World Bank Treasury Webinar on Debt Management Amidst Large Capital Flows The Case of the Philippines 26 February 2014 Sharon P. Almanza Zeno Ronald R. Abenoja Deputy Treasurer Director Bureau of the Treasury Bangko Sentral ng Pilipinas
Agenda 1. Background on evolution of key macroeconomic variables 2. FX flows and effects on the economy 3. Impact on monetary policy objectives 4. Debt management under FX flows 5. Challenges in achieving debt management and monetary policy objectives 6. Strategies to overcome these challenges 7. Lessons learned and recommendations 2
Favorable alignment of solid growth and low inflation 15 consecutive years of positive GDP growth since 1999 while inflation within target for 5 consecutive years since 2009 10.0 10.0 9.0 8.3 7.6 7.6 8.0 6.8 7.2 8.0 6.7 6.6 GDP growth rate (%) Inflation rate (%) 7.0 6.2 6.0 4.8 5.2 5.5 5.0 6.0 4.4 4.1 4.2 3.9 4.6 5.0 2.9 3.6 3.6 4.0 3.1 2.9 4.0 3.2 2.9 3.0 3.0 3.0 2.0 1.1 2.0 1.0 -0.6 0.0 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -2.0 Sufficient fiscal space behind sustainable revenue NG debt ratios have declined significantly and expenditure path over the last 8 years FISCAL BALANCE (As percent of GDP) NG outstanding debt (lhs) Jan - Sep 7,000 90 NG Debt as % of GDP (rhs) 80 2005 2006 2007 2008 2009 2010 2011 2012 2012 2013 6,000 0.0 70 5,000 60 -0.2 -0.5 Billion Pesos Percent 4,000 50 -1.0 -0.9 40 3,000 -1.0 -1.5 -1.2 30 -1.4 2,000 -2.0 20 1,000 -2.0 10 -2.5 -2.3 - 0 -2.6 -3.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Sep) -3.5 -3.5 -4.0 -3.7 3
PHL economy on the receiving end of foreign exchange inflows Foreign investments continue to post net inflow Current account in structural surplus position for 10 years 25.0 5,000 Million US$ Current account balance OF cash remittances 4,000 20.0 3,000 Jan - Sep 2,000 15.0 1,000 Billion US$ 10.0 0 2008 2009 2010 2011 2012 2012 2013 -1,000 5.0 -2,000 -3,000 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012 2013 -4,000 Net foreign direct investments -5.0 -5,000 Net foreign portfolio investments Q1-Q3 Sustained build-up of foreign exchange reserves Surge in capital inflows resulted in strengthening of the peso no. of months in billionUSD 55.00 P/US$ 100 15 11.9 FX Reserves (LHS) 12.0 12.1 50.00 80 Import Cover (RHS) 9.5 8.7 10 45.00 60 6.0 5.8 40.00 83.8 83.2 40 4.2 75.3 3.8 5 62.4 44.2 35.00 20 37.6 33.8 23.0 18.5 30.00 0 0 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 4
Surge in capital flows complicates the conduct of monetary policy… Market interest rates have diverged from BSP’s Sterilization volume increased remarkably policy interest rates in 2010 - 2012 Billion Pesos 8.0 91-day T-bill 182-day T-bill Percent 2,500 364-day T-bill SDA 7.0 RRP SDAs RRP 6.0 2,000 5.0 1,500 4.0 3.0 1,000 2.0 500 1.0 0.0 0 2008 2009 2010 2011 2012 2013 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 5
… and shifts the structure of BSP balance sheet BSP Liabilities: Deposits account for a substantial portion BSP Assets: Significant shift in the composition from of BSP liabilities domestic securities to international reserves 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 10% 20% 0% 10% 2006 2007 2008 2009 2010 2011 2012 0% 2006 2007 2008 2009 2010 2011 2012 Other Liabilities Reverse Repurchase Agreements Special Deposit Accounts (SDA) Reserve and Other Deposits Other Assets Loans and Advances Currency Issue Domestic Securities International Reserves BSP has incurred losses due to foreign exchange rate fluctuations Income Position of the BSP For the periods indicated, in billion pesos Jan - Nov 2007 2008 2009 2010 2011 2012 2012 2013 Revenue 93.8 95.0 104.4 113.6 118.7 65.7 61.0 53.0 Less: Expense 67.1 86.3 81.4 82.5 116.0 110.7 101.0 77.0 Equals: Net Operating Income/Loss (-) 26.8 8.8 23.0 31.1 2.8 -45.0 -40.0 -23.9 Add/Less: Gains/losses on FX Rate Fluctuations -113.7 0.5 -9.7 -90.1 -36.2 -50.4 -46.3 2.7 Equals: Net Income/Loss (-) -86.9 8.9 13.1 -59.0 -33.7 -95.4 -86.3 -23.5 6
