Tighter spreads seen on upcoming bond exercises

The Philippines signaled continued interest in selling bonds within the next two or three months to help it finance an ambitious infrastructure buildup program, particularly if the market cooperates and bond spreads tighten.

Finance Secretary Carlos G. Dominguez III emphasized this on Wednesday in a statement where he said he hopes to replicate the kind of credit spreads extended to IOU the government sold in Japan in 2010, for instance.

Dominguez also sold so-called panda bonds just last May when the spread was just 35 basis point above the three-year benchmark.

“Investors have demonstrated their high level of confidence in the Philippine economy under the Duterte administration with the tight spreads of the country’s dollar and renminbi-denominated bonds issued earlier this year, which the government expects to be replicated with its upcoming sale of yen-denominated debt securities in the Japanese market in the latter part of 2018,” Finance Secretary Carlos Dominguez III said.

Spreads measure the cost of selling a bond in the market and tell potential issuers whether a particular issue is cheap or expensive.

Dominguez expressed optimism the bond spreads would remain attractive by the time the government decides to go back if only because the bond proceeds would help underwrite the massive infrastructure buildup program under President Duterte.

“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 of the beneficiary of the bond sale consisting of 75 high-impact projects to be pursued under the government’s Build, Build Build program.

Dominguez said that 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 tightened further to 67 basis points.
After President Duterte signed the Tax Reform for Acceleration and Inclusion (TRAIN) Act into law in December, the government sold $2 billion worth in 10-year IOUs the following month at a spread of just 37.8 basis points over the US Treasuries.
Its maiden “Panda” bond float of 1.46 billion renminbi in March had an even tighter spread of only 35 bps over the benchmark, the finance chief said.
Dominguez said the Bureaus of Internal Revenue (BIR) and of Customs (BoC) have exceeded their collection targets following the implementation of TRAIN and after putting in place complementary reforms in tax administration.
From January to May this year, revenues rose by 19 percent year-on-year. Tax revenues also grew by 19 percent, with BIR collections improving by 16 percent and BoC collections growing by 31 percent over the same period last year.

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