Debt Management Amidst Large Capital Flows The Case of the Philippines 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… 10.0 7.6 6.8 7.2 7.5 8.0 6.7 6.6 5.8 GDP growth (%) 4.8 5.2 6.0 5.0 4.4 4.2 2.9 3.6 3.7 3.1 4.0 1.1 2.0 -0.6 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 -2.0 Q1-Q3 …while inflation within target for 5 consecutive years since 2009 10.0 8.3 Jan-Oct 9.0 Inflation rate (%) 7.6 inflation 8.0 6.2 7.0 5.5 4.3% 4.6 6.0 4.2 5.0 4.0 3.0 3.8 2.0 3.0 2.9 2.9 3.2 3.0 1.0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* *January-October 3
Favorable alignment of solid growth and low inflation Sufficient fiscal space behind sustainable revenue and expenditure path Fiscal Balance (As percent of GDP) Jan - Jun 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 0.0 -0.5 -0.2 -1.0 -0.9 -0.9 -0.9 -1.0 -1.5 -1.4 -2.0 -2.0 -2.5 -2.3 -3.0 -2.6 -3.5 -3.7 -3.5 -4.0 NG debt ratios have declined significantly over the last 10 years 7,000 90.0 NG outstanding debt (lhs) NG Debt as % of GDP (rhs) 80.0 6,000 70.0 Billion Pesos 5,000 60.0 Percent 4,000 50.0 40.0 3,000 30.0 2,000 20.0 1,000 10.0 - - 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 End-Aug 4
PHL economy on the receiving end of foreign exchange inflows Current account in structural surplus position for 11 years 25.0 Current account balance OF remittances 20.0 15.0 Billion US$ 10.0 5.0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 -5.0 Jan-Jun Continued rise in foreign direct investments 8.0 Net foreign direct investments Net foreign portfolio investments 6.0 4.0 Billion US$ 2.0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 -2.0 Jan - Jun -4.0 5
PHL economy on the receiving end of foreign exchange inflows Sustained build-up of foreign exchange reserves GIR in billion US$ No. of months 100.0 14 GIR (LHS) 11.6 11.5 10.8 11.6 12 10.4 Import Cover (RHS) 80.0 9.2 10 83.8 60.0 75.3 6.7 83.2 8 6.4 79.4 5.1 62.4 4.6 6 40.0 44.2 4 37.6 33.8 20.0 2 18.5 23.0 0.0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* *As of October Surge in capital inflows resulted in strengthening of the peso 55.00 P/US$ Oct ‘14 US$1 = P44.80 50.00 45.00 40.00 Mar ‘13 35.00 US$1 = P40.71 30.00 2008 2009 2010 2011 2012 2013 2014 6
Surge in capital flows complicates the conduct of monetary policy… Sterilization volume increased remarkably in 2010 - 2012 2,500 RRP SDAs 2,000 Billion Pesos 1,500 1,000 500 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* *As of end-August Market interest rates have diverged from BSP’s policy interest rates 8.0 91-day T-bill 182-day T-bill 364-day T-bill 7.0 SDA RRP 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2008 2009 2010 2011 2012 2013 2014 7
… and shifts the structure of BSP balance sheet BSP Liabilities: Deposits account for a substantial BSP Assets: Significant shift in the composition from portion of BSP liabilities domestic securities to international reserves 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2006 2007 2008 2009 2010 2011 2012 2013 2014* Other Liabilities Reverse Repurchase Agreements Other Assets Loans and Advances Special Deposit Accounts (SDA) Reserve and Other Deposits Domestic Securities International Reserves Currency Issue *As of end-August *As of end-August BSP has incurred losses due to foreign exchange rate fluctuations Income Position of the BSP For the periods indicated, in billion pesos Jan - Aug 2007 2008 2009 2010 2011 2012 2013 2013 2014 Revenue 93.8 95.0 104.4 113.6 118.7 65.7 56.5 43.7 31.6 Less: Expense 67.1 86.3 81.4 82.5 116.0 110.7 84.1 58.9 44.3 Equals: Net Operating Income/Loss (-) 26.8 8.8 23.0 31.1 2.8 -45.0 -27.5 -15.2 -12.7 Add/Less: Gains/losses on FX Rate -113.7 0.5 -9.7 -90.1 -36.2 -50.4 5.6 2.6 8.2 Equals: Net Income/Loss (-) -86.9 8.9 13.1 -59.0 -33.7 -95.4 -24.3 -14.4 -4.5 8