Debt Management Strategic Guidelines In achieving the ideal debt portfolio NG follows a medium-term strategic guideline in the conduct of its debt structuring and borrowing operations 7
Gross borrowing mix as a policy tool Government Financing is shifting towards being more domestically funded (flow) Domestic GPN Foreign Gross Borrowing Mix 8.0% 13.0% 14.2% 25.0% 28.5% 3.2% 43.8% 5.9% 9.8% 92.0% 85.8% 83.8% 65.6% 65.2% 56.2% 2008 2009 2010 2011 2012 2013E Debt dynamics have improved as share of FX denominated debt is on decline (stock) PHP Debt GPN** FXC Denominated* Evolution of NG Debt 32.5% 34.6% 40.4% 42.8% 41.9% 43.8% 2.4% 2.3% 2.0% 0.9% 65.2% 63.0% 57.6% 57.2% 57.1% 56.2% 8 2008 2009 2010 2011 2012 2013
However, foreign currency funding is still needed From cost perspective, issuance of dollar USD vs PHP YC, 2012 bond (in 2012-2013) makes sense: US 7 Treasury rates were near zero and the ROP 6 sovereign spread was at its tightest Regular dollar bond issuance helps 5 preserve healthy access to external market in case domestic funding conditions 4 deteriorate. Need to re-price sovereign USD YC: more 3 10 15 20 25 tightly priced USD YC will benefit local USD 2012 PHP 2012 corporations in need of dollar funding. NG needs to provide quality investment FCDU Liabilities vs Available ROP’s vehicle* for dollar holdings of local banks (in USD Millions) (FCDU’s ). 31,249 28,470 28,255 Bond issuance is an effective tool for 24,988 23,162 29,294 27,628 26,711 maintaining long average maturity (11 23,730 21,370 years) of external debt portfolio. Local investors have stiff preference for shorter term investments (i.e. SDA), thus 2008 2009 2010 2011 2012 compromising NG’s duration target. FCDU Liabilities Oustanding ROP Global Bonds (less BSF holdings) 9
Working towards a solution to the challenges In 2012 NG trimmed down its global bond issuance, and bought back about USD500 Mn Particulars 2013 2013 of high coupon ROP’s using internal funds. Program Actual Gross Foreign 189.8 45.54 Borrowing bPHP bPHP At end 2012 NG debuted a 10-year onshore Dollar Bond targeted at USD of local banks: Gross Domestic 568.0 401.138 Borrowing bPHP bPHP low-cost dollar funding without additional inflows. Financing Mix Foreign 25% 8% In 2013, the NG held back a USD3 Bn global Domestic 75% 92% bond opting instead for jumbo issuance of peso denominated Retail Treasury Bonds (PHP150 Bn). The NG also accelerated the repayment of expensive direct and guaranteed loans to multi-lateral partners (about USD540 Mn) 10
Lessons Learned Increased coordination between government debt management and monetary policy is paramount Any medium-term borrowing strategy should incorporate other public sector policy objectives (e.g. Monetary Policy, Financial Stability) and the limitations arising therefrom. Publication of a formal MTDS provide valuable platform to argue debt management decisions, in the face of multiple objectives, including those of other policy institutions. Having a deep and relatively developed domestic capital market is crucial as it affords flexibility to switch funding sources in case access to other markets become unavailable 11
World Bank Treasury Webinar on Debt Management Amidst Large Capital Flows The Case of the Philippines 26 February 2014 Sharon P. Almanza Zeno Ronald R. Abenoja Deputy Treasurer Director Bureau of the Treasury Bangko Sentral ng Pilipinas 12
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