Emerging Markets: Purisima interview

Emerging Markets, May 6 2011

The Philippines has pledged to move away from offshore borrowing and to source more of its funding than ever before from local markets.

Secretary of Finance Cesar Purisima told Emerging Markets that the Aquino government aims to borrow 73% of its funds in pesos in 2011 and just 27% from foreign markets, compared to a 67/33 split last year that was itself a historically pro-local split. The government aims for foreign currency debt to account for just 20% of total national debt in subsequent years. Mr Purisima said this remained the case despite a recent announcement that the Philippines will increase its dollar amount of offshore funding from $2.5 billion to $3.25 billion for 2011, US$2.75 billion of which has already been raised.

“In the first months of the Aquino administration we have floated peso bonds twice: once for 10 years and once for 25, the first in Asia to do so,” said Mr Purisima. “We plan to continue to do that, especially for liability management.” He said that building a long-dated curve in pesos would be crucial to infrastructure development, a vital requirement for the Philippines’ growth. “Opening up the 25-year market was a move in preparation for infrastructure financing. That will allow project proponents to fund projects in pesos, matching their revenues in costs.”

This relates to an ambitious program of the new government to launch 10 public-private partnerships for infrastructure in 2011, four of them airports and most of them based around improving the prospects of the tourism industry, a key Aquino goal. In total the government has identified 73 projects for a preliminary list that will be updated each quarter, which includes education and hospital projects in addition to airports, roads, ports and energy.

Despite a mixed history of privatization and infrastructure development in the Philippines, Mr Purisima said he believed these projects could succeed as PPPs. “We are confident we have made enough changes in our PPP framework to make it attractive,” he said, citing a pledge to give approvals on solicited projects within six months, a steady pipeline of new projects, the opening up of long-term local currency borrowing, and improved transparency as reasons.

The government faces a challenge of creating growth and development while also bringing down the country’s budget deficit. Having targeted a deficit of 3.9% of GDP last year and delivered 3.74%, this year’s target is 3.2%, equating to a Ps300 billion deficit. The aim is then to bring it down to 2% of GDP by 2013. To general surprise, the first quarter deficit came in at Ps26.2 billion compared to a planned P112 billion, which Mr Purisima attributed to improved revenues and well-managed expenditures, though analysts said they reflected the government undershooting on planned disbursements.

“It was certainly much less than was programmed, but that’s the best it’s going to get, because in succeeding quarters – especially this one – there is a need for the government to ramp up spending on the infrastructure side,” said Jun Trinidad, economist at Citi.

Mr Purisima said that deficit reduction would not impede vital spending, and stressed the benefits of getting to his 2% target. “When that happens our interest to GDP will go down, creating more fiscal space for additional investment. And when you do that, you get into a more virtuous circle,” he said. “Our hope is we will be rewarded with an upgrade to investment grade – the market is already allowing us to borrow at close to investment grade prices – so that the flow of investments will increase, more jobs will be created, more taxes, less deficits and less debt. That will be crucial in reducing poverty in the Philippines.”