Philippines confident of tighter spreads on Samurai bonds

The government expects to replicate the tight spreads of the previous dollar- and renminbi-denominated bonds issued early this year with the upcoming sale of Samurai bonds in the latter part of 2018, Finance Secretary Carlos Dominguez III said Wednesday.

Dominguez said in a statement foreign investors demonstrated their high level of confidence in the Philippine economy under the Duterte administration with the tight spreads of the previous bond floats.

Tight spreads offer low-interest rates, which indicate that the issuer has less chances of defaulting on its bond sale, while higher spreads mean investors view the bond as having bigger chances of its issuer defaulting, and thus, high-interest rates are offered to attract buyers of such riskier investments.

Dominguez said another factor that contributed to the tight spreads of bonds issued by the Philippines in the offshore market was the fact that the government was now selling securities to raise funds for its infrastructure investments, rather than to cover a ballooning budget deficit.

“We are funding our ‘Build, Build, Build’ program,” Dominguez said, referring to the government’s ambitious infrastructure modernization program consisting of 75 high-impact projects.  “This is for investment and not for covering our budget deficit because we’re spending too much. This is actually investment money that we are putting in.”

Dominguez said in 2016, when the Aquino administration sold bonds, the spread over the US treasuries was 103 basis points. When the Duterte administration announced that it was pushing a tax reform program in 2017, the spread dropped 67 basis points.

After President Duterte signed the Tax Reform for Acceleration and Inclusion (TRAIN) Act into law in December, the government’s issue of $2 billion-worth of 10-year dollar-denominated bonds the following month recorded a spread of just 37.8 basis points (bps) over the US Treasuries, while its maiden “Panda” bond float of 1.46 billion renminbi in March had an even tighter spread of just 35 bps over the benchmark, the finance chief said.

Dominguez said the country’s revenue agencies—the Bureaus of Internal Revenue and of Customs—had exceeded their collection targets following the implementation of TRAIN and after putting in place complementary reforms in tax administration.

National government revenues in the first five months of 2018 rose 19 percent year-on-year. Tax revenues also grew 19 percent, with BIR collections improving by 16 percent and BoC collections increasing by 31 percent over the same period last year.

As a result, the tax effort rose from 13.4 percent of gross domestic product to 14.3 percent, which was the highest first-quarter tax effort that the Philippines has achieved in the past 25 years, Dominguez said.

Topics: Finance Secretary Carlos Dominguez III , Samurai bonds , Duterte administration , ‘Build , Build , Build’ program , Bureaus of Internal Revenue and of Customs
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