THE government should pursue a fourth tranche of foreign commercial borrowing in the near future to plug its budget deficit and raise ample funds for the post-typhoon reconstruction.
Last Tuesday’s rejection of bids for seven-year Treasury bonds shows that local banks and insurance firms are not about to cut the government some slack despite its fiscal blowout.

The Bureau of Treasury was supposed to raise P6.5 billion from the sale of the IOUs, but investors were willing to buy only as much as P3.48 billion.

Had the auction committee made a full award, the debt papers would have fetched an average rate of 7.376 percent, or 1.126 basis points higher than the 6.250 percent quoted previously.

The seven-year debt instrument was last quoted at 7.1436 percent in the secondary market.

Had the government allowed domestic rates to rise, then it would have boxed out the private sector from the credit market. This in turn would have risked jeopardizing the Philippines’ slow recovery from the global crisis.

Investors’ high bids for the seven-year IOUs were owed to skittishness arising from the government’s likely failure to rein in its budget deficit this year.

On Wednesday, the government announced that it already breached its full-year fiscal ceiling at end-October. The budget gap widened to P266.1 billion in the first 10 months this year, or well beyond the P250 billion full-year ceiling.

As a result, the Department of Finance admitted that it was entertaining a worst-case scenario of a P300-billion deficit this year, even as it hopes to keep the revenue shortfall to P280 billion.

Poor revenues largely to blame

Poor revenues were largely to blame for the fiscal blowout. Collections at end-October slipped 4.8 percent to P925.4 billion from last year’s P972.6 billion.

The Bureau of Internal Revenue (BIR), which contributes more than 75 percent of government revenues, raised a mere P612 billion, or 5.1 percent lower than last year’s P644.8 billion.

Meanwhile, expenditures for the 10-month period—excluding interest payments—rose 15.1 percent to P1.2 trillion from last year’s P1.03 trillion.

Lower interest rates—courtesy of the Bangko Sentral ng Pilipinas’ monetary easing up from December last year until July this year—were responsible for the slight reduction in the government’s interest payments
Besides the economic slowdown, the BIR has been blaming its collection shortfall on Republic Act 9504, which raised both the individual taxpayer’s personal exemptions and the deductions for dependents. Also adding to the bureau’s woes is the reduction in the corporate income tax rate to 30 percent from 35 percent, as prescribed by the Expanded Value-Added Tax Law.

We cannot argue with the global financial crisis, which caused the current economic slowdown. R.A. 9504 is meant to mitigate the impact of the weak global economy on households, while the cut in the corporate tax rate is a concession the government extended to the business community after it agreed to the hike to 35 percent in the first place.

Pass prioritytax measures

Unfortunately, Congress has yet to pass three priority tax measures, namely the Sin Tax Reform Act, the Rationalization of Fiscal Incentives, and the Simplified Net Income Tax System. All three measures are supposed to plug some loopholes in the country’s tax system.

Given the above, the government has no other recourse but to seek funds from abroad. It has already raised $3.25 billion from three transactions this year involving the sale of global bonds.
A plan to float Samurai bonds had stalled, as Japan is not yet prepared to accommodate the Philippines’ request for parity.

Manila has been asking Tokyo for a guarantee on the yen-denominated offering that would make the financing structure comparable to the earlier ROP (Republic of the Philippines debt paper) issuances, but nothing has come out of it.

Any additional global bond issuance should be done, as the DOF said, opportunistically, and we leave our national treasurer to executive to determine the timing.