Gigantic BSP rate hike to drive up local debt yields

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The off-cycle and oversized rise in Bangko Sentral ng Pilipinas (BSP) interest rates will increase yields on domestic government borrowing while reducing external debt service.

“For future issues [of T-bills and bonds], expect rates to rise,” National Treasurer Rosalia de Leon said Friday. Bid rates from government-eligible brokers or local lenders, including banks, had risen on jitters about aggressive central bank tightening to stop high global inflation.

For outstanding government securities issued locally, De Leon said the BSP’s decision to raise the key bank lending rate by 75 basis points to 3.25% last Thursday will not affect debt servicing as those these had fixed term rates.

About 70% of the national government’s outstanding debts were denominated in pesos, De Leon noted. Of the 12.5 trillion pesos of bonds outstanding at the end of May, 8.6 trillion pesos were denominated in the national currency.

On the positive side, De Leon said the latest surprise rate hike has reduced pressures on the peso, easing currency risks in the country’s external debts. Note that the weaker peso in May, for example, added a total of 15.04 billion pesos in foreign exchange adjustments to the stock of external debt.

Former BSP Deputy Governor Diwa Guinigundo said last Thursday that “while the policy rate adjustment sends a market signal in the right direction for interest rates, it should not necessarily immediately translate into a higher debt service” because “everything will depend on the relative demand for the government”. debt instruments and the need for public expenditure.

“It is time for the BSP to focus on stabilizing inflation and the exchange rate, as both would also affect market rates. Uncertainty about the direction of policy when inflation hits historic highs and the peso misbehaves could also drive up interest rates and, therefore, debt service costs,” he said. said Guinigundo.

Budget documents had shown that the national government would settle a record 1.3 trillion pesos in debt this year, including 785.2 billion pesos for principal amortization and 512.6 billion pesos for interest.

The government will borrow a total of 2.2 trillion pesos this year, of which three quarters or 1.65 trillion pesos will be locally sourced through the issuance of treasury bills and bonds.

For the period 2023 to 2028, the Marcos Jr. administration plans to raise 80% of its borrowing needs in the domestic debt market to reduce currency risks, Finance Secretary Benjamin Diokno said last week. .

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