Gov’t to issue P5-B zero coupon bonds

The National Government (NG) will issue some P5-billion worth of five-year zero coupon bonds to help bankroll its budget deficit for the remainder of the year.

Pressed to meet its P197.8-billion fiscal deficit target for 2004, the government has been resorting to heavy borrowings since the start of the year as the improvement in revenue collections still cannot compensate for the public expenditure needs.

National Treasurer Mina Figueroa said they plan to issue the bonds on Aug. 31 in order to raise at least P5 billion, although she hinted that the issue could be bigger depending on market response.

"The demand for this is coming from retail investors as presented by underwriters," Figueroa said.

The issue would be jointly underwritten by Citibank and the Land Bank of the Philippines.

Unlike the usual Treasury bonds, zero coupon bonds pay no interest but they are offered to investors at a huge discount to their face value.

The NG has just concluded a 350-million eurobond sale at the European market but the proceeds were mostly re-lent to the National Power Corp. (Napocor), as the power firm faces difficulties tapping the market on its own.

The eurobonds were scheduled to mature in 2010 and are expected to be priced late last night at 103.25 to yield 8.35 percent. The issuance was managed by Credit Suisse First Boston and Deutsche Bank.

In a statement, credit rating agency Standard and Poor’s said that the sovereign credit ratings on the Philippine government is supported by the country’s adequate external liquidity, with total debt service (including short-term debt) projected at 30 percent of current account receipts in 2004.

"The general government deficit is likely to remain relatively high at over four percent of GDP (gross domestic product) by the government’s definition this year, compared with 4.6 percent in 2003, due largely to weak tax collection," said S&P’s credit analyst Agost Benard, associate director in the Asia-Pacific Sovereign and International Public Finance Ratings Group.

Benard said general government debt, excluding amounts guaranteed by the government and lent to public sector corporations, is approaching 84 percent of GDP this year.

Benard said interest payments are likely to consume about 37 percent of central government revenues, up substantially from 22 percent in 1999. He said the weak fiscal profile and shallow domestic capital markets force a continuing dependence on external capital to accelerate economic growth.

"This raises the vulnerability of Philippine financial markets to adverse external developments, and constrain macroeconomic stability," Benard said.

He added that the Philippines’ narrow tax base contributed to weak public finances. Tax revenues as a share of GDP have fallen by more than three percentage points since 1997, due largely to weak revenue collections.

Benard said there is also an "increasing likelihood" of the government assuming most or all of Napocor’s debt, which is expected to reach $10 billion by yearend.