ADB urges Philipines to boost municipal bond issuance

MANILA, Philippines — The Asian Development Bank (ADB) is pushing for greater issuance of municipal bonds in the Philippines and three other countries in Asia to expand financing options.

In its working paper titled “Mobilizing Resources through Municipal Bonds: Experiences from Developed and Developing Countries,” the multilateral lender provided recommendations to promote greater issuance and acceptance of municipal bonds in the Philippines, India, Indonesia and Vietnam.

These four countries have sizable infrastructure requirements, adequate legal and regulatory framework for issuing and servicing municipal bonds, developing bond market infrastructure, as well as stock exchanges for listing and trading of bonds.

According to the ADB, India, the Philippines and Vietnam have a limited history for municipal bond issuance.

Indonesia has been promoting their issuance, but has yet to see results.

“While it is unlikely that any of the target Asian DMCs (developing member countries) will develop an active municipal bond market, an enhanced role for municipal bonds is envisaged in all four countries,” the ADB said.

In the Philippines, the ADB said there is no reason for a local government unit (LGU) to go to the bond market under the current setup since it can borrow from state-run banks at a rate that is close to the government’s cost of capital.

Approximately 91 percent of LGU loans come from government financial institutions (GFIs) such as Land Bank of the Philippines and the Development Bank of the Philippines, as well as through direct government lending through the Municipal Development Fund Office.

As such, the ADB said it could work with the Department of Finance and with GFIs to limit the percentage of the debt that state-run banks can provide relative to the approved borrowing authority of an LGU.

If GFI lending was limited to 30 percent of a total borrowing, the multilateral lender said LGUs would then be incentivized to tap the bond market or go to the commercial banks for the remainder.

“This would allow for LGUs to benefit from a lower blended average cost of capital (a blend of bond market rates and GFI rates), while also diversifying the domestic bond market,” the ADB said.

ADB also recommended that government-generated data on LGUs be made available online to bond market participants.

“This would socialize the bond market to municipal finance issues and debt issuance plans, providing a forward calendar of potential project borrowing,” the ADB said.