PFMP, SGV support Bureau of the Treasury in management and monitoring of GOP’s contingent liabilities
The SGV Team paid a courtesy call to PFMP Team Leader and DFAT Counsellor Daniel Featherston at the Australian Embassy in Manila.
From left to right: SGV Partners Christian Lauron, Joselito Lopez, and Leonardo Matignas;
PFMP Team Leader and DFAT Counsellor Daniel Featherston, Maria Theresa Quirino and Agnes Arban of PFMP;
and SGV Team Alister Benedict Rodriguez, John Arididon, Earl Adrian Lim, Ernest Adrian Co, and Mitchelle Collin Valero.
29 February 2016
The Philippines-Australia Public Financial Management Program (PFMP) has commissioned the services of Sycip Gorres Velayo & Co. (SGV) to provide technical assistance to the Bureau of the Treasury (BTr) in the management and monitoring of the Government of the Philippines’ (GOP) explicit contingent liabilities. SGV was mobilized last October 2015 and is expected to finish the project by March 2016.
One of the key milestones under the project is the development of a risk-based policy framework on the provision and pricing of guarantee and foreign exchange cover fees. At present, the National Government provides fixed 1% - guarantee fee and 3% - Foreign Exchange (FX) cover fees for borrowings of Government-Owned or Controlled Corporations (GOCCs) including Government Financial Institutions (GFIs).
The Policy Framework is intended to provide risk- based policy and guidelines in extending and pricing of guarantees and foreign exchange covers. The recommendations aim to improve the existing business processes of the National Government through the Department of Finance (DOF) in extending a guarantee to all GOCCs/GFIs following its authorized ceiling on foreign borrowings under Republic Act (RA) 4860.
The framework will recommend a more comprehensive financial evaluation for the guarantee approval process. Aside from the submission of the GOCC’s financial and physical performance documents, project information should also be provided. In assessing a GOCC’s financial performance, Contingent Claims Analysis (CCA) through the Merton Model will be used to calculate the probability of default (PD), using the parameters agreed with the government, i.e. asset value, average growth, debt value, risk free rate, recovery rate by Basel and using the projected dollar-peso rate of the Development Budget Coordination Committee or DBCC.
The probability of default (PD) of the GOCC/GFI will be the main basis for the determination of the guarantee fee. For example, if the Land Bank’s probability of default or PD is less than 1%, the guarantee fee will be .50 %, while if another GOCC PD is 8%, the fee will be 1% instead of the existing pricing of 1% fee charged for all GOCCs by the GOP.
GFIs such as the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP) and Small Business Guarantee Finance Corporation (SBGFC) are extended with an FX cover with a fee of which the pricing is based on the standard rate of 3%.
SGV proposes the use of the Garman Kohlhagen option pricing model which will be used to price FX covers for dollar, yen and euro borrowings by the GFIs. The proposal will also incorporate the tenor of the loan extended to these GFIs.
It is expected that this policy framework will be implemented by the DOF/BTr as soon as this is approved by the Secretary of Finance.
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