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PH should tap municipal bonds to expand its financing options

August 22, 2023By BusinessWorld

Developing countries like the Philippines should promote the use of municipal bonds to expand and decentralize financing options, the Asian Development Bank (ADB) said.

“While it is unlikely that any of the target developing member countries will develop an active municipal bond market, with municipal bonds as a core investment in the portfolios of domestic institutional investors, it is feasible to envisage greater issuance within all four countries (India, Vietnam, the Philippines, and Indonesia),” the ADB said in a report.

The ADB said there is still a “very limited” history of municipal bond issuances in the Philippines.

It said decentralization remains a “work in progress” in the country.

“The Local Government Code provides an adequate legal framework for the activities of local government units (LGUs), including for the issuance and servicing of debt for infrastructure projects,” it said.

“Some regulatory issues, such as the possibility of annual appropriations risk for the payment of debt service, and the possibility under certain circumstances for an LGU to assign an intercept of shared tax revenues for the repayment of debt, require further clarification,” it added.

According to the ADB, LGU debt accounts for just 1.3% of outstanding public sector debt, indicating “low relative participation compared with the central government in the financing of infrastructure projects.”

Data from the multilateral lender showed the Philippine domestic bond market has around P10.427 trillion in capitalization.

“The Philippine domestic bond market is relatively small and shallow, but it is growing. The bond market is dominated by government bonds that constitute 82% of all bonds outstanding,” it said.

“Should municipalities return to the bond market, the Securities and Exchange Commission provides a robust regulatory framework for bonds, although this does not include guidelines for the issuance and listing of municipal bonds, as are present in some Asian developing member countries, such as India and Indonesia,” it added.

The report also included recommendations such as debt structuring, particularly in broadening municipal debt security, diversifying tenors, and creating pooled finance vehicles.

The multilateral lender also recommended the redirection of government-owned financial institution lending to municipalities.

“These recommendations pertain to redirecting the lending activities of government-owned financial institutions, which in many target DMCs dominate municipal finance because of their low cost of capital and strong relationships with the local government sector,” it added.

Institutional capacity building is also key to helping municipalities enter the bond market. It cited the promotion of municipal ratings, the production of independent financial audits, and benchmarking exercises, among other measures. — Luisa Maria Jacinta C. Jocson

This article originally appeared on bworldonline.com

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