The government will fast track its borrowings from Japan over the next two years to take advantage of lower interest rates granted to lower-middle income economies, as the Philippines is poised to soon become an upper middle income country (UMIC), the Department of Finance (DOF) said.
The two sides discussed the loan financing arrangements for the Philippines as it transitions to UMIC status ahead of schedule in 2020, during the 9th High-Level Meeting of the Philippines-Japan Joint Committee on Infrastructure Development and Economic Cooperation recently held in Hakone, Japan.
The country will still have a two-year grace period to avail of lower interest rates once the Philippines transitions to upper-middle income level.
“Definitely, we will be fast tracking our drawdowns,” Carlos Dominguez, DOF secretary, told reporters at the DOF office in Manila last Wednesday.
Dominguez also said other lenders are ready to lend to the Philippines, faster than usual.
“The interest rate differential is not that big anyway and it’s only fair to everybody. Money is scarce so they want to make sure that those who need it get more or those who can use it productively,” Dominguez said.
Last June, Ernesto Pernia, socioeconomic planning secretary, said the Philippine government may consider adjusting its borrowings to continue to take advantage of lower interest rates granted to lower-middle income economies, as well as prioritize projects that are more costly than others, as the country may soon achieve upper-middle income status.
“We anticipated to achieve upper middle-income country status around the end of this year, but it could move back to 2020 because of our lower economic growth rate this year, possibly,” Pernia had said.
With the Philippines’ forthcoming elevated status as an upper-middle income economy, the government expects that the cost of money is going to be higher because the country will no longer qualify for the lower interest rates for poorer countries.
This refers to low lending rates granted by development partners to countries classified as low-income and lower-middle income economies.
The DOF earlier said Japan’s Special Terms for Economic Partnership (STEP) facility for its ODA loans, for instance, grant lower interest rates with fixed terms to low-income countries.
Lower-middle income countries, like the Philippines’ current status, do not qualify for STEP rates but may be granted preferential terms but with higher interest rates, the DOF said. UMICs get higher interest rates than lower-middle income countries.
“Once we achieve upper-middle income country status then we will not be qualified for the STEP funding, (but there will be) a grace period of two years between the time we achieve upper-middle income country and the non-qualification for us to be able to avail of step funding. So by 2022, we will not qualify,” Pernia said.
“What we have to do now is to prioritize projects, such that those that are more costly than others will be prioritized, the more costly ones we want them to move faster than the lesser costly ones,” he added.