Benchmark T-bill rate drops to 5.193%

Yesterday’s auction pulled the rate of benchmark 91-day Treasury bills down 12.7 basis points to 5.193 percent as banks lined up to lend to the government in the absence of credit demand in the private sector.

The auction committee made a full award of in all tenors with subscription totalling to P20.256 billion compared to the total offering of P9 billion.

According to the National Treasury, total tenders for the 91-day bills amounted to P12.651 billion while the 181-day bills fetched bids totalling P3.69 billion. The 364-day bills attracted a total of P3.69 billion in bids.

Although the market was fully aware of the government’s need for cash to fund its deficit, banks had little choice but to accept lower interest rates. In a market where most corporate borrowers had little appetite for credit, the cash-strapped government was ironically the only creditworthy borrower.

As a result, banks could not afford to test how far the government was willing to let the interest rates go up and in fact ended up bring the rates down as they lined up for government securities.

National Treasurer Sergio Edeza said the government could fund a deficit of up to P210 billion this year, saying it is in a healthy cash position despite the shortfall in revenues.

The government has pre-funded much of its requirements for 2002 and what it could not get from the domestic bond market, it could get from the international credit market.

The market was also aware that the government had successfully launched its $500-million global bond offer and is planning to issue P5 to P10 billion worth of dollar-linked bonds this December .

The new borrowing is expected to discourage people from buying dollars in the spot market and investing these in dollar-denominated papers.

If a bank or an investor bought P100 million worth of these papers, for example, they would earn a yield based on the prevailing rate of the three and five-year Philippine debt papers.

But the principal amount would be paid at the prevailing exchange rate at the time of maturity. If the peso falls in two to three years to a level lower than the time the investment was made, then the investor gets an additional return.

If the peso is stronger by the time the debt paper matures, then the government would have additional earnings.

Although the Arroyo administration has completed the bulk of its pre-funding activities, it is still not out of the woods as its deficit had ballooned to P188 billion as of October.

By the end of the year, the deficit is expected to run up to P223 billion, almost P93 billion over its original target of P130 billion for the whole year.

As a result, the government would have to borrow even more than it had originally anticipated despite the fact that the bulk of its expenditure was due to the sheer size of its obligations and the cost of debt service.

The Department of Finance (DOF) and the Department of Budget Management (DBM) announced that the deficit had widened beyond all expectations due to the combined impact of dismal revenue performance and the worsening debt burden that pushed government expenditures.

At P223 billion, DBM Secretary Emilia Boncodin said the 2002 deficit is equivalent to a whopping 5.6 percent of gross domestic production (GDP), way above the government target of 3.3 of GDP.

The government said the dismal revenue performance has been aggravated by the increase in expenditures which reflected the rising cost of the country’s outstanding obligations.

For the whole of 2002, the DBM said the government had to set aside P223 billion for debt servicing alone and this would go up to P229 billion in 2003 because of the increase in interest rates and in the amount of obligations that generate interest expense.