DOF eyeing Catastrophe bonds, peso debt offers for offshore investors
Photo: Finance Secretary Carlos Dominguez

BALI, Indonesia— The Department of Finance (DOF) is exploring a plan to sponsor a Catastrophe Bond (Cat Bond) to help cover disaster-related risks in the Philippines and a separate offer of peso-denominated securities to offshore investors.

These proposals, along with a plan to come up with SDG bonds--securities linked to attaining the United Nations’ Sustainable Development Goals (SDG)--were discussed by Finance Secretary Carlos Dominguez III with executives of Citigroup on the sidelines of the Annual Meetings of the World Bank and the International Monetary Fund held here.

Jay Collins, Citi vice chairman for Corporate and Investment Banking, explained that under a Cat Bond, the Philippine government will serve as sponsor, with the World Bank issuing the bond to qualified investors.

Depending on the insurance coverage and its trigger, the Philippines as sponsor of the Cat Bonds will get paid the principal contributed by investors if a catastrophe occurs. But if there is no trigger, then investors would make a positive return on their investment in the bonds.

According to Collins, Cat bonds are attractive to hedge-fund investors and asset managers because these diversifies their portfolio.

Also at the meeting was Javed Kureishi, head of Citi’s Public Sector Group, Asia Pacific Corporate and Investment Banking.

Citigroup helped draw up the $1-billion catastrophe bond covering four nations of the Pacific Alliance in Latin America—Chile, Colombia, Peru and Mexico—that was successfully launched earlier this year. It is the largest single issuance of Cat bonds ever facilitated by the World Bank.

Dominguez welcomed Citi’s proposal, which, he said, could be included in the other insurance packages the Duterte administration is now exploring with Lloyd’s of London and the World Bank to cover state assets.

He said the government can have multiple mechanisms to help cover the disaster-related risks both for the national government and local government units (LGUs).

“I want the local executives to participate,” Dominguez said, pointing out that these officials have a better grasp of the disaster-related risks in their respective localities.

“Right now, we have a local autonomy law and quite a number of the LGUs are liquid that they can buy the insurance. What we want to do is structure a system where everybody can participate. But everybody pays their own share. The national government does, LGU can participate if they wish but they have to pay their own share,” Dominguez said.

On a broader scale, Dominguez said the Cat bond coverage could later be expanded to include other countries within the Association of Southeast Asian Nations (ASEAN), so that funds could be pooled to push down the price of insurance premiums for each country-participant.

During the meeting, Dominguez also said the Philippines was open to Citi’s proposal on launching Global Depositary Notes (GDNs), in which peso-denominated debt instruments are offered to offshore investors to help diversity the country’s investor profile while enhancing the liquidity available in the domestic economy.

The proposal is timely, given that the Duterte administration is now pushing for tax reform that would reduce the withholding tax on interest income from 20 percent to 15 percent even for non-resident investors.

Collins said Citigroup is interested in “wanting to attract foreign buyers into the peso market to keep those yields down on this environment.”

GDNs would allow international institutional investors to access the Philippine domestic sovereign debt market through investments in peso-denominated debt instruments while trading in US dollar terms.

Dominguez also said the government would consider Citi’s suggestion on coming up with SDG-linked bonds, which was first launched by the World Bank last year to help raise financing support for projects in countries that want to achieve their Sustainable Development Goals, such as eradicating poverty or mitigating the effects of climate change.

These SDGs adopted by UN members in 2015, include 17 goals on attaining sustainable development, such as fighting poverty and hunger; providing affordable and clean energy, quality education and health care; and reducing inequality.