The Department of Finance said Friday the Bureau of the Treasury has converted to fixed interest rate from floating rate a total USD11.13 billion of the Philippines’ outstanding loans with the World Bank and its arm International Bank for Reconstruction and Development, a proactive step that could save the country USD125.1 million in interest expense in 2024.
A floating reference rate means the setting of interest on loans periodically adjusts based on economic or financial conditions. On the other hand, a fixed reference rate means the benchmark rate is unchanged throughout the entire term of the loan.
DOF said the step taken by the National Treasury will not only mean interest expense savings next year but will permanently lessen the exposure of government debt service to further escalation in global interest rates.
The sustained elevated level of the Secured Overnight Refinancing Rate—the primary reference rate used in USD-denominated floating rate loan contracts—prompted the interest fixing exercise.
The SOFR rose markedly from 0.05 percent at the beginning of 2022 to 5.35 percent at the end of October 2023, contributing largely to the 20 percent year-on-year growth in the government’s interest payments for the first 10 months of 2023.
Converting to a fixed reference rate will allow the government to take advantage of the inversion in the interest rate swap market to lower its borrowing cost.
The transaction, which was executed between the 14th to the 21st of November 2023, achieved an average fixed reference rate of 4.19 percent for the 40 IBRD loans converted, which is substantially lower than the prevailing SOFR.
With the conversions, around 91 percent of the USD12.24 billion WB-IBRD loan portfolio of the National Government are now on fixed reference rates, eliminating the risk of absorbing an additional USD111 million in foreign interest payments for every 1 percentage point increase in the SOFR.
“This development is a testament to the DOF’s strong commitment to continue exercising sustainable and prudent strategy in all of our borrowings to ensure that we maintain our solid fiscal position while investing heavily in social services and infrastructure projects to sustain recovery and propel long-term development,” Finance Secretary Benjamin E. Diokno said.
He said the move keeps the government on the path of fiscal consolidation through its Medium-Term Fiscal Framework that envisages the debt-to-gross domestic products 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.
At the end of September, debt-to-GDP 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,” Diokno said.
