1. Adopting a Sound Debt Management Strategy : Domestic Against Foreign Sources* by ROBERTO B. TAN Treasurer of the Philippines 13 October 2009 * Presentation Before the 2009 AGAP Convention, Bacolod City Bureau of the Treasury

2. Presentation Outline  Why does the NG Incur Debt ?  What is NG’s Rationale in Incurring Debt ?  What does NG Borrowing Achieve?  BTr Priorities in Debt Management  Results of Debt Management Efforts  Conclusion Bureau of the Treasury

3. 3 Why does the NG Incur Debt ?  It allows the government to consume and/or invest today more than it’s current income or revenues;  To finance budgetary deficit and service maturing obligations of the government

4. 4 What is NG’s Rationale in Incurring Debt ?  To allow greater investment to increase production capacity and potential income;  To maintain or minimize erosion of social and economic welfare in times of revenue constraints;  Government’s debt paper serves as investment instrument for the private sector.

5. 5 What does the Government Borrowing Achieve ?  Liquidity ensure that funds are available when budget disbursements are made; To achieve liquidity : To achieve liquidity : - consider the depth of the market; - issue different types of instruments; - generate forex bonds in 3-5 days execution

6. 6 What does the Government Borrowing Achieve ?  Deficit and Off-Budget Financing bridges gap between revenues and expenditures and off-budget transactions Debt Refinancing Debt Refinancing pay maturing principal obligations/payments (In BP)20002002200420062008 Revenues514.8578.4706.7979.61,202.9 Expenditures649.0789.1893.81,044.41,271.0 Deficit(134.2)(210.7)(187.1)(64.8)(68.1) Financing203.8264.2242.5110.1160.1

7. 7 BTr Priorities in Debt Management  Ensure Liquidity - adequate cash balance to cover projected operational budget disbursements and debt service for the programmed period; - undertake borrowing operations based on programmed requirement and build reserves for future maturing obligations.

8. 8 BTr Priorities in Debt Management  Minimize Borrowing Cost I. Domestic Interest Rates */ Average for Jan-Sept 2000200520082009 */ 91-day9.6816.3575.3894.264 182-day10.8427.6716.1924.457 364-day11.8008.6836.4924.615 5-year13.76410.9937.8756.250 7-year14.35011.2928.3597.000 10-year14.79511.6887.7197.875

9. 9 Yield Curve

10. 10 BTr Priorities in Debt Management  Minimize Borrowing Cost II. Foreign Interest Rates  Maximize Duration Average Maturity Profile – Foreign : 10-11 years (have issued 25 yr bonds) Domestic : 4-5 years (have issued 20 yr bonds) 1996- 19992000 2007- 20082009 7-yr---6.25 10-yr8.8759.875-6.50 20-yr 25-yr 8.750/ 9.875 - 10.625 - 6.375 -

11. 11 BTr Priorities in Debt Management  Ensure Liquidity  Avoid Bunching of Maturities Domestic debt exchange program that would strengthen the government securities’ market and lessen the country’s dependence on foreign borrowings.  Manage Currency Risk - borrow local currency to finance budgetary requirements and avoid forex risk - borrow foreign to service foreign obligations - looking into/exploring diversification strategies

12. 12 BTr Priorities in Debt Management  Diversify Sources of Funds -Develop the retail investor base (offer more RTBs & enhance the Small Investor’s Program) - tapping other foreign sources of funding i.e., yen, euro  Develop longer term and innovative/hedging financial instruments  Deepen local capital market - BTr’s developmental role as the largest issuer and benchmark for domestic interest rate - enables quick and large funds generation

13. 13 Results of Debt Management Strategies  Debt Ratios (In %)  Borrowing Mix (In %) 2000200520072008 Debt to GDP64.5971.4255.8556.86 Debt Service to Expenditures 31.050.641.138.0 Interest Payments to Expenditures 21.7131.1323.3121.42 2000200520072008 Foreign43352714 Domestic57657386

14. 14 Financial Instruments Developed  Treasury Bills  Treasury Bonds  Retail Treasury Bonds  Peso-Dollar Swaps  Dollar Linked Bonds  Zeros  Warrants (exempts holders from Basel II, reserve requirements)  Exchange Bonds

15. 15 Where are we headed ?  NG will continue to rely more on borrowing from domestic sources, financing mix for 2010 will be 28% foreign and 72% domestic ;  In 2010, premised on a more positive global outlook and much improved national growth prospects, NG intends to raise P1,335.6 B in revenues;  Programmed deficit of 2.8% to GDP will now start a downward trend towards fiscal consolidation for a balanced budget by 2013

16. 16 Where are we headed ?  NG is expected to be within its deficit target of P250 B in 2009 and P233 B in 2010 or 2.8% of GDP ; 20092010 Revenues1,239.11,335.6 Tax1,082.61,195.7 Non-Tax 156.5 129.9 Disbursement1,489.11,569.1 Deficit(250.0)(233.4) % to GDP3.2%2.8% Primary Surplus 61.2 107.4

17. 17 Conclusion What is essential to sustain sound debt management ? Sound macroeconomic management Meeting fiscal targets Pursue fiscal consolidation program to attain balanced budget by 2013 Consequently, sovereign credit rating improves enabling efficient access and securing lower cost of funds

18. Thank you ! Bureau of the Treasury