[PPT] - The Case of the Philippines Sharon P. Almanza Zeno Ronald R. PowerPoint Presentation

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Debt Management

Amidst Large Capital Flows

Sharon P. Almanza Deputy Treasurer Bureau of the Treasury Zeno Ronald R. Abenoja Director Bangko Sentral ng Pilipinas

The Case of the Philippines

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2

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

Agenda

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3

0.6

3.1 4.4 2.9 3.6 5.0 6.7 4.8 5.2 6.6 4.2 1.1 7.6 3.7 6.8 7.2 7.5 5.8

2.0

0.0 2.0 4.0 6.0 8.0 10.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 GDP growth (%)

15 consecutive years of positive GDP growth since 1999…

Favorable alignment of solid growth and low inflation

Q1-Q3 2.9 3.0 5.5 7.6 6.2 2.9 8.3 4.2 3.8 4.6 3.2 3.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* Inflation rate (%)

*January-October

Jan-Oct inflation 4.3%

…while inflation within target for 5 consecutive years since 2009

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4

2.6
1.0
0.2
0.9
3.7
3.5
2.0
2.3
1.4
0.9
0.9
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014

Fiscal Balance (As percent of GDP)

Sufficient fiscal space behind sustainable revenue and expenditure path

Favorable alignment of solid growth and low inflation

Jan - Jun

NG debt ratios have declined significantly over the last 10 years

10.0

20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

1,000

2,000 3,000 4,000 5,000 6,000 7,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014

Percent

Billion Pesos NG outstanding debt (lhs) NG Debt as % of GDP (rhs) End-Aug

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5.0

0.0 5.0 10.0 15.0 20.0 25.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 Billion US$

Current account balance OF remittances

Jan-Jun

PHL economy on the receiving end of foreign exchange inflows

Continued rise in foreign direct investments Current account in structural surplus position for 11 years

Jan - Jun

4.0
2.0

0.0 2.0 4.0 6.0 8.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 Billion US$

Net foreign direct investments Net foreign portfolio investments

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6 30.00 35.00 40.00 45.00 50.00 55.00 2008 2009 2010 2011 2012 2013 2014

P/US$

PHL economy on the receiving end of foreign exchange inflows

Sustained build-up of foreign exchange reserves Surge in capital inflows resulted in strengthening of the peso

Oct ‘14 US$1 = P44.80 18.5 23.0 33.8 37.6 44.2 62.4 75.3 83.8 83.2 79.4 4.6 5.1 6.7 6.4 9.2 10.4 11.6 11.5 11.6 10.8 2 4 6 8 10 12 14 0.0 20.0 40.0 60.0 80.0 100.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

No. of months

GIR in billion US$ GIR (LHS) Import Cover (RHS) Mar ‘13 US$1 = P40.71 *As of October

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Surge in capital flows complicates the conduct of monetary policy…

Sterilization volume increased remarkably in 2010 - 2012 Market interest rates have diverged from BSP’s policy interest rates

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2008 2009 2010 2011 2012 2013 2014

91-day T-bill 182-day T-bill 364-day T-bill SDA RRP

500 1,000 1,500 2,000 2,500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* Billion Pesos

RRP SDAs

*As of end-August

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… and shifts the structure of BSP balance sheet

BSP Assets: Significant shift in the composition from domestic securities to international reserves

BSP Liabilities: Deposits account for a substantial portion of BSP liabilities

BSP has incurred losses due to foreign exchange rate fluctuations

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

2013

Income Position of the BSP

For the periods indicated, in billion pesos

2007 2010 2011 2012 Jan - Aug 2008 2009

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2006 2007 2008 2009 2010 2011 2012 2013 2014* Other Assets Loans and Advances Domestic Securities International Reserves

*As of end-August

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Other Liabilities Reverse Repurchase Agreements Special Deposit Accounts (SDA) Reserve and Other Deposits Currency Issue

*As of end-August

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Continued inflows amid US normalization

QE in EU and Japan could drive flows into EM assets

3,000
2,000
1,000

1,000 2,000 3,000 4,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct 2013 2014

BSP-registered Foreign Portfolio Investments In million US$, as of end-October 2014

Gross Inflows Outflows Net Inflows

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Debt Management Targets To improve the debt profile, NG has identified strategic targets to guide annual debt structuring and borrowing operations Strategic Guidelines

2013 2014 2015 2016 2017

a. Reduce debt service payments (interest

payments to revenue)

18.5- 20.1% 17.0- 19.5% 15.5- 18.5% 14.3- 16.9% 12.6- 15.5%

b. Minimize foreign exchange risk by reducing

foreign currency denominated debt (as % of total debt stock)

32.5- 35.0% 29.0- 33.7% 28.6- 32.6% 27.0- 31.0% 25.4- 29.4%

c. Minimize re-financing risks by:
Keeping debt maturing in one year

manageable (as % of total) 9-15%

Maintaining long average residual maturity

7-10 years

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Gross borrowing mix as a policy tool

Government Financing is shifting towards being more domestically funded (flow) Debt dynamics have improved as share of FX denominated debt is on decline (stock)

85.8% 56.2% 65.6% 65.2% 83.6% 93.9% 82.6% 86.3% 88.3% 88.6% 5.9% 9.8% 3.2% 14.2% 43.8% 28.5% 25.0% 13.2% 6.1% 17.4% 13.7% 11.7% 11.4%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Domestic GPN Foreign PROGRAM 57.2% 56.2% 57.1% 57.6% 63.0% 65.2% 64.6% 67.6% 69.8% 71.4% 73.0% 0.9% 2.0% 2.4% 2.3% 2.3% 2.1% 2.0% 1.9% 1.8% 42.8% 43.8% 42.0% 40.4% 34.6% 32.5% 33.1% 30.3% 28.3% 26.7% 25.2%

2008 2009 2010 2011 2012 2013 2014 Q3 2014 2015 2016 2017

PHP Debt GPN FXC Debt PROGRAM

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However, foreign currency funding is still needed

3 4 5 6 7 10 15 20 25

USD vs PHP YC, 2012

USD 2012 PHP 2012

From cost perspective, issuance of dollar bond (in 2012-2013) makes sense: US Treasury rates were near zero and the ROP sovereign spread was at its tightest. Regular dollar bond issuance helps preserve healthy access to external market in case domestic funding conditions deteriorate. Need to re-price sovereign USD YC: more tightly priced USD YC will benefit local corporations in need of dollar funding. NG needs to provide quality investment vehicle* for dollar holdings of local banks (FCDU’s). Bond issuance is an effective tool for maintaining long average maturity (11 years) of external debt portfolio. Local investors have stiff preference for shorter term investments (i.e. SDA), thus compromising NG’s duration target.

23,162 24,988 28,255 28,470 31,249 21,370 23,730 26,711 27,628 29,294

2008 2009 2010 2011 2012

FCDU Liabilities vs Available ROP’s (in USD Millions)

FCDU Liabilities Oustanding ROP Global Bonds (less BSF holdings)

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Particulars (in PHP Billion) 2013 Program 2013 Actual Gross Foreign Borrowing 189.8 33.8 Gross Domestic Borrowing 568.0 520.9 Financing Mix Foreign 25% 6% Domestic 75% 94%

In 2012 NG trimmed down its global bond issuance, and bought back about USD500 Mn of high coupon ROP’s using internal funds. At end 2012 NG debuted a 10-year

nshore Dollar Bond targeted at USD
f local banks: low-cost dollar funding

without additional inflows.

Working towards a solution to the conflict

In 2013, the NG held back from a USD3 Bn global bond program,

pting 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)

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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

bjectives 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

Lessons Learned

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