The central bank has asked the Department of Finance to revise its proposed $1 billion peso-denominated bond offer since pricing was still off and the bond float’s impact on foreign exchange liquidity has to be clarified.

Also, the DoF was planning to use P31.8 billion of the P45-billion or equivalent to $1 billion proceeds from the peso bond offer to plug the deficit, but the Bangko Sentral ng Pilipinas (BSP) wanted more details on how it would use the balance of P13.2 billion.

Of the three DoF fund-raising proposals this month, the Monetary Board only approved its bond exchange of up to $6 billion last week, but postponed an approval-in-principle for the peso bonds because there were issues that needed to be discussed thoroughly.

For example, according to documents, the BSP was worried that the proposed pricing for the Global Peso Bonds were not in lined with yields of government securities. The analysis was that the seven-year bonds might be priced “too cheaply” as indicated in the proposals and the effect of this was likely to increase government securities yields.

Based on the proposals, the coupon for the bonds would likely be from 6.1769 percent to 6.6964 percent against the 7-year PDST-F rate of 7.1269 percent less 95 basis points discount, and 10-year PDST-F rate of 7.6096 percent less 12 percent discount.

In the meantime the central bank said the peso bonds’ impact on the foreign exchange volatility was expected to be manageable. The BSP said FX volatility may ensue if residents would be allowed to buy FX or US dollars from the local banks and FX dealers to purchase the local currency bonds. Offshore investors, on the other hand, would likely influence the fixing rates used in determining the exchange rate in their favor by engaging in transactions such as non-deliverable forwards.

The central bank has asked the DOF to explain further how the peso bonds would "help deepen the local currency market" and to make sure the undertaking would be tax exempt. The Global Peso Bonds, while peso-denominated, would be settled in US dollars.

The Monetary Board has initially given the DoF authority to solicit/request for proposals from arrangers, advisors and underwriters but it has not yet granted an approval in principle for the planned peso bond offering.