PH locks in $11-B World Bank loans; saves $125 M
At A Glance
- The Philippine government has successfully locked in the majority of its outstanding loans with the World Bank, resulting in substantial savings in taxpayers' money, as announced by the Department of Finance (DOF).<br> The Bureau of the Treasury has converted the reference rate on $11.13 billion of its loans from floating to fixed with the World Bank - International Bank for Reconstruction and Development (WB-IBRD), potentially generating significant foreign interest payment savings for the government and reducing exposure to global interest rate escalations.<br>The conversion to a fixed reference rate is expected to save the government as much as $125.1 million (approximately P6.88 billion) in foreign interest payments in the coming year, while also safeguarding the government's financial stability.<br>The decision to switch to a fixed reference rate is timely, given the significant increase in the Secured Overnight Refinancing Rate (SOFR), from 0.05 percent at the beginning of 2022 to 5.35 percent at the end of October 2023, contributing to a 20 percent year-on-year growth in the government's interest payments.<br>By leveraging the inversion in the interest rate swap market, the DOF has successfully lowered its borrowing costs, achieving an average fixed reference rate of 4.19 percent for the 40 IBRD loans converted, substantially lower than the prevailing SOFR.<br>Approximately 91 percent of the $12.24 billion (about P681.66 billion) WB-IBRD loan portfolio of the National Government is now on fixed reference rates, effectively eliminating the risk of absorbing significant additional foreign interest payments due to fluctuations in the SOFR.
The Philippine government has successfully locked in almost all of its existing loans with the World Bank, leading to savings of millions of dollars in taxpayer money, the Department of Finance (DOF) has announced.
Finance Secretary Benjamin E. Diokno said the Bureau of the Treasury has successfully converted the reference rate from floating to fixed on $11.13 billion of its outstanding loans with the World Bank - International Bank for Reconstruction and Development (WB-IBRD).
A floating reference rate means that the interest on loans can change over time based on the economy or finances. In contrast, a fixed reference rate means that the interest rate stays the same for the entire loan period.
Diokno said this change could save the government up to $125.1 million, or about P6.88 billion, in foreign interest payments next year.
He added that it will also help protect the government from potential increases in global interest rates, providing long-term benefits by lowering the risk of higher debt payments.
Due to the consistently high Secured Overnight Refinancing Rate (SOFR), which is the main interest rate used in US dollar-based floating rate loan contracts, the DOF decided to switch to a fixed reference rate.
The SOFR increased significantly from 0.05 percent at the start of 2022 to 5.35 percent by the end of October 2023, leading to a 20 percent year-on-year growth in the government's interest payments for the first 10 months of 2023.
Switching to a fixed reference rate enabled the DOF to benefit from the unusual situation in the interest rate swap market, resulting in lower borrowing costs, Diokno said.
The conversion, carried out last Nov. 14 to 21 achieved an average fixed reference rate of 4.19 percent for the 40 IBRD loans that were switched, which is considerably lower than the prevailing SOFR.
As a result of the conversions, approximately 91 percent of the national government's $12.24 billion WB-IBRD loan portfolio is now on fixed reference rates, eliminating the risk of incurring an additional $111 million in foreign interest payments for every one percentage point increase in the SOFR.
Diokno said this program demonstrates the DOF’s effort to consistently implement responsible and sustainable strategies in government borrowing activities.
This ensures the maintenance of a strong fiscal position while making substantial investments in social services and infrastructure projects to support ongoing recovery and drive long-term development, he added.
“The Marcos, Jr. administration will stay true to the path of fiscal consolidation through our Medium-Term Fiscal Framewors,” Diokno said.
“Our debt-to-GDP [gross domestic product] ratio as of end-September 2023 stood at 60.2 percent, which is below the full-year MTFF target of 61.2 percent. This indicates that we are on track to achieving our targets,” he added.
The MTFF aims to bring down the country’s debt-to-GDP ratio to less than 60 percent by 2025, and cut the deficit-to-GDP ratio from the current 6.5 percent to 3.0 percent by 2028.