THE Department of Finance (DOF), through the Bureau of the Treasury (BTr), said Friday it expects to save $125.1 million in interest payments next year after converting the reference rate from floating to fixed on $11.13-billion outstanding loans with the World Bank-International Bank for Reconstruction and Development (WB-IBRD).
A floating reference rate means the setting of interest on loans periodically adjusts based on economic or financial conditions. A fixed reference rate means the benchmark rate is unchanged throughout the entire term of the loan.
The DOF said the exercise may generate foreign interest payment savings of up to $125.1 million por about P6.88 billion for the government next year and will permanently lessen the exposure of government debt service to further escalation in global interest rates.
The sustained elevated level of the Secured Overnight Refinancing Rate (SOFR)—the primary reference rate used in US dollar-denominated floating rate loan contracts—prompted the DOF to engage the bank in the fixing exercise.
The SOFR rose markedly from 0.05 percent at the beginning of 2022 to 5.35 percent at the end of October 2023, contributing largely to the 20 percent year-on-year growth in the government’s interest payments in the first 10 months of 2023.
Converting to a fixed reference rate allowed the DOF to take advantage of the inversion in the interest rate swap market to lower its borrowing cost.
The transaction, executed between Nov. 14 to 21, 2023, achieved an average fixed reference rate of 4.19 percent for the 40 IBRD loans converted, lower than the prevailing SOFR.
The DOF said with the conversions, around 91 percent of the $12.24 billion (about P681.66 billion) WB-IBRD loan portfolio of the national government (NG) is now on fixed reference rates, eliminating the risk of absorbing an additional $111 million (about P6.12 billion) in foreign interest payments for every 1 percentage point (ppt) increase in the SOFR.
