THE Philippines is seriously considering proposals, like the issuance of a catastrophe bond (Cat bond), that could be included in the other insurance packages the Duterte administration is now exploring with Lloyd’s of London and the World Bank to cover state assets, the Department of Finance (DOF) said.
At the sidelines of the annual meetings of the World Bank and the International Monetary Fund (IMF) in Bali, Indonesia, the DOF pointed out that it is exploring a plan to sponsor a Cat bond to help cover disaster-related risks in the Philippines and a separate offer of peso-denominated securities to offshore investors.
Finance Secretary Carlos G. Dominguez III, with executives of Citi Group (Citi), discussed these proposals, along with a plan to come up with SDG bonds or securities linked to attaining the United Nations’ Sustainable Development Goals.
Citi Vice Chairman for Corporate and Investment Banking Jay Collins explained that under a Cat bond, the Philippine government will serve as sponsor, with the World Bank issuing the bond to qualified investors.
Depending on the insurance coverage and its trigger, the Philippines as sponsor of the Cat bond will get paid the principal contributed by investors if a catastrophe occurs. But if there is no trigger, then investors would make a positive return on their investment in the bonds.
Citi helped draw up the $1-billion catastrophe bond covering four nations of the Pacific Alliance in Latin America, namely: Chile, Colombia, Peru and Mexico. It was successfully launched earlier this year. It is the largest single issuance of Cat bonds ever facilitated by the World Bank.
The finance chief said the government can have multiple mechanisms to help cover the disaster-related risks both for the national government and local government units (LGUs).
“Right now, we have a local autonomy law and quite a number of the LGUs are liquid that they can buy the insurance. What we want to do is structure a system where everybody can participate. But everybody pays their own share. The national government does. LGUs can participate if they wish but they have to pay their own share,” Dominguez said.
On a broader scale, Dominguez said the Cat bond coverage could later be expanded to include other countries within the Association of Southeast Asian Nations so that funds could be pooled to push down the price of insurance premiums for each country-participant.
During the meeting, Dominguez added that the Philippines was also open to Citi’s proposal on launching Global Depositary Notes (GDNs), in which peso-denominated debt instruments are offered to offshore investors to help diversity the country’s investor profile while enhancing the liquidity available in the domestic economy.
According to the finance chief, the proposal is timely, given that the Duterte administration is now pushing for tax reform that would reduce the withholding tax on interest income from 20 percent to 15 percent even for nonresident investors.
GDNs would allow international institutional investors to access the Philippine domestic sovereign debt market through investments in peso-denominated debt instruments while trading in US dollar terms.
Last month the DOF met with officials of Lloyd’s of London to discuss possible insurance structures that could be applied to cover the Philippines’s expanding roster of government assets and properties.
During the visit of a Philippine delegation to London, Dominguez learned about global best practices and ways of strengthening the Philippines’ fiscal resilience to varied risks in the event of disasters and climate change-related incidents.
