The Department of Finance (DoF) has already directed the Bureau of the Treasury (BTr) in a memorandum released last week, to convert existing local bonds for longer-dated issues.

The first exchange was in 2006 and the last one was conducted February 2007.

For this year, the BTr is planning to exchange 5-year benchmark bonds to 10-year and 20-year government securities.

Debt swaps are done to improve the liquidity of the domestic bond market and to encourage investments in peso-denominated securities.

By conducting an exchange now, the government will be able to create new bonds due 2014 for the 5-year bonds.

In previous bond exchange schemes, the BTr targeted both the 3-year and 5-year tenors, which have minimum issue size of P30 billion for the 3-year bonds and P20 billion for the 5-year bonds. The 3year and 5-year maturities are considered key reference points to ensure suitable and credible benchmarks for corporate issuances.

BTr officials will conduct consultation with the market to determine the volume of government securities to be exchanged.

Prepayment and debt swaps/exchanges are part of the government’s debt management strategy to reduce its dependence on foreign borrowings and to cut the costs of external debt service.

Finance Secretary Margarito B. Teves said the DoF is always reviewing debt swaps and other prepayments to reduce national debt to below 40 percent by 2010.

As of end-December National Government debt totaled P3.71 trillion, 3.6 percent lower than 2006’s. As a ratio to GDP, total debt also declined from 64 percent of GDP in 2006 to 56 percent of GDP in 2007.

Last year the government offered to exchange its existing global bonds of various maturities aggregating $ 11.83 billion.

Under the offer, debts worth $ 9.14 billion due in various years between 2007 and 2019 would be exchanged for debt, which will mature only in 2024. Similarly, $ 2.69 billion of debt due in 2024 and 2025 would be swapped for bonds maturing in 2031, giving the government more fiscal flexibility.

The country’s sovereign credit is still below investment grade, which means Philippine bonds are speculative buys.

For example, credit rating agency Moody’s ratings for both long-term and short-term ROPs is "B1" while Fitch has a "BB" rating for foreign currency and a "BB+" for local currency issues. In the meantime Standard & Poor’s credit score is "BB" for foreign currency and BB+ on peso bonds. Moody’s, S&P and Fitch Ratings each attached a "stable" outlook on RP credit.