Debt prepayments hit $1.45 B in 1st half

Lawrence Agcaoili (The Philippine Star) - August 20, 2018 - 12:00am

MANILA, Philippines — Philippine borrowers–both the national government and the private sector — continued to prepay their foreign obligations resulting in the further weakening of the peso against the dollar, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Debt prepayments amounted to $1.45 billion in the first six months. The national government accounted for 67 percent or $975.3 million of the total prepayments in the first semester, while private corporations cornered the remaining 33 percent or $472.6 million.

BSP Deputy Governor Diwa Guinigundo said during the briefing of the 2019 proposed national budget by the Development Budget Coordination Committee (DBCC) to the Senate Committee on Finance both the public and private sectors prepaid almost $4 billion worth of foreign obligations.

Private corporations cornered the bulk or 70 percent, or $2.74 billion of the total debt prepayments last year, while the government accounted for the remaining 30 percent or $1.17 billion.

“Market tendency of some corporates to even prepay their external debt obligations is adding to the higher demand for foreign exchange which in time will lead to some depreciation of the peso against the dollar,” Guinigundo said.

The frontloading of debt payments is a continuing process for the national government and the private sector.

Both the government and private companies may choose to prepay their foreign currency obligations depending on the exchange rate as well as ahead of the series of rate hikes by the US Federal Reserve.

The national government and private corporations started prepaying their foreign debt after the Philippines settled its obligations to the International Monetary Fund (IMF) in 2005.

However, higher debt prepayments have contributed to the depreciation of the peso against the dollar.

The peso has emerged as one of the weakest performing currency in the region as it breached the 53 to $1 level to hit a fresh 12-year high due the volatile financial market amid the normalization path taken by the US Fed as well as the higher trade and current account (CA) deficits.

Inflation leapt to a fresh five-year high of 5.7 percent in July from 5.6 percent in June due to higher oil and food prices, weak peso, and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

The consumer price index (CPI) averaged 4.5 percent in the first seven months, exceeding the BSP target of two to four percent. Based on the latest assessment of the BSP, it now sees inflation averaging 4.9 percent this year and 3.7 percent next year. Inflation is seen hitting 3.2 percent in 2020.

The BSP has so far raised interest rates by 100 basis points and has left the door open for further tightening as inflation in seen peaking either in August or September before easing starting the fourth quarter.

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