Local debt mart to be tapped more

The government will veer away from foreign borrowings and instead obtain more of its funding from domestic creditors in 2007 given the country’s improving fundamentals, as shown by a sound fiscal position and a strengthening peso. National Treasurer Omar T. Cruz said the government has programmed a 67% domestic to 33% foreign borrowing mix for next year, from this year’s ratio of 58-42 in favor of local borrowings. The shift to more domestic debts was prompted by a low-yield environment, induced by investors’ bullish outlook on the government’s fiscal position. At Tuesday's auction, the 10-year Treasury bond fetched 8.605%, down by 52 basis points from the 9.125% coupon rate the government had awarded at last week’s exchange. Mr. Cruz noted that this early, the government’s borrowing schedule was already tilted towards domestic debt. From January to July, total debts stood at P341.481 billion, 62% of which come from local creditors, data from the Bureau of the Treasury showed. The government initially targeted $3.9 billion in external loans -- $3.1 billion of commercial borrowings and $850 million in the form of project loans from various multilateral and bilateral funding agencies. Commercial debts, however, were capped at $3.05 billion after the government sold $750 million in sovereign bonds in July, its last issuance in the foreign debt market for the year. "We continue to move away from foreign borrowing and tilt towards domestic. To date, we’re doing much better than [the programmed 58-42 mix]," Mr. Cruz said. Tapping the domestic debt market more allows the government to lessen the cost of its debt servicing, which largely hinges on exchange rates. The peso yesterday hit a fresh four-year high of P50.37, and traders said the local currency could break P50 per dollar. "By issuing more locally than foreign, we’re moving away from foreign exchange risks. A weakening peso will increase the amount we pay for debt servicing," Mr. Cruz said. He added that the government had set up the backdrop to encourage investors to flock to the local debt market by issuing highly liquid benchmark bonds. Last Aug. 31, the government swapped P58 billion of new 10-year benchmark bonds for its maturing obligations. The bond exchange was the second for the year. "The idea is to continue building up those benchmark issues, which is consistent with the republic’s objective of moving away from foreign borrowing," Mr. Cruz said. The national treasurer declined to disclose the amount of borrowings for 2007, but the schedule has been presented to Congress last Monday. "Our deficit target is only P67 billion, so imagine how that will translate. It’s a much lower financing," Mr. Cruz said. - Maria Eloisa I. Calderon/BusinessWorld