The Marcos administration raised $2 billion in total in the foreign commercial bond market for the Philippines, marking its debut. It is stated that the current Marcos administration scored in its first official attempt of making a mark in the global bond market, this is a move that is done despite the continuous pressures that increases borrowing costs.
The DOF or the Department of Finance stated that the transaction is anticipated to be settled on October 13, 2022. The $2 billion dollar bonds for the Philippines, or roughly around 117 billion in Philippine currency, according to the National Treasurer Rosalia de Leon, will be utilized by the administration as financing for the general government and for state projects and programs.
What is ESG in Bond Investing?
The bonds that the Philippines offered are five-year global bonds and a 10.5-year global bond with a 25-year for Environmental, Social, and Governance bonds or the ESG. The ESG is a set of standards used in screening possible investors.
1. E – Environmental Criteria
The environmental criteria of the ESG focuses on how a party ensures the safety of the environment. This includes the policies and programs that address the current issues of climate change and the environment in general, as well as the timely solutions for them.
2. S – Social Criteria
The social criteria of the ESG focuses on the relationship of an administration to its subordinates, to its employees, clients, and communities which it administers.
3. G – Governance Criteria
The governance criteria of the ESG focuses more on the quality of leadership of the administration, including internal controls and shareholder rights. Investing on ESG is often referred to as sustainable and responsible investing.
The $2 billion bonds for the Philippines will have a final pricing level listed below:
- 500 million dollars five-year at 5.17 percent / five-year US Treasury spread +120 basis points.
- 700 million dollars 10.5-year at 5.609 percent / 10-year US Treasury spread +185 basis points.
- 75- million dollars 25-year ESG at 6.10 percent.
In relation to its effects on the economy of the Philippines, this decision of making a mark in the international debt market is a way of introducing new funding sources for the country. This includes the overseas, for as long as the value of Peso continues to be relatively stable. In short, the $2 billion bond is expected to help boost the economy of the Philippines despite the country experiencing some tense conditions, especially now that the pandemic is only starting to slow down.
How will this $ 2 billion bond affect the Philippine economy?
The $2 billion bond that was secured by the Marcos administration is planned to be a source for general government funding and to aid with the projects and programs of the government. In simpler words, bonds are loans or debts of the investors to their borrowers.
Due to its recent acquisition and announcement, it is too early to see the impact of these bonds on the country’s economy. But early statements and predictions were already out, which are polarized. The multi-tranche bond received a Baa2 rating from Moody’s which falls under the rating of “senior unsecured”. The Baa2 rating suggests that this bond offering is subjected to moderate credit risk. It would be considered as a medium-grade and could potentially have speculative characteristics. Credit ratings accompanied by thorough research serve as a guide and give insights to investors for them to fully analyze the credit risks associated with this type of agreement.
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With the addition of this newly announced $2 billion worth of bonds for the Philippines, the total offshore loans of the Philippines are now at an estimated 4 trillion in Philippine currency. With this, the national debt stock may have increased from the previously estimated amount of 13 trillion pesos.
As the country currently has an inflation rate of 6.9 percent in September of this year, which is higher compared to the inflation rate of 6.3 percent of the Philippines in August 2022. Although a lot of individuals are reassured that this decision will have a positive impact on the Philippine economy, the “moderate credit risk” rating that it got is slightly deterring. See this as something like throwing another slipper to dislodge a slipper stuck on a tree branch, it’s a risk you might take in order to, hopefully, get positive results. You might get your slipper back or you might end up getting both of them stuck on the tree branch. This is further explained by National Treasurer Rosalia de Leon stating that “the success of this transaction is an indication of the Philippines’ readiness to brave choppy waters in pursuit of excellent results.”
It’s a decision indeed that spawned a lot of opinions and think pieces on the internet and in official statements.
The new bonds will be an addition to the national government’s debt stock. Some people have said that this move is an interesting choice since it is not an obvious or expected decision when a country is having inflation. As the bonds will be used to fund the government’s project, from what is planned, it generates questions, about whether it would produce great and surprising results or not.
In relation to this news, let’s look at the state of the economy of the Philippines today. According to several sources, the Philippine economy is expected to slowly improve this year, rising from the paralyzing pandemic and other obstacles.
What’s an indication of a good economy?
Since we’re on the topic, let’s discuss the indications of a good economy, not only of the Philippines, but in general.
The first indication of a good economy of a country is having strong employment numbers. An increase in the GDP or the Gross Domestic Product means that there is a huge number or increase in consumer spending. An increase in the number if products being produced at a time is also a factor that influences the increase of the Gross Domestic Product. Another indication is for a country to have a stable inflation rate, which is around 2 to 3 percent, and it should be consistent. A higher inflation rate means that the consumers will have less income to spend on essentials as the primary effect of a high inflation rate is a great increase in the cost of living. Meanwhile, a lower inflation rate is an indication of a weak economy as well.
Another indication of a good economy is the increase in real estate sales since real estate is a large contributor to a large portion of the economy. Other indications include wage growth, an increase in retail sales, and higher industrial production. In summary, you know that a country is experiencing a good economy when the people are earning enough disposable income to afford the basic things in life with product prices not going extremely high and the value of money is at its state of stability.
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Hopefully, the $2 billion worth of bonds that the Marcos administration acquired, which are planned to shape a better country by funding government programs, would spawn positive.
The numbers are often confusing and exhausting to look at. But if you’re still wondering about the state of the economy of the Philippines, good indications are the prices of goods from your local public market.
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