An assessment of the Philippine local government unit bond market

• Main Authors: Abadilla, Anniebien Llora F., Aquino, Aurora Althea B., Jordan, Vincent Patrick B., Señeres, Golda Hannah Isadora M.
• Format: text
• Language: English
• Published: Animo Repository 2000
• Subjects: Bond market > Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/16677
• Institution: De La Salle University

Since the enactment of the 1991 Local Government Code, local government units have been authorized to tap the capital market for various funding sources to meet their financial requirements. The Code allows LGU's to ease their reliance on transfers from the National Government, from IRAs, ODAs, GFIs, MDFs or local taxes, and permit them to tap other sources of financing. LGUs have been allowed to incur indebtedness on their own through public or private debt. One of the possible ways that LGUs can engage in private financing is by issuing feasibility of floating local government unit bonds as a source of financing for LGUs. Within the past decade, several LGU bonds have been issued including the Cebu-Equity-Bond-Units (CEBU) for P300M, Victorias Pabahay Bond-Negros Occidental for P8M, Legazpi Suerte Bonds-Albay for P26M, Claveria Housing Bonds-Misamis Oriental for P20M and others. The previously floated bonds were issued on a term of 2-3 years and carried the guarantee of the LGUGC or the HIGC for housing. The proceeds from the sale of the bonds were used for the development of the projects and were secured by the real properties of the municipality and other assets in the trust and sinking fund. Since the past floatation's of LGU bonds, the local LGU bond market has been faced with many setbacks and disincentives which have hindered the market's prospects for growth. In this study, the potential problems for future LGU bond issuers were classified under three types: (1) loss of market for LGU bonds (2) mismanagement of the flotation (3) required issue size. Some issues that were addressed include the relatively small issue size, short maturities, political succession issues, lack of tax-exemption for non-housing projects, lack of a credit rating system and a secondary market for these instruments. From the analysis of these problems, it is clear that additional incentives are needed to promote the development of a broader LGU bond market in the Philippines. In this regard, the study proposes several recommendations that will enhance the marketability of LGU bonds. This includes the amendment of the 1991 Local Government Code to provide for tax exemption feature for LGU bonds. There is also a need to develop an efficient information systems to facilitate trading and to provide an exit mechanism for the LGU bonds. Plans by the PSE to list all bonds and debt securities including government issues with a view to encouraging their active trading in the exchange as a secondary market should enhance the liquidity of these instruments. The maturity structure must also be lengthened especially for long-gestating infrastructure projects. There is also a need for the expansion of the responsibilities of the Credit Information Bureau to include safety and credit rating of all publicly tradable debt instruments including LGU bonds and to assess the credit quality of LGUs. There is a need for proper disclosure of information on the track record of LGUs to attain creditworthiness through the establishment of the viability projects. Lastly, to enhance the marketability of LGU bonds, there should be massive education and information dissemination for local officials as well as for potential investors. Although this study may not address all of the problems faced by the LGU bond market, it aims to take a concrete step forward towards the diversification of the capital market. The enhancement of the marketability of LGU bond instruments should be addressed to provide investors with an alternative investment and to encourage participation of the community in building infrastructure and livelihood projects. In this way, establishing the viability of the LGU bond market can assist in the development of the Philippine capital market.