BSP urges Aquino admin to settle foreign debt

The Philippines should take advantage of the strong peso and the abundance of US dollars in the system by pre-paying some of its foreign debts, according to the Bangko Sentral ng Pilipinas. President Aquino’s fiscal mandarins should look into the possibility of pre-paying foreign obligations on the heels of the high level of liquidity in the financial system that, in the process, could temper the appreciation of the peso against the US currency, BSP Gov. Amando Tetangco Jr. said in an interview with reporters over the weekend. "We should take advantage of all this external liquidity. This will reduce foreign debt. This will also become [a] source of foreign demand and will also help moderate foreign exchange appreciation," Tetangco said. With enough dollars now in the Philippine financial system, the government should prepay foreign currency debts that could be settled, he added. When the domestic currency is strong, prepayment is a good debt management strategy, the central bank chief pointed out. Tetangco’s call came amid pressures favoring the peso. Bangko Sentral policy allows market forces to determine the foreign exchange rate, but intervenes from time to time to keep exchange rate volatility in check. The strengthening of the peso in the year to date has forced the BSP to support the US currency avoiding spikes in the exchange rate. Forex losses Because of efforts to keep the foreign exchange market stable, the central bank booked P9.67 billion in foreign exchange losses last year, BSP data showed. The government’s efforts to prepay some of its foreign debts are compared to the private companies that take advantage of the favorable fiscal conditions by settling foreign obligations ahead of maturity, Tetangco said. "I think the national government is looking at the possibility again, if there are debts that can be prepaid. The private sector continued to prepay," the BSP chief stressed. While the national government pre-paid significant amounts of foreign obligations in 2007 and 2008, it did not do the same last year and so far this year, the BSP governor said. To cover its burgeoning budget deficit, the Philippines must borrow from foreign and domestic creditors as the revenue agencies fail to meet the collection targets. The 2010 deficit is expected to reach a P325 billion or 3.9 percent of the gross domestic product from P298.5 billion or 3.9 percent of GDP last year. Central data showed that the Philippine debt stock stood at P4.605 trillion as of end-July, of which 57 percent or P2.627 trillion were sourced from domestic creditors and 43 percent or P1.978 trillion from foreign lenders. The government, Tetangco earlier urged, must take advantage of strong domestic liquidity and the strong capital flows from foreign investors and overseas Filipino workers by sourcing more funds from the domestic market. Opportune environment "Given an environment of strong foreign exchange inflows and ample domestic liquidity, it would be opportune for the national government to consider looking more to the local markets as its main source of funding," Tetangco stressed. Considering that risk aversion currently plague the US and European markets, net foreign portfolio investments or "hot money" surged toward the Philippines by 520 percent to $1.421 billion in the first nine months of the year from $1.192 billion a year earlier, central bank data showed. Investment capital continued to flood emerging markets including the Philippines — with foreign fund managers attracted by its stronger-than-expected economy in the first half. Gross foreign portfolio investments grew 52.7 percent to $7.189 billion in the January-September period from $4.709 billion in the same period last year. In the same comparable period $5.769 billion in hot money was taken out of the Philippines or 28.8 percent from $4.48 billion, according to central bank data. Foreign portfolio funds in shares of stocks listed on the Philippine Stock Exchange (PSE) rose by 44 percent to $5.3 billion in the first three quarters of the year from $3.7 billion in the same period last year. This catapulted the PSE index to close at record 4,284 on Friday. The BSP expects hot money to reach $2.9 billion this year, up by 747 percent from $388.02 million in 2009. Meanwhile, the Philippine balance of payments surplus widened by 49 percent to $6.54 billion in January-September from $4.403 billion a year earlier. The payments balance consists of foreign exchange that enters and leaves the country in a particular period, reflecting a country’s transactions with the rest of the world. On the other hand, domestic liquidity or M3 — the amount of money circulating in the domestic economy — expanded by 8.6 percent to P3.922 trillion as of end-August from P3.611 trillion in the same eight-month period last year. — VS, GMANews.TV