Gov’t’s ‘defense bonds’ sale hits budgetary snag
The government’s planned sale of defense bonds is facing budgetary hurdles, which officials want to sort out immediately so that the government can finally decide on the timing of the debt issuance.
In a message to the Inquirer, Finance Secretary Ralph Recto said he would meet “soon” with officials of the Department of National Defense (DND) to tackle the budgetary requirements of the defense bonds, which would be the first of its kind in the country.
Eduardo Francisco, president of BDO Capital, said in a separate interview that there will be demand for such a debt issuance as long as it will be guaranteed by the government.
That means the DND’s yearly budget must include allocations dedicated for repaying creditors who will participate in the defense bond offering.
“There are issues that they (DND) have to fix first. They have to make sure that there are government allocations,” Francisco said.
“If there’s no budget allocation, they can’t go out [and sell the bonds],” he added.
Adviser
The BDO Capital chief added that the defense department wanted the payment terms to be “as long as possible.”
The investment banking unit of top lender BDO Unibank Inc. is advising the government on the planned fundraising activity, which could help bankroll the military’s modernization efforts.
That said, Francisco also warned about any increases in allocation that could bloat the DND’s budget to a level exceeding the funding for key sectors, such as education and health.
Under the 1987 Constitution, education must receive the “highest budgetary priority.”
“They could be criticized if the allocation for the DND would be bigger than the funding for health,” Francisco noted.
Asked about the potential timing of the debt sale, Recto said there is no clear timeline yet and “I cannot comment until I know exactly what they (DND) need.”
P300-billion target
The Armed Forces of the Philippines received P35 billion this year for its modernization program, as the government seeks to bolster the country’s defenses amid the ongoing sea row with China over the resource-rich West Philippine Sea, the part of the South China Sea within the country’s exclusive economic zone that Beijing claims nearly entirely.
The approved budget for the revised AFP Modernization Program, however, was P15 billion lower than the P50 billion initially proposed by President Marcos to Congress.
As the government grapples with generating enough revenues, Francisco said the DND may borrow up to P300 billion from the local capital market through the defense bonds.
But he said the timing of the defense bond sale is very crucial because the Marcos administration might also have a plan to raise P300 billion via the sale of retail treasury bonds (RTBs) this year.
Francisco said the two jumbo fundraising activities can have a four-month gap in between to avoid mopping up too much liquidity in the local financial system.
“The market will choke if we will have P300 billion in RTBs and P300 billion in defense bonds at the same time,” he said. “The market cannot take that.”
