Phasing out of LIBOR borrowing factor


The Philippine government’s foreign borrowing next year would take into account the volatility of benchmark interest rates as part of the phasing out of the London Interbank Offered Rate (LIBOR), a finance official said.

Foreign borrowing for 2022 will start with official development assistance (ODA), followed by commercial borrowing.

“We go through multilateral ODA first, then bilateral ODA, then commercial borrowing because we want to minimize the overall cost of financing and lengthen the duration of our portfolio,” said Under Secretary of Finance Mark Dennis YC Joven at a press conference on December 15.

Investors face a year-end deadline to stop basing new loans and transactions on discredited LIBOR, prompting central banks to seek alternative benchmarks.

LIBOR is being phased out as the benchmark rate after being manipulated before and during the 2008 financial crisis. Concerns were also expressed about the amount of derivatives using the benchmark, which in many cases was based on assumptions about their borrowing costs and not on actual transactions.

Some LIBOR rates will cease to be published after December 31, while others are expected to end in mid-2023.

Mr Joven said they would take overall funding costs, swap rates and deadlines into account in their decision making. “At the time of the show, we have to compare each modality and see which one makes sense for us.”

The first issue in 2020 and 2021 was euro bonds because the currency’s interest rates were low and demand was robust, he said.

“Now, for 2022, we have to consider that there is an overall change in the benchmark rates,” he added.

Joven said the resulting short-term market instability prompted the government to rely more on multilateral official development assistance “just in case the market becomes a bit unstable.”

The government is borrowing from local and foreign creditors to finance the budget deficit that has widened since last year after the coronavirus pandemic crippled the economy and reduced tax revenue.

Gross government borrowing from foreign creditors during the 10-month period to October fell 9.7 percent to 518.71 billion pesos from the previous year.

The treasury office raised 146.17 billion pesos in global bonds, 121.97 billion pesos in euro-denominated banknotes and 24.19 billion pesos in Japanese yen-denominated securities. It also contracted 139.98 billion pesos in program loans and 86.41 billion pesos in project loans.

The government has so far repaid 223.93 billion pesos of its outstanding external debt, which translates to 294.78 pesos of net external borrowing over 10 months.

In April of this year, the government raised 2.1 billion euros (122.4 billion pesos) from a three-tranche offering of euro-denominated bonds, taking advantage of low interest rates on the bond market in euros.

It sold 650 million euros in global four-year bonds, another 650 million euros in 12-year bonds and 800 million euros in 20-year debt. – Jenina P. Ibañez

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