19 February 1988
Reuters News
(c) 1988 Reuters Limited
English 

MANILA, Feb 19 – The Philippines plans to speed up its sluggish debt/equity swap program, Central Bank Governor Jose Fernandez said. 

“Our policy is to get rid of the large backlog,” he told a news conference. “We think the people who have applied deserve to be told what can be done. Those swaps that are good for the country we want to see happen quickly.” 

In order to speed up the program, investors using private-sector debt paper would not be charged transaction fees by the Central Bank, he said. 

Fernandez said private-sector debt paper was more difficult to track than Central Bank or public-sector debt but did not require Central Bank approval. 

Deputy Governor Gabriel Singson said investments made through private-sector debt swaps did not carry remittance or repatriation privileges. 

Under the debt/equity program, an investor cannot repatriate his investment for at least three years, after which he is allowed to repatriate funds in five annual instalments. 

Fernandez said there had been a sudden surge in the number of debt/equity applications in the last quarter of 1987. 

“The most important element has been the autonomous decisions of large (creditor) banks to provide reserves on their exposures and that had a steamrolling effect on (debt paper) discounts,” he said. 

As discounts widened, debt/equity swaps became increasingly attractive, Fernandez said. 

He said the Central Bank had received a total of 319 applications worth 1.49 billion dollars between August 1986, when the program was launched, and December 31, 1987. 

Fernandez said 135 applications valued at 456 million dollars have been approved by the Monetary Board but the swap has actually taken place in only 92 cases, worth 280 million dollars. 

He said another 154 applications worth 556 million dollars were pending with the Monetary Board, while 15 applications worth 214 million dollars had been rejected. 

The slow pace of debt/equity approvals was criticised sharply last week by David SyCip, head of the government’s Asset Privatisation Trust, who said acquisitions of non-performing assets from the trust had been held up by delays in debt/equity approvals that often ran into months. 

In October the Central Bank revised its debt/equity program as discounts on the secondary market debt deepened. 

It abolished a flat fee of five pct imposed on the peso proceeds of conversions and said investors would be encouraged to bring in new money with a system of graded fees ranging from 20 pct for investments with no foreign-exchange components to 6.7 pct if 40 pct of the investment was in foreign exchange. No fees were charged  if half the investment was in foreign exchange. 

Fernandez said the Central Bank could not help being cautious in vetting debt/equity swaps. 

Central Bank debt paper was the most easily convertible because the bank could easily come up with pesos to fund the conversions, Fernandez said. 

“(But) we consider (Central Bank debt)…in a sense the most dangerous for the country, because it involves monetization of debt by the Central Bank,” he said. 

“When we monetise Central Bank debt, we create money,” he said. “Instead of having a long-term liability on the bank’s balance sheet, we have currency and bank deposits, so you have converted a long-term obligation into a very short-term readily usable and spendable obligation.” 

Fernandez said there was a limit to such swaps because the Philippines was bound by agreements on monetary aggregates like money supply with the International Monetary fund. 

He said public-sector debt conversions in which state-owned firms used their own peso resources to redeem debt were less dangerous but also had to be monitored closely. 

“Their debt too, being public sector, has long maturities of 17 years (under current debt rescheduling agreements),” he said. “So when they begin to use short-term resources to pay off long-term debt …somewhere along the line there’s going to be a crunch.”