Corporate bond demand seen healthy despite government shift in infrastructure financing

APPETITE for corporate bonds will likely be sustained even if the government takes on more debt to fund its massive infrastructure program, market participants said in recent interviews.

Philippine Dealing and Exchange Corp. Chairman and Chief Executive Officer Cesar B. Crisol said the pipeline of new corporate debt offers still looks robust despite the shift in the government’s infrastructure policy away from one that is anchored on public- private partnerships (PPP), which had been the case under the previous administration.

“There is sufficient liquidity in the market,” Mr. Crisol said.

“For a big portion of the government-initiated initiatives, you have government-to-government funding so that you don’t crowd out the private sector.”

State economic managers have said that infrastructure projects, estimated to cost P8.4 trillion in the next five years, will be financed by government appropriations — supported by trillion of pesos of expected additional revenue from up to five packages of tax reforms — overseas development assistance and PPP.

One concern: reduced revenue projections from the first tax reform package — which was watered down in the House of Representatives from the version the Finance department submitted to Congress in September last year — could mean the government will have to borrow more from the public to cover the shortfall, setting off a race for investors’ money that will jack up the cost of financing and investment for the private sector.

“If the Senate version continues to be watered down, then they ( government) might borrow more from the public,” Sun Life of Canada Philippines, Inc. Chief Investment Officer Michael Gerard D. Enriquez said.

“This might mean… higher rates in the medium term. We definitely welcome higher corporate bond rates as an investment vehicle in the medium term.”

ING Bank Senior Economist Jose Mario I. Cuyegkeng said the impact on local interest rates of the government’s infrastructure policy will be “more moderate” since it has a menu of financing options including foreign- denominated borrowings.

“Domestic borrowing is likely to be higher than program, but the increment is unlikely to bring interest rates to prohibitive levels,” Mr. Cuyegkeng said.

Sun Life’s Mr. Enriquez said corporate bonds will always offer a spread over government debt that will continue to draw investors.

“Given there’s still quite a lot of liquidity in the market, the appetite for corporate bonds will probably be only slightly affected, if at all. Of course, a lot also depends on pricing,” said RCBC Capital Corp. President Jose Luis F. Gomez.

BDO Capital & Investment Corp. President Eduardo V. Francisco said companies are lining up to raise funds in anticipation of the government’s infrastructure program that will provide the private sector more opportunities for expansion.

“As government undertakes the projects themselves, however, the capital-raising requirement of the corporates seeking to invest in infrastructure may be lessened. The ‘ build, build, build’ strategy, however, will spur further economic activity and expansion for the conglomerates,” First Metro Investment Corp. Executive Vice-President Justino Juan R. Ocampo said, referring to the catch phrase of the government’s P8-trillion infrastructure drive.

Ayala Land, Inc. (ALI) which has a balance of P18 billion in shelf registration and one of the most active bond issuers, will continue to tap the debt capital market to bankroll capital expenditures.

“Fixed- income investors continue to look for investment outlets and the appetite for both local corporate and government debt should remain healthy,” ALI Chief Finance Officer Augusto D. Bengzon said.

Budget Secretary Benjamin E. Diokno has said that the administration of President Rodrigo R. Duterte will cap annual budget deficit at three percent of gross domestic product ( GDP) — a ceiling designed to make room for increased public spending on infrastructure and social services.

For 2017 the government set a P3.35-trillion budget, earmarking P860.653 billion for infrastructure spending, equivalent to 5.4% of GDP, against the P756.441 billion programmed in 2016.

Until the end of its term in 2022, the administration is looking to jack up infrastructure spending to an equivalent of 7.1% of GDP, as it aims to spur the economy to grow 7-8% annually starting 2018, from 6.5-7.5% this year.

ING’s Mr. Cuyegkeng said the government has some headroom for additional borrowing to fund infrastructure spending, noting a few years of fiscal deficits that are above three percent of GDP could be acceptable to the market and credit rating agencies for as long as spending is for expansion of the economy’s capacity.

The government debt-to- GDP ratio dropped to 42% in 2016 — the lowest level since 1996 — on the back of prudent fiscal spending, debt liability management and improved tax collections under previous administrations.

“But a chronically high deficit ratio without government measures to eventually cut this to more acceptable levels of three percent or less would be a cause for concern,” Mr. Cuyegkeng said.