The Philippines is prepared to reject investors’ demands to purchase local-currency debt at higher interest rates as it seeks to raise funds to finance a widening budget deficit, said Deputy Treasurer Eduardo Mendiola.

The Bureau of the Treasury “won’t hesitate to reject unreasonable bids in the future,” Mendiola said in an interview in Manila Friday. “There’s so much liquidity. In fact they’re drowning in it because banks aren’t lending. There’s no reason why the government should be paying a premium.”

The government on Oct. 6 rejected all bids in a sale of P6.5 billion ($139 million) of seven-year debt to prevent yields from climbing to 7.482 percent, the highest rate paid on the notes since May 2008. Last month it sold similar maturity securities targeted at retail investors at 7 percent.

The Philippines may exceed its initial P250 billion budget-deficit goal for this year by P10 billion as it spends on relief efforts and rebuilding following deadly storms that ravaged the country, Budget Secretary Rolando Andaya said on Oct. 1. Finance Secretary Gary Teves said Friday the government may have to borrow more.

The yield on the 6.25 percent note due January 2014 fell one basis point to 6.16 percent as of 3:04 p.m. in Manila, according to ICAP Plc. Yields dropped 24 basis points, or 0.24 percentage point, in the past four days.
Sourcing Funds

The additional P10 billion “can easily be sourced,” Mendiola said, without providing details. The Philippines sold a record P114 billion of retail bonds in September and plans to reduce this quarter’s domestic borrowing, Treasurer Roberto Tan said on Sept. 23.

The worst Philippine flooding in at least 40 years and a typhoon caused more than P11 billion of damage to infrastructure and farm output in the past two weeks and left more than 300 people dead, according to the government. The budget shortfall reached P210 billion in the first eight months of the year.