debt is a novel step in the right direction.

The ball is in your court, Finance Secretary Purisima.