14 September 2010
Debt & Public Finance
– Contrary to the pronouncements of the Department of Finance (DoF), the recent “success” in the flotation of $1-billion worth of Peso Global Bonds is not due to sound economic fundamentals. Rather, it was due to the “blanket assurance” to pay the lenders as stipulated by the “archaic” automatic appropriations law for debt service, according to the Freedom from Debt Coalition.
“The international credit market sees this assurance as ‘attractive’ especially as they minimize dollar and Euro-denominated bond exposure amid the ongoing financial crisis in the United States and Europe,” said incoming FDC president Ric Reyes.
Stated in Section 31 (B) of Presidential Decree 1177 and Section 26 (B), Book VI, of the Revised Administrative Code of 1987, the Philippine government is to automatically appropriate funds for interest payment and principal amortization of public obligations.
Reyes said that it is doubtful for the credit market to trust the government without “automatic appropriations” due to the large deficit and the recent hostage crisis that tarnished the administration of President Benigno S. Aquino III.
“Without this guarantee, the Aquino government is still a long way from really fixing the economic fundamentals, given that it inherited an underperforming government in terms of revenue from the previous administration,” Reyes said.“Breakthrough transaction”
In its September 9 statement, the DOF announced that the government has embarked on a “breakthrough transaction” in the international capital markets with its offering of P44.109 billion (equivalent to US$1.0 billion) 10-year Philippine Peso Global Bonds.
Finance Secretary Cesar Purisima boasted that said transaction “marks the first-ever local currency-denominated offshore issuance by the Republic and is also the first deal of its kind out of Asia.”
The newly issued bonds, which were priced at 99.607% with a coupon of 4.95% and a yield of 5.0%, will mature in January 2021. The U.S. SEC-registered bonds are Peso-denominated but will be settled offshore in U.S. dollars.
Citi and Deutsche Bank acted as joint global coordinators for the transaction. Citi, Credit Suisse, Deutsche Bank, Goldman Sachs (Asia) L.L.C., HSBC and J.P.Morgan were the joint bookrunners.“Pain reliever”
FDC also stated that the Philippine government’s continuous flotation of bonds make it more dependent on borrowings, undermining tax improvement efforts.
“Bond flotation is like a pain reliever for the deficit-ridden Aquino government. It distracts it from fixing the fundamentals on improving tax performance and running against tax evaders,” Reyes said.
Reyes said that like the unpopular Reformed Value Added Tax (R-VAT) law implemented by former President Gloria Macapagal-Arroyo, President Aquino is relying on “quick fixes” in resolving the deficit.
“Like the R-VAT which shifted the burden of financing the deficit from corporate tax evaders to the ordinary Filipino consumer, the peso global bonds shifts the burden to future taxpayers who will have to bear the brunt of more debt burden,” Reyes said.“Don’t pay bad debts”
FDC suggested that instead of more borrowings, the Aquino government should look into repudiating and asking for the cancellation of fraudulent or illegitimate debts.
“Aquino should look into the long list of illegitimate debts, starting with the cases the 14th Congress listed in the 2008 national government budget. Congress then suspended interest payments worth P25 billion for these debts, which Arroyo unfortunately vetoed,” Reyes said.
The illegitimate debts are identified in the Special Provision No. 1 (“Use of the Fund”) and Special Provision No. 2 (“Reporting Requirement”) covered under the heading “Debt Service-Interest Payment” of the Bicameral Conference Committee Report for House Bill 2454, then proposed 2008 General Appropriations Bill duly ratified by the House of Representatives and the Senate.
“This is more than half of what was raised via bond flotation. Surely Aquino can at least take a look and investigate these debts,” Reyes said.-30-