THE BANGKO SENTRAL ng Pilipinas’ (BSP) Monetary Board has approved a zero-percent reserve requirement on repurchase (repo) transactions ahead of the start of organized market operations on Monday, the BSP said in a statement on Friday.

Circular No. 983, signed by BSP Governor Nestor A. Espenilla, Jr. on Nov. 23, amended the Manual of Regulations for Banks to assign a zero percent rate of required reserves for deposit substitutes under repo arrangements from four percent currently. The circular takes effect on Nov. 27.

“In support of the comprehensive initiative to develop the domestic local currency debt market, the Monetary Board approved the issuance of a circular assigning a zero-percent reserve requirement on repurchase transactions under the Government Securities Repo Program,” the statement read.

“This responds to the industry request to minimize the friction cost on repo transactions that conform to international best practices,” it added.

“This complements the earlier issuance of the Bureau of Internal Revenue providing exemption of repo transactions under the program from documentary stamp tax.”

This latest reform measure is expected to enhance liquidity and deepen the domestic debt market, according to the BSP and the November issue of the Asian Bond Monitor which the Asian Development Bank (ADB) released on Friday.

Under a repo agreement, one party sells peso-denominated debt papers like Treasury bills and bonds to another with the promise to buy these back at a set price and a future date. In the process, the seller gets hold of short-term liquidity to hand out fresh loans and service client withdrawals, among other uses.

The repo market forms part of the government’s road map for capital market reform that will deepen the local debt market — a plan that will be implemented in phases over the next 18 months.

“The BSP believes that the establishment of an organized inter-dealer repo market will aid the development and deepening of the domestic financial market,” the central bank said in its statement, adding that this latest move is designed to enhance price transparency and market liquidity.

“At the same time, the BSP strongly encourages industry participants to adopt prudent governance standards in line with international best practices pertaining to trading and settlement, documentation, accounting, and market and regulatory disclosures as well as to establish appropriate safeguards to address risks such as counter-party and settlement risks.”

A STEP FORWARD
ADB said in its Asian Bond Monitor that the BSP has been amending its regulations to “provide greater flexibility in tapping the capital market as an alternative funding source” and took note of the central bank’s announcement in October of the rollout of the bank repo market. The BSP, ADB recalled, had said the financial reforms it will implement over the year and a half ahead will start with “improving benchmark markets as this is critical for pricing risk assets and other capital instruments”.

Moreover, the Treasury bureau has been reviewing the performance of government securities eligible dealers in the primary and secondary markets in order to establish market-makers entrusted with facilitating securities trading. The bureau will announce the first batch of market-makers and launch the enhanced government securities eligible dealers program early next year.

The Philippines’ local currency (LCY) bond market continued to expand in the third quarter, though slowing from the preceding three months, with anticipation of an impending US interest rate hike keeping investors cautious in the latest period in review, according to the latest Asian Bond Monitor.

It noted that outstanding Philippine LCY bonds increased by 0.8% quarter-on-quarter and by 8.5% year-on-year to P5.21 trillion ($102 billion) in the three months to September, with government and corporate bonds making up 80.8% (P4.212 trillion, barely changed from the preceding quarter but 6.5% more on the year) and 19.2% (P998, 4.2% up on the quarter and 18.1% more year-on-year), respectively, of the total.

Those increases, however, were smaller than the quarterly 4.6% and the annual 10.2% clocked in the second quarter, which had been boosted by a retail Treasury bond (RTB) sale.

Yields of debt papers with maturity of up to one year fell by an average of 2.1 basis points (bps), while those of bonds falling due between two and 20 years rose by an average of 19.1 bps — except for the five-year and 20-year tenors that fell by 7.8% and 0.8 bps, respectively.

CAUTIOUS
“The decline in yields at the short end of the curve and the rise in yields of most long-tenor bonds suggest that market participants are being cautious ahead of widely expected interest rate hike from the United State Federal Reserve in December,” ADB explained in its report, noting that “[i]nvestors buying long-term government securities are bidding for higher yields and are being more cautious in taking positions along that segment of the yield curve”.

The government sold a total of P270.2 billion worth of debt in the third quarter, lower than in the preceding three months. Treasury bonds issued totaled some P75 billion, falling short of a P90-billion program, while Treasury bill issuance totaled some P95.2 billion against a P105-billion program for the same three months, though more than in the second quarter “as a result of more auctions”.

“Market players expect that the government’s ambitious infrastructure plan will increase the supply of local government bonds in the market, given the need to borrow more to fund these projects,” the report read.

Much, it said, depends on the ability of the Executive to make sure tax reforms that come out of Congress retain enough revenue-generating provisions — despite populist pressures on lawmakers — so that “the government may not need to borrow more as its revenue will already be augmented, thus limiting the impact of infrastructure development on the local bond market”.

The report noted that the corporate bond market grew faster than the government counterpart on both quarter-on-quarter and year-on-year basis, with the property sector continuing to hog the biggest share of the total at 28.4%, followed by banks’ 27.7% and holding firms’ 21.1%.

Corporate bond issuers raised a total of P49.8 billion in the third quarter — “less than the amount issued in the second quarter” — led by BDO Unibank, Inc. which sold P11.8 bilion worth of six-year bonds carrying a 3.63% coupon rate.

Ayala Land, Inc. occupied the top spot in terms of outstanding bonds with P91.6 billion, up from P87.3 billion in the second quarter.

The Philippines, which together with Vietnam had “the smallest LCY government bond markets in the region”, saw the biggest drop in issuance in Asia — with declines of 31.9% quarter-on-quarter and 13.5% year-on-year to $6 billion in the third quarter — “primarily due to a high base in the second quarter when the government issued P181 billion worth of retail Treasury bonds” last Mar. 28-Apr. 6.

The Treasury bureau last Nov. 20 launched this year’s second RTB offer, scheduled to end on Nov. 29, involving some P30 billion worth of five-year debt papers. It issued P130 billion worth of RTBs with a 4.625% coupon on that first day. — Elijah Joseph C. Tubayan and K. A. N. Vidal

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