Funding the Republic Towards Sound PFM System :

A Mission of the Bureau of the Treasury

CHRISTINE LACSON-SANCHEZDeputy Treasurer of the Philippines

April 5, 2013

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What is the Mission of the BTr ?

Mission Statement

To efficiently and effectively manage the financial resources of the government by maximizing revenues from available funds and minimizing costs of financing whenever possible.

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What is the Vision of the BTr ?

Vision Statement

To be a pro-active manager of the public funds characterized by active duration management, minimization of interest rate risks and hedging of financial risks.

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What does the BTr do?

Contributes to the formulation of fiscal policies particularly on borrowing, investment and capital market development

Prepares the domestic financing program of the National Government

Manages the cash resources of government

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What does the BTr do?

Report to the public through the media on a regular basis the results of the Cash Operations Report (COR) of the National Government as well as on the National Government debt.

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Milestones . . . . . . .

18971897 –The Filipino nation had its first National Treasurer in the person of Baldomero Aguinaldo.

19001900 – The Philippine Commission headed by William Taft created the Bureau of Insular Treasury task to receive and disburse public funds and account for the same. It also began the supervision of the country’s banks.

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Milestones . . . . . . .

1901 – The Bureau of Insular Treasury was placed under executive control of the Department of Finance and Justice by Section 3 of Act Number 222.

1905 – The Bureau of Insular Treasury was renamed to Bureau of the Treasury by Act 1679 and given the additional task of coinage and currency supervision.

1929 – The Bureau of Banking assumed the supervision of the country’s banks from the Bureau of Treasury. The Bonding Law was passed as a provision of Admin Code of 1917.

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Milestones . . . . . . .

1949 – Republic Act 265 transferred the functions of coinage and currency printing from the Bureau of the Treasury to the newly organized Central Bank of the Philippines.

1965 –Bureau of the Treasury branches were opened throughout the country.

1971 – The Bureau of Treasury was reorganized into 3 major services – Financial and Admin, Cash Operations and Public Debt Management Services under RA 6130 (Integrated Rationalization Plan).

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Milestones . . . . . . .

1986 – Executive Order 127 reorganized the Bureau of the Treasury .

1993 – The Bureau accounted an P18 B surplus, ending two decades long of budgetary deficits.

1995 – The Bureau assumed the fiscal function, namely the issue, service and redemption of government securities as mandated by RA 7653 or the New Central Bank Act.

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Milestones . . . . . . .

1995 – The Bureau assumed the fiscal function, namely the issue, service and redemption of government securities as mandated by RA 7653 or the New Central Bank Act.

The Electronic Auction of the Philippine government securities was introduced, the first of its kind in Asia .

1996 - Issued 7and 10 year bonds, also, the first in Asia.

- Introduced the Registry of Scripless Securities (RoSS), an electronic system for official registration of scripless/uncertificated government securities from the time of origination to redemption.

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Milestones . . . . . . .

1998 – The Bureau launched the Small Investors Program (SIP) that allows the selling of government securities to small savers.

2003 – The Bureau capped the year with international awards from International Finance Review (IFR) Magazine’s Asia Awards for “being the largest retail bond in the local market and Asia’s largest retail-targeted bond ever”. These are : the Domestic Bond Deal of the Year and the Philippine Capital Markets Transaction of the Year awards.

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Milestones . . . . . . .

2010 – The Bureau embarked on the Financial Sector Stabilization Program (FSSP), a multi-year, multi-pronged but systematically linked program designed to address the weaknesses in the fiscal sector consisting of Cash and Asset-Liability Management System.

2012 – The Bureau completed the digitization of backpay records.

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Background | Why the Government Borrows?

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Background

To bridge the time mismatch between government revenues and expenditures

To finance relatively expensive but socially responsive programs which are essential to enhance the productive capacity of the country.

To spur economic activities when the private sector activities are constrained by weak economic conditions. (in times of crisis)

To set benchmarks for borrowings undertaken by the private sector. (especially the case for “surplus” countries like Qatar)

Why Governments borrow?

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Why our government borrows?

