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World Bank Treasury Webinar on Debt Management Amidst Large Capital - - PowerPoint PPT Presentation

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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

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World Bank Treasury Webinar on Debt Management Amidst Large Capital Flows The Case of the Philippines

26 February 2014

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

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  • 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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SLIDE 3

3

  • 2.6
  • 1.0
  • 0.2
  • 0.9
  • 3.7
  • 3.5
  • 2.0
  • 2.3
  • 1.4
  • 1.2
  • 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 2012 2013

FISCAL BALANCE (As percent of GDP)

Sufficient fiscal space behind sustainable revenue and expenditure path

15 consecutive years of positive GDP growth since 1999 while inflation within target for 5 consecutive years since 2009

Favorable alignment of solid growth and low inflation

  • 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 3.6 6.8 7.2

  • 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

GDP growth rate (%) 2.9 3.0 5.5 7.6 6.2 2.9 8.3 4.1 3.9 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 Inflation rate (%) Jan - Sep

NG debt ratios have declined significantly

  • ver the last 8 years

10 20 30 40 50 60 70 80 90

  • 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 (Sep) Percent Billion Pesos NG outstanding debt (lhs) NG Debt as % of GDP (rhs)

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PHL economy on the receiving end of foreign exchange inflows

Sustained build-up of foreign exchange reserves

18.5 23.0 33.8 37.6 44.2 62.4 75.3 83.8 83.2 3.8 4.2 5.8 6.0 8.7 9.5 12.1 11.9 12.0 5 10 15 20 40 60 80 100 2005 2006 2007 2008 2009 2010 2011 2012 2013

FX Reserves (LHS) Import Cover (RHS)

in billionUSD

  • no. of months

Foreign investments continue to post net inflow Surge in capital inflows resulted in strengthening of the peso

30.00 35.00 40.00 45.00 50.00 55.00

2008 2009 2010 2011 2012 2013 2014 P/US$

  • 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 2012 2013

Billion US$

Current account balance OF cash remittances

Q1-Q3

Current account in structural surplus position for 10 years

  • 5,000
  • 4,000
  • 3,000
  • 2,000
  • 1,000

1,000 2,000 3,000 4,000 5,000

2008 2009 2010 2011 2012 2012 2013

Million US$

Net foreign direct investments Net foreign portfolio investments Jan - Sep

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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 Percent 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

Billion Pesos

RRP SDAs

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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

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

Other Assets Loans and Advances Domestic Securities International Reserves

BSP Liabilities: Deposits account for a substantial portion

  • f BSP liabilities

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

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

BSP has incurred losses due to foreign exchange rate fluctuations Income Position of the BSP

For the periods indicated, in billion pesos 2007 2008 2009 2010 2011 2012 Jan - Nov 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
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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

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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)

57.2% 56.2% 57.1% 57.6% 63.0% 65.2% 0.9% 2.0% 2.4% 2.3% 42.8% 43.8% 41.9% 40.4% 34.6% 32.5% 2008 2009 2010 2011 2012 2013

Evolution of NG Debt

PHP Debt GPN** FXC Denominated*

85.8% 56.2% 65.6% 65.2% 83.8% 92.0% 5.9% 9.8% 3.2% 14.2% 43.8% 28.5% 25.0% 13.0% 8.0% 2008 2009 2010 2011 2012 2013E

Gross Borrowing Mix

Domestic GPN Foreign

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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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SLIDE 10

10 Particulars 2013 Program 2013 Actual Gross Foreign Borrowing 189.8 bPHP 45.54 bPHP Gross Domestic Borrowing 568.0 bPHP 401.138 bPHP Financing Mix Foreign 25% 8% Domestic 75% 92%

Working towards a solution to the challenges

  • In 2012 NG trimmed down its global bond

issuance, and bought back about USD500 Mn

  • f high coupon ROP’s using internal funds.
  • At end 2012 NG debuted a 10-year onshore

Dollar Bond targeted at USD of local banks: low-cost dollar funding without additional inflows.

  • In 2013, the NG held back a USD3 Bn global

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)

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  • 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

  • ther 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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World Bank Treasury Webinar on Debt Management Amidst Large Capital Flows The Case of the Philippines

26 February 2014

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