Vote of confidence

IF THERE is one aspect of the economy for which the Aquino administration deserves praise, it’s the handling of government finances. International credit watchers took notice of it when they raised the Philippines’ sovereign debt rating to investment grade more than three years ago.

Last week, another feather was added to the administration’s cap insofar as financial management is concerned: the sale of $2 billion worth of long-term bonds at a record-low interest rate of 3.7 percent—a feat made remarkable by the fact that economic conditions around the world have been quite challenging.

Volatility in financial markets is making it difficult for borrowers to raise cheap funds overseas. Still, the Philippines sold $2 billion in 25-year global bonds at a record-low yield, which reflects the sustained investor confidence in the country. Some $8 billion in bids were received for the new cash component of the bond issuance while $5.6 billion was offered for the one-day accelerated switch tender offer. More than half, or 51 percent, of the tenders for the global bonds came from the United States, 32 percent from Asia, and 17 percent from Europe.

According to the Department of Finance, the coupon for the US-dollar-denominated sovereign bonds maturing in 2041 is not only lower than the initial pricing guidance of 4 percent but also the lowest ever for an offshore issuance by the Philippines. The transaction was also the first sovereign US dollar bond issuance and the longest-dated US dollar bonds coming from Asia this year. Of the proceeds, $500 million will be new money to be infused into the budget, while $1.5 billion will be used to retire previously issued IOUs maturing between October 2016 and October 2034, thus lengthening the maturity of some obligations.

National Treasurer Roberto B. Tan noted that the strong support received by the country from investors in this transaction was a sign of confidence in the reforms and strategies that the government had institutionalized. Finance Secretary Cesar V. Purisima was ecstatic. He said the Philippines’ “stellar track record” in executing liability management transactions underpinned the Aquino administration’s firm commitment to proactive risk management. “By leveraging on these opportunities to reduce high-coupon debt and to extend the maturity of our debt portfolio, the country achieves valuable savings that we can use to target broad-based and inclusive growth and development,” he added. Of course, the issue involving inclusive economic growth and poverty alleviation is an entirely different story.

There are indeed huge challenges that the government faces moving forward. The International Monetary Fund has in fact again lowered its 2016 growth projection for the Philippines to 6 percent from 6.2 percent, mainly on the back of external challenges. While the IMF noted that the Philippine economy has performed remarkably well in the face of a weaker external environment and global financial turbulence in 2015, “real GDP growth is projected at 6 percent in 2016 and 6.2 percent in 2017, driven by continued strong domestic demand offsetting weak net exports.” Growth last year remained robust at 5.8 percent despite a large drag from exports due to a strong pickup in private investment and public construction during the year.

The IMF slightly downgraded its growth forecast for the Philippines to reflect the more challenging external environment characterized by lower growth in China and the region, higher global financial volatility and capital outflows and weather-related disruptions.

Moving forward, according to the IMF, the next administration should continue to increase tax revenues, among other structural reforms, to sustain economic expansion and further slash poverty. Over the medium term, a continuation of prudent macroeconomic policies and good governance will be critical to sustain investor confidence and the growth momentum. To support growth, structural reforms will also be needed to address issues such as the low rate of public investment, opening up the economy to greater competition and foreign investment, and high rates of poverty and inequality.

The next few years will be very challenging for the Philippines. The next administration would do well not to tinker with the existing fiscal management style that has put the government’s fiscal position in order.