Gov’t to issue $750-M bonds linked to inflation

MANILA, Philippines - The Aquino Administration is looking to issue up to $750 million worth of inflation-linked bonds this year to help lessen its borrowing costs.

Inflation-indexed bonds are bonds that provide protection against inflation. They typically have lower coupons than conventional debt because the principal increases annually at the rate of gains in the consumer price index.

National Treasurer Rosalia De Leon said the issuance of the inflation-linked bonds, which may have a tenor of 10 years, is part of efforts to sustain the growth momentum of the local retail bond market.

With the issuance of this type of debt security, the government hopes to attract more individual investors to invest in bonds.

She said the government must offer a minimum $700 to $750 million worth of the bonds to meet the benchmark liquidity level.

De Leon, however, said the issuance is subject to the approval of the necessary regulatory bodies.

Technical and regulatory issues have yet to be threshed out before the government could proceed with the issuance, she noted.

The government’s medium-term inflation target has been lowered to two percent — four percent for 2015-2016 from 3.5 percent — five percent for this year and 2014.

The manageable inflation outlook provides room for monetary policy to support domestic economic activity amid uncertain global prospects.

Consumer prices went up by 2.6 percent from a year earlier in April and May, near the slowest pace in 13 months.  The Central Bank expects inflation to remain within its three to five percent target range until 2015.

The Central earlier said the issuance of the inflation-linked bonds would be a wise move as it would allow the government to pre-fund a 2014 foreign borrowing program of $1 billion.

First Metro Investment Corp. (FMIC), a member of the Metrobank Group, had submitted an unsolicited proposal for the sale of inflation-linked bonds.

If the plan materializes, the Philippines will join South Korea, Japan and Thailand which have issued inflation-protected bonds.