Aug 022016

Broken down, domestic debts fetched a higher rate of 5.42 percent than their external counterparts with 4.48 percent. File photo

MANILA, Philippines — Legacy loans going back as early as the Asian financial crisis are hampering efforts to lower interest rates on government debts despite the previous administration’s six-year liability management program.

On average, the National Government’s debt pile of P5.89 trillion fetched an interest rate of 5.09 percent as of May, data from the Bureau of the Treasury showed.

This barely moved from 5.11 percent recorded in February and is much higher than the central bank’s benchmark interest rate of 3.5 percent.

A key sticking point is the more than P500 billion in 20- and 25-year Treasury bonds whose rates still go as high as 18 percent issued as early as 1997 despite prevailing low yields, separate Treasury data showed.

“Our legacy debt which is about 45 percent of our total domestic debt has a weighted average cost of around 8 percent,” National Treasurer Roberto Tan said in a text message. 

That is causing the setback, he said, because these bonds are part of the P5.38 trillion in debts with fixed rates. They account for 91.37 percent of the total as of May.

Only P500 million or 8.5 percent have floating interest, which means they are affected by market swings, while only P8 million is interest-free. 

Broken down, domestic debts fetched a higher rate of 5.42 percent than their external counterparts with 4.48 percent. However, both were down year-on-year. 

Higher interest costs mean the government would need to set aside more funds for debt payments instead of spending more on public and social projects.

This was the reason why the previous administration has undergone numerous debt swaps, mostly during the start of each year, to exchange expensive with cheap debts. 

“But if you look at it from the investor perspective, why would you want to exchange a high-yielding debt?” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc.

“You will surely want that because it means you will earn more,” he said in a phone interview. 

Emilio Neri Jr., lead economist at Bank of the Philippine Islands, said it could also be a factor of debt agreements.

“There could be debt contracts long time ago that prohibits the pre-payment or swapping of these liabilities,” Neri said in a separate phone interview.

But that does not mean that debt exercises in recent years were unsuccessful. In fact, data showed that average rates have dropped 44 basis points from their 2009 level.

“We are continuing liability management initiatives and refinancing maturing debts with lower borrowing costs,” Tan said.

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