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Wednesday, June 17, 2009

Citi: Philippines Macro View: Proposed Samurai Bond Issue as the Fiscal Gap Swells

                                    Philippines Macro View: Proposed     
                                    Samurai Bond Issue as the Fiscal Gap 

        Proposed JPY bond issuance of US$500mn - The planned Samurai   
        bond issuance of US$500mn with JBIC guarantee could ease       
        pressure on a local bond market that remains wary of higher     
        debt supply risk following the government's recent revision     
        of its FY09 fiscal deficit target to 3.2% of GDP (from the     
        previous 2.5%), and the likelihood of ratings action by         
        long-term credit rating agencies in view of a swelling fiscal   
        deficit. We anticipate less selling pressure on the             
        intermediate- to long-end in the near-term on the news.         
        Neutral to ROP and CDS spreads - We view that ROP spreads and   
        CDS spreads should not react negatively to the planned         
        Samurai bond issuance since it does not expand ROP supply.     
        With local banks having modest JPY deposits in their FCDU       
        books, we may see modest onshore demand for the planned JPY     
        bond issuance.                                                 
        Other key benefits/costs - The JBIC guarantee on the Samurai   
        bond issuance lowers the interest cost than otherwise would     
        have been obtained. It's not the maiden Philippine issue,       
        although the last Samurai bond issuance was in 2000, when the   
        government floated 55bn Yen (~US$325mn) of 5-year bonds with   
        a coupon rate of 3.2%. Increased Yen exposure in a weak         
        US$/Asia setting would be a disincentive from a liability       
        management point of view, but not a major one. Government       
        debt exposure to Yen-denominated foreign debt (arising from     
        ODA borrowings [US$8.76bn] and bonds [US$508mn]) was roughly   
        24% of total government foreign loans as of Feb-2009. Aside     
        from the relatively low interest cost with the guarantee, the   
        Japanese government's program lacked 'pre-conditionalities',   
        another interesting facet of the program, although we suspect   
        that having the IMF's 'seal of good housekeeping' under the     
        usual Fund's program policy monitoring would be still be       
        needed. The government may want to test investor appetite in   
        the Samurai bond market, while perhaps reserving a larger       
        Samurai bond float with JBIC's guarantee to fund next year's   
        budget program.                                                 
        Revise lower our fiscal deficit forecast to 4.5% of GDP from   
        2.5% previously - The combination of weak cyclical             
        environment and a tax to GDP ratio likely stalled in the       
        range of 12%-13%, could lead the fiscal deficit to balloon to   
        Php350bn or roughly 4.5% of GDP. At 12%, the low end of the     
        range, the fiscal gap could expand to more than Php400bn or     
        5.3% of GDP. We note the tax to GDP ratio trend (using         
        Hodrick-Prescott filter) stabilized at close to 14%, but the   
        first quarter actual estimate of the tax to GDP ratio (11.5%)   
        fell way below this estimate. Raising this ratio to the range   
        of 12%-13%, still below the tax ratio trend, and without       
        benefit of new revenue measures, would still be deemed a       
        sanguine fiscal scenario.                                       
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