Continued inflows amid US normalization QE in EU and Japan could drive flows into EM assets BSP-registered Foreign Portfolio Investments In million US$, as of end-October 2014 4,000 Gross Inflows Outflows Net Inflows 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 May Oct May Oct Jan Feb Mar Apr Jun Jul Aug Sep Nov Dec Jan Feb Mar Apr Jun Jul Aug Sep 2013 2014 9
Debt Management Targets To improve the debt profile, NG has identified strategic targets to guide annual debt structuring and borrowing operations 2013 2014 2015 2016 2017 Strategic Guidelines a. Reduce debt service payments (interest 18.5- 17.0- 15.5- 14.3- 12.6- payments to revenue) 20.1% 19.5% 18.5% 16.9% 15.5% b. Minimize foreign exchange risk by reducing 32.5- 29.0- 28.6- 27.0- 25.4- foreign currency denominated debt (as % of 35.0% 33.7% 32.6% 31.0% 29.4% total debt stock) c. Minimize re-financing risks by: • Keeping debt maturing in one year 9-15% manageable (as % of total) • Maintaining long average residual maturity 7-10 years 10
Gross borrowing mix as a policy tool Government Financing is shifting towards being more domestically funded (flow) Domestic GPN Foreign 6.1% 11.7% 11.4% 13.2% 13.7% 14.2% 17.4% 25.0% 28.5% 3.2% 43.8% 9.8% 5.9% 93.9% 88.3% 88.6% 85.8% 86.3% 83.6% 82.6% 65.6% 65.2% 56.2% PROGRAM 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Debt dynamics have improved as share of FX denominated debt is on decline (stock) PHP Debt GPN FXC Debt 25.2% 26.7% 28.3% 30.3% 32.5% 33.1% 34.6% 40.4% 42.0% 42.8% 43.8% 1.8% 1.9% 2.0% 2.1% 2.3% 2.3% 2.4% 2.0% 0.9% 73.0% 71.4% 69.8% 67.6% 65.2% 64.6% 63.0% 57.6% 57.2% 57.1% 56.2% PROGRAM 11 2008 2009 2010 2011 2012 2013 2014 Q3 2014 2015 2016 2017
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 6 ROP sovereign spread was at its tightest. � Regular dollar bond issuance helps 5 preserve healthy access to external 4 market in case domestic funding conditions deteriorate. 3 10 15 20 25 � Need to re-price sovereign USD YC: more USD 2012 PHP 2012 tightly priced USD YC will benefit local corporations in need of dollar funding. FCDU Liabilities vs Available ROP’s � NG needs to provide quality investment (in USD Millions) vehicle* for dollar holdings of local banks 31,249 28,470 28,255 24,988 (FCDU’s). 23,162 29,294 27,628 26,711 23,730 � Bond issuance is an effective tool for 21,370 maintaining long average maturity (11 years) of external debt portfolio. 2008 2009 2010 2011 2012 � Local investors have stiff preference for FCDU Liabilities shorter term investments (i.e. SDA), thus Oustanding ROP Global Bonds (less BSF holdings) compromising NG’s duration target. 12
Working towards a solution to the conflict � In 2012 NG trimmed down its global Particulars 2013 2013 (in PHP Billion) Program Actual bond issuance, and bought back about Gross Foreign 189.8 33.8 USD500 Mn of high coupon ROP’s Borrowing using internal funds. Gross Domestic 568.0 520.9 Borrowing � At end 2012 NG debuted a 10-year Financing Mix onshore Dollar Bond targeted at USD of local banks: low-cost dollar funding Foreign 25% 6% without additional inflows. Domestic 75% 94% � In 2013, the NG held back from a USD3 Bn global bond program, opting instead for a 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) 13
Lessons Learned � Close coordination between government debt management and monetary policy is paramount � As monetary policy has tightened due to inflation outlook and as pre- emptive move with shift in US monetary policy, fiscal policy will need to provide stimulus within the policy space � Formulation of the 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 provides valuable platform to defend debt management decisions, in the case of divergence with the objectives 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 14
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