T-bills not going back to single-digit level – Medalla

Government economists said they don‘t see the benchmark 91-day Treasury bill rates going back down to single-digit levels in the foreseeable future.

Economic Planning Secretary Felipe Medalla told reporters that T-bill rates would not go back to single-digit levels especially with the public sector deficit bigger than programmed for the next few years.

According to Medalla, government is not likely to go back to issuing dollar bonds to finance its deficit especially with the current rates. "They’re unattractive," he said.

"If you float an eight-year dollar bond right now, the interest would be around 11 percent. The last time we borrowed, it was eight percent," he said. Medalla said that with the peso depreciating at an average of 7.7 a month, no one would be attracted to T-bills anyway.

"I see the foreign exchange rate as a consequence of the interest rate not the other way around," he said.

The direction of the National Treasury, Medalla said, is for longer maturity bonds. However, with the very volatile situation, he said government has been forced to resort to short-term and very expensive borrowings.

Medalla said government would be running a surplus before interest payment but he said this would say nothing about paying for the principal. "Maturing debt would have to be met with more borrowings," he said. "Fortunately for us, the maturity of most of our loans are not titled against our favor."

"But still, it will really hurt us if interest rates continue to be high, he said.

This is why, Medalla explained, financing the budget deficit would be the biggest problem of the administration regardless of the outcome of the ongoing impeachment proceedings.

After missing its deficit target this year by a wide margin, Medalla said government will have serious difficulties going to financial institutions for financing while internally-generated revenues are not expected to be of any help.

According to Medalla, this will have far-reaching implications as government begins to hold back on its pump-priming activities in an effort to spur growth through increased spending on much-needed public infrastructure.

Medalla explained that in the changing structure of the economy, heavy debts in the corporate sector and the institutional weakness of the Bureau of Internal Revenue (BIR) give little cause for optimism where revenue collection is concerned.

According to Medalla, these factors will make it even more difficult for government to meet its revenue targets in 2001. This year, government has had to revise its revenue targets at least four times from P440 billion to P397 billion and then to P377 billion before reaching the present target of P360 billion.

Medalla explained that despite the modest growth in gross domestic production, there are fundamental changes in the country’s economic structure that will rule out better revenue performance because the growth is heavily concentrated on the least-taxed sectors: agriculture and exports.

"This year, what really saved the economy is the agriculture sector," Medalla said. "Its performance assured that there would be no increases in food prices and this kept inflation down while staying the need for wage increases."

"The downside of that is the fact that agriculture is not taxed so this growth will not translate to higher revenues for government," he pointed out. "The same is true for the export sector which we don’t tax that much either."

Under the government’s export development program, export industries are able to avail of various tax exemptions that have removed them from the government‘s list of dependable revenue sources.

According to Medalla, government will also start feeling the debt hang-over in the corporate sector as companies avail of tax remedies to ease their burden. – Des Ferriols