Philippines pushes out the curve for infrastructure

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By:
Lawrence White
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Purisima says more local funding to come; Republic targets investment-grade rating

The Republic of Philippines secretary of finance Cesar Purisima

"Our rating matters to us: our goal is to get to investment grade within the current administration"

Cesar Purisima

The Republic of the Philippines is considering issuing more peso-denominated bonds in the local market to help fund infrastructure development, according to secretary of finance Cesar Purisima. Speaking to Euromoney on the sidelines of the Asian Development Bank meeting in Hanoi, Purisima says that infrastructure development is a top priority for the country and that peso-denominated 25-year bonds might be issued to help fund various projects.

"There’s over Ps1.5 trillion in deposits at the central bank," he says, "and we’re keen to tap into that local liquidity to help fund the pipeline of infrastructure development projects. The size of each bond would obviously depend on the project but we can now do 25-year bonds locally thanks to our work in extending the yield curve."

The key deals in this liability management programme came in September and November 2010. In September, taking advantage of strong issuer demand for Philippines bonds, Citi, UBS and HSBC were able to persuade investors to swap over $3 billion-worth of debt into longer-dated paper. Investors switched into a new $2.24 billion January 2020 note, and exchanged shorter-dated debt for a tap of the existing October 2034 bond. In November, the republic repeated the same trick with its local-currency debt, exchanging shorter-dated outstanding debt for new 10-year and 25-year paper. Now that Purisima and his team have successfully extended both the international and the domestic yield curve, greatly improving the country’s funding situation, investors are keen to know whether that will translate into action on infrastructure.

Most sources familiar with the Philippines cite the lamentable condition of the ageing Ninoy Aquino airport, and the controversy surrounding the barely used new terminal 3, as the leading example of the indecision, corruption and delay that have hampered the country’s infrastructure development. But the country’s requirements go much beyond improving the international airport, as Purisima acknowledges, including domestic transport, tourism and power.

Purisima said he would consider issuing inflation-linked bonds but his focus was on "continuing to aggressively manage liabilities, to extend maturities, lower borrowing costs and reduce the FX component."

During the Philippines’ country presentation at the ADB meeting, Maria Almasara Cyd Amador, assistant governor of the Central Bank, said: "Inflation management is our top priority. Inflationary pressures for us are mainly on the supply side, and as the rate hike yesterday [on May 5 the overnight borrowing rate was increased by 25 basis points to 4.5%] showed we are using a combination of policy tools to contain inflation. There’s a flood of capital coming our way not necessarily due to our growth prospects but rather to quantitative easing. That flood could one day reverse so we are also employing a range of instruments to stem those flows."

Debt capital markets bankers and investors now rate the Philippines as the most effective sovereign issuer in the Asia-Pacific region, noting its continued liability management efforts and the speed with which it can get deals done.

Purisima says: "We’re three notches below investment grade with Moody’s and two below Indonesia but if you look at the cost we borrow at the market is clearly discounting some of that gap. Nonetheless our rating matters to us: our goal is to get to investment grade within the current administration."

Moody’s assigned a positive outlook to the country’s Ba3 rating in January. This followed an upgrade from double-B minus to double-B from Standard & Poor’s in November.

"The ratings agencies can tend to be lagging indicators when it comes to sovereign debt," says a debt capital markets banker who has worked with both Indonesia and the Philippines, "and for Indonesia to be two notches above the Philippines is not reflective of how the market views the two of them."