Borrowing costs

Rate hikes to drive up borrowing costs

MANILA, Philippines — President-elect Ferdinand Marcos Jr. could find his administration scrambling for cash in his first six months in office as borrowing costs are expected to soar to levels the government may no longer deem reasonable.

National Treasurer Rosalia de Leon told The STAR that the rate hikes pursued not only by the US Federal Reserve, but also by the Bangko Sentral ng Pilipinas (BSP) are affecting both demand and local bond yields.

De Leon said incoming BSP Governor Felipe Medalla had signaled that the benchmark rate would be raised by 25 basis points each in the next two policy meetings to contain inflation.

“Let’s add the 25 basis point hike by the Monetary Council [on] the remarks of the new Governor Medalla. Of course, these (developments) are factored into the pricing of (bonds),” De Leon said.

A bond trader said investors might think twice before lending money to the government due to the Fed’s latest rate hike. They can either stay out of treasury bill and bond auctions or demand yields above market prices.

“With the Fed’s 75 basis point hike, we expect investors to remain cautious – even defensive – with their asset purchases due to heightened risks stemming from monetary tightening,” the trader said.

According to the trader, the BSP may respond to the Fed’s actions with a 50 basis point hike on June 23 to prevent the Philippine peso from succumbing to external pressures.

The economy has become sensitive to fluctuations in exchange rates, with the government covering supply shortages by increasing imports of fuel, meat and rice.

The Bank of the Philippines, headed by Ayala, has also warned that the interest rate differential between the BSP and the Fed will stabilize by the end of 2022 if the BSP increases by just 25 basis points and that the Fed increases up to 75 basis points per meeting.

The bank said inflation could worsen in this scenario as the peso is bullied by the US dollar.

Michael Ricafort, chief economist of Rizal Commercial Banking Corp., also expects the BSP to raise its policy rate by 50 basis points at its June meeting. By doing so, the central bank will avoid the crisis faced by some economies in which their rate differentials are narrowing.

As it stands, the difference between Philippine and US rates stands at 50 basis points, with the BSP at 2.25% and the Fed at 1.75%.

“If the BSP proceeds with a 50 basis point hike, we expect borrowing costs to rise further in the coming months,” the trader said.

The budget deficit, measured against gross domestic product (GDP), hit a record 8.6% in 2021, down from 7.6% in 2020, as the government continues its spending spree to manage the pandemic and boost economic growth. economy.

The government hopes to borrow a total of 2.47 trillion pesos this year, of which 1.91 trillion pesos will come from local lenders and 560.58 billion pesos will come from foreign sources. The government borrows to cover the national budget deficit.

However, the next administration no longer has the fiscal room to pay additional rates on its future borrowing due to the pile of debt it will inherit.

The national debt hit a 17-year high of 63.5% of GDP in March, requiring the government to increase revenue and cut spending to meet its obligations.

De Leon, who is set to retain her post as national treasurer, said the Treasury will broaden the tenor of its offerings to capture demand from all corners without giving in to pressure to borrow at high cost.

“We will also include long curve segments because there is also demand, and there might even be a curve inversion (in the future),” De Leon said.

De Leon said investors may prefer safe-haven assets like short-term bonds in times of crisis like this, but some opt for high-risk, high-return investments, including long-term securities.