S&P upgrade, successful offshore bond floats repudiate critics’ ‘debt trap’ yarn—DOF

S&P Global Ratings’ recent move to upgrade the Philippines’ long-term credit rating to the higher investment grade of “BBB+” and later, Manila’s highly successful floats of Euro and "panda" bonds in the offshore capital markets are telling marks of the international financial community’s continued vote of confidence in our domestic economy and a “clear repudiation” of the misinformed belief that the Duterte administration is steering the country towards a so-called “debt trap,” according to Finance Assistant Secretary Antonio Lambino II.

He said the higher “BBB+” rating "is an affirmation that the Philippines, given its strong macroeconomic fundamentals and impressive liability management that were continued under the Duterte administration, is more than capable of meeting its financial obligations.”

“Moreover, the credit rating upgrade makes debt servicing less expensive even for private companies that borrow from abroad as they will be able to access financing at lower interest rates,” Lambino added.

Lambino said the Philippines’ higher credit rating that is just one step away from the ‘A’ investment grade accorded the world’s most stable economies, plus the subsequent oversubscribed sale of Philippine global bonds worth 750 million Euros in key European financial capitals and elsewhere show that “investors are confident the country can indeed manage and pay back its debt.”

“These positive developments also fly in the face of the misinformed view spread by critics that Malacañang is steering the country towards a debt crisis,” Lambino said.

Lambino stressed that the government has been securing Official Development Assistance (ODA) ODA financing and floating bonds overseas as part of its efforts to raise enough resources for infrastructure and human capital development, which are at the center of President Duterte’s agenda for sustained high growth and financial inclusion.

“Keeping the domestic economy on its high growth path will all the more help the government raise enough funds not only for its priority growth-friendly initiatives but also for servicing its debts in the long run,” he said.

As for the overseas bond floats, Lambino said the overwhelming reception from foreign investors was illustrated by the fact that the Bureau of the Treasury (BTr) had to raise its base offering size for the euro bonds to 750 million euros, from the original 500 million euros, after the offer was oversubscribed six times.

On the panda bonds, the BTr has successfully issued its Renminbi-denominated notes of RMB2.5 billion with a tenor of three years--the second such float since the first one in March 2018.

The panda bonds were priced at 3.58 percent, which allowed for a tight spread of 32bps above the benchmark. The order book reached a total of more than RMB11 billion.

Lambino said “the tight spreads of these latest offshore bond issuances underlined investor confidence in the way the Duterte administration has soundly managed the country’s fiscal program.”

The issuance of euro bonds marked the country’s return to European capital markets after an over 10-year hiatus. The overwhelming reception from the market allowed the pricing for the newly issued Global Bonds to tighten at EUR Midswaps +70 bps after being revised twice from an initial pricing guidance of EUR Midswaps+90-100 bps area.

By geographical allocation, 24 percent of the bonds went to Germany, 15 percent to Italy, 10 percent to the UK, 26 percent to the rest of Europe, 9 percent to the U.S., 6 percent to the Philippines, 5 percent to the rest of Asia, and the remaining 5 percent to other countries.

In terms of geographical breakdown of investors, leveraging on the Bond Connect scheme, 42.4 percent of final allocation was placed to China’s onshore investors, and 57.6 percent went to overseas investors. Major investors included commercial banks from China’s onshore and offshore markets.

After the euro bond offer, Finance Secretary Carlos Dominguez III said: “This successful transaction is a testament to the international investor community’s vote of confidence in the country’s strong macroeconomic fundamentals and sustained high growth prospects despite global financial headwinds.”

And following the panda bonds` issuance, Dominguez said, “The success of the second ‘Panda’ bond float, which has come on the heels of the similarly well-received float of Euro-denominated offshore securities, illustrates the high level of confidence of the international markets in the Philippines amid the game-changing reforms initiated by President Duterte to sustain its upward growth trajectory and attract more investments.”

“Such confidence by the global investor community stems from our solid creditworthiness brought about by the government’s unwavering commitment to sound macroeconomic policies and fiscal discipline in the face of domestic and external challenges,” Dominguez added.

Dominguez pointed out that the government has issued global bonds in Europe and China as part of its efforts to diversify funding sources for its aggressive investments in infrastructure and human capital development.

As for the S&P credit rating upgrade, Dominguez said it was an undeniable tribute to President Duterte’s “unwavering commitment to bold reforms and soundeconomic policies as embodied in the 10-point Socioeconomic Agenda of the administration and his strong political will to get these tough initiatives done at the soonest.”

“To his credit, President Duterte has transcended all the political chatter and stayed focused on pursuing policy initiatives, such as tax reform, trade liberalization and infrastructure modernization, that are necessary to sustain the growth momentum, attract investments and ensure financial inclusion for all Filipinos on his watch. We also want to thank the legislature for their support of the President’s socioeconomic program,” Dominguez added.

Earlier, Finance Undersecretary Bayani Agabin explained that the provisions in the loan agreements entered into by the Philippines with China, for instance, are standard in all other loan accords signed by the country with other states and even with multilateral institutions such the World Bank and the Asian Development Bank (ADB).

Agabin, who heads the DOF Legal Affairs Group, also said it is farfetched that the Philippines will default on any of its loans, especially now with its strong fiscal position and low debt-to-GDP (gross domestic product) ratio on the Duterte watch.

Finance Undersecretary Mark Dennis Joven pointed out, meanwhile, that concerns about Chinese laws governing the loan agreements are also unfounded because this is the same with all other loan agreements signed by the Philippines with other countries.

Moreover, he said, the interest rates of the loans with China are very similar or can even be lower than those in loan agreements with other countries.