The government borrows because we simply do not have enough revenues to finance government operations, which include programs and projects that promote welfare and development.

This results in “Deficit Spending”

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Domestic BorrowingsDomestic Borrowings

Tax Revenues(i.e. VAT, Custom Duties)

Non-Tax Revenues(i.e. fees and charges,

BTr Income)

FINANCING SOURCES

Foreign BorrowingsForeign Borrowings

Internal Revenue Allotment (IRA)

Interest Payments

Agency Budgets

Capital Outlays

Personal Services/ Maintenance and

Operating Expenditures

Borrowing supports the budget requirements of the public sector.Borrowing supports the budget requirements of the public sector.Why our government borrows?

EX

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Rationale of deficit spending?

A Filipino Family

MONTHLY INCOME

Mother’s Part-time 2,000

Father’s Salary 13,000

Total Income 15,000

TYPICAL MONTHLY EXPENSES

Food 6,000

Housing 2,000

Transport 1,000

Light/Water 2,000

Education 3,000

Health 2,000

Total 18,000

Others 2,000

DEFICIT = 3,000 Company Loan

Family/Friends

SSS/GSIS/Bank Loan

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Rationale of deficit spending?

BorrowingsProductive Spending/ Economic and Social

InvestmentsIncreased Economic Activities and Jobs

Increased TaxesIncreased Ability to

RepayIncreased Fiscal

Space

Improved Social Outcomes (MDGs)

The money we borrow, when managed effectively, can be used to grow the economy, provide more jobs and upgrade our quality of life.

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2013 Budget Allocation by Sector

Social services34.8%

Economic services25.5%

Debt burden16.6%

General public service17.3%

Others5.8%

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GOVERNMENT DEBT | Where are we know?

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Debt level remains sustainable

Where we are now ?

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Declining Vulnerability to FX Risk

The share of foreign currency denominated debt to total National Government debt has been gradually declining over the years.

*includes MRTBs and ODB

*

Domestic / foreign borrowing mix effectively managed

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Managing the Debt Portfolio

Heavy Bias Towards Domestic Debt

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Ability to Service Debt

Revenues allocated to debt service have declined drastically

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Ability to Service Debt

More funds are being allocated to productive spending as share of interest payments over expenditures decline, even as deficit narrows.

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“The ratings and outlook are supported by

strong external finances, a track record

of macroeconomic stability, favorable

economic prospects, and falling public

debt ratios. The strength of the external

finances also suggests the capacity to

absorb a substantial external shock

”

“In addition to lower headline deficits, the

Philippine government’s debt profile has

improved: average tenors have

lengthened, while debt servicing costs

have decreased. The government is less

reliant on external financing than many

of its ratings peers

”

“Philippines’s fiscal flexibility is gradually

increasing, reflecting an improving

government debt profile and

moderating debt burden. We expect the

country will move into a slight net-external

creditor position this year

”

Credit ratings are moving in the right direction

Jul-0

0

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Jul-1

0

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S&P

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0

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Moody's

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Fitch

Baa3

Ba1

Ba2

Ba3

B1

B

B-

Fitch: Upgraded to BB+ (June 23, 2011)/Outlook: Stable

Fitch: Upgraded to BB+ (June 23, 2011)/Outlook: Stable

S&P: Upgraded to BB+ (July 4, 2012)/Outlook: Stable

S&P: Upgraded to BB+ (July 4, 2012)/Outlook: Stable

Moody’s: Upgraded to Ba2 (June 15, 2011)/Outlook: Positive (May 29, 2012)

Moody’s: Upgraded to Ba2 (June 15, 2011)/Outlook: Positive (May 29, 2012)

BBB-

BB+

BB

BB-

B+

B

B-

BBB-

BB+

BB

BB-

B+

B

B-

Source: Moody’s, S&P and Fitch.

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MOVING FORWARD | How do keep National Government Debt from ballooning?

