Goodbye, Mr. Bond

By Dean dela Paz

It was one of the most often repeated lines uttered by mad megalomaniacs and villains in the James Bond franchise. For some reason, it is strangely appropriate to the Filipino condition under a new government yet to show any inclusive improvement in tackling one of the most severe economic crises created as a result of failed responses to a global calamity and a series of serious economic mismanagement blunders both past and present.

Note our vital signs as we subject ourselves to terminal palliative care. Total outstanding debt at the start of the second quarter was over P12.76 trillion. This is presumably higher now with increased borrowings, the imposition of higher interest rates and the falling value of the peso since April 2022.

Where one-third of our outstanding debt was borrowed externally, given the deep fall of the peso where it now trades at P55.78 to the U.S. dollar, the net negative impact on debt is now north of P31.50 billion. The failure to prop the peso has buried us deeper in a debt sink hole by that unfortunate amount.

As for key policy rates, those benchmark costs of money applied when banks borrow from each other overnight, since the first quarter these have cycled up several times where the total aggregated bloating is now painfully at 1.25% over what it had started out to be. For debtors and bond issuers, an increase of a hundred basis points is excruciatingly painful, enough to negatively alter a viable albeit vulnerable balance sheet.

Inflicted within weeks of each other, the increasing indebtedness from the simple act of increasing interest rates is an added affliction struggling businesses can ill-afford. To worsen matters, ironically, we increased our costs of money faster than did the Americans whose economy typically sets the bellwether gauge for our rate hikes.

Should the complexity of the macroeconomics in the foregoing be unrelatable to the public, allow us to simplify and show its cumulative impact to those queuing in the unemployment and underemployment lines.

Forget the economic calculus and quantification. Look simply at the empirical evidence. Allow us to include those lined up in terminals waiting for an adequate number of public utility jeeps and buses given the prohibitive costs of diesel. Include afflicted families who have resorted to watering down a pack of instant noodles so that single-serve packs might feed a family of five.

The foregoing public, already vulnerable and victimized by past incompetent governance, are several times over negatively impacted when, due to the high costs of indebtedness, businesses, and manufacturing slow down, manpower is streamlined, and the prices of goods and services inflate to compensate for diminished revenues.

Unfortunately, in bidding bonds farewell as a source of capital for corporate expansion, we are not referring to the threatened fate of Ian Fleming’s fictional British secret agent. We are talking about victims of implicit economic mismanagement closer to reality. A reality that includes resurgent crony capitalism and behest benefits on a hilly playing field.

We are talking about the aborted plans and funding programs of quite a number of corporate bond issuers needing debt capital and planning to issue debt papers given the substantial challenges in capital appreciation with increases in key policy rates sucking up investible funds from the lower priced capital markets.

Corporate bonds are typically priced using the appropriate treasury bill rates, where the five-year or ten-year tenors, plus prevailing key policy rates are used to value its price. The latter has however increased so aggressively that they ballooned beyond a hundred-basis points even before the United States Federal Reserve (the Fed) had increased theirs where in the past our interest rate movements tailgated.

Compressed within a couple of weeks, the net effect is an astronomical increase on the liabilities side of corporate balance sheets for those who have already issued bonds. For those who have not, expansion and development are either backburnered, placed on hold, funded either by equity though relatively volatile capital markets or are totally dead in the water.

Many now mull the wisdom of issuing bonds while some simply say goodbye to bonds as principal forms of funding where bloated rates threaten corporate viabilities even as they benefit institutional investors and creditors. As for the consuming public, their interests remain collateral and their welfare only incidental to the equation.

Discern these limited menus of alternatives for capital funding. These neither instill confidence nor comfort, nor do they form the formula for the kind of growth our newly appointed economic brainiacs ballyhoo.

By year-end, even higher rates are threatened. Fortunately, perhaps hopefully, as the final end-credits roll, the last words will be, “Bond will return”.

(Dean dela Paz is a former investment banker and a managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance and Mathematics professor)