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Ensuring debt sustainability

Government can sustain its ability to repay debt obligations without compromising spending for the people

NEED TO INCREASE FISCAL SPACE

Invest in social welfare and fund PNoy’s Social Contract

Honor and repay our debt obligations

Good Governance Fiscal Consolidation

Prudent Debt Management

FISCAL DISCIPLINETRANSPARENCY

AND ACCOUNTABILITY

PRIORITY

OBJECTIVE

MEASURES

PRINCIPLES

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Three pronged approach

Ensuring debt sustainability

Good-Governance

Fiscal Consolidation

Prudent Debt Management

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Good Governance

Key Reforms Instituted by the Administration

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Prudent fiscal controls coupled with intensified revenue collection efforts over the past year have laid the framework for efficient budgetary allocation in 2012

Tax reform measures including the hike in the Sin tax (alcohol and tobacco product taxes) and the proposed rationalization of fiscal incentives aim to further improve the fiscal position

Tighter prioritization of expenditures through the Zero Based Budgeting approach, improved composition of expenditures and quality of government services

Rigorous implementation of RATE, RATS, RIPS programs to go after evaders, smugglers, corrupt officials, respectively, have improved tax collection

Contracts and public tenders are now posted on public websites to instil transparency in the procurement process

Set-up BIR key performance indicators and publish actual results; establish appropriate performance standards and evaluations

Enacted the GOCC Governance Act of 2011 which lays the groundwork for enhanced discipline in GOCCs

Set up the Debt Management Office at the Department of Finance which is tasked to formulate and oversee the implementation of the Republic’s debt management strategy

3131

Fiscal Consolidation

Deficit Targeting (2% of GDP from 2014-2016)

Fiscal Discipline

- Tapping PPPs

Improve Tax Measures

- Rationalization of fiscal incentives

- Sin Tax Law

- RIPS, RATS, RATE

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Prudent Debt Management

Sound Issuance Policy

-financing mix

-innovative products/tight spreads

-locking-in low rates

-extending maturity

Liability Management Exercise

-redenomination

-buybacks

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BTr’s Role to Achieve a Sound PFM System

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Treasury Single Account (TSA)

The PFM Committee shall carry out all necessary activities for the completion and installation of the following PFM systems within the current administration:

b) A TSA that provides BTr a more effective way of cash management and rationalizing agency bank accounts, a more economical system for cash disbursements which will remove revenue and expenditure floats, and a more efficient reconciliation of bank balances.

Section 2 b) of Executive Order No. 55 states that….

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What is Cash Management ?

It is a strategy and associated processes for

managing cost-effectively the government’s

short-term cash flows and cash balances both

within government and between government and

others sectors.

Ensuring cash is available to meet commitments

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Benefits of Cash Management

Ensures obligations can be met as they fall due

Minimizes idle cash balance and associated costs

Contributes to the development of short term money markets

Reduces liquidity impact from budget deficits/surpluses

Separation of cash management and monetary policy

Enhances transparency of government flows

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Establishment of the TSA

Government overnight balances in the banking system should be zero

The Aim :

Intermediate Objective :

• Identify all NG bank accounts• Integrate them into single TSA• Remove collection floats and seed funds• Ensure that all NG cash flows pass thru TSA

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Steps Being Undertaken

• Strengthening of the Cash Programming and Monitoring Committee (CPMC)

Composition : DBM, DOF (BIR, BOC, BTr), BSP, NEDA Chairperson : BTr

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Steps Being Undertaken

• Constitution of working groups within the Bureau to expedite the development and implementation of the Treasury Single Account

- Treasury Accounts in Foreign Currencies & Dormant

Accounts

- Treasury Accounts in Pesos: Collection and

Disbursement Accounts

- Off-Budget Accounts and Bond Sinking Fund Analysis

- Government Agencies Accounts

- GOCCs Accounts

- IT Implementation Group

- Legal and Regulatory Analysis, Text Preparation

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Steps Being Undertaken

- Technical and Functional Analysis for Implementing TSA

- Relation between BSP and Treasury

- Relation between Treasury and the banking Sector

(Including GFIs), Collection Issue, Seed Fund

- Restructuring of the Treasury Organization

- Capacity Building in the Treasury

- Developing Investment Instruments and Modernizing

the Repo Market

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Thank you !