Prudence drags debts prepayment

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The amount of foreign debts being settled before maturity has declined in the first half of the year, Bangko Sentral ng Pilipinas (BSP) data showed.

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The BSP reported on Friday that debt prepayments on medium- and long-term foreign loans fell by 16 percent to $1.541 billion in the first six months of 2016, compared with $1.834 billlion in the first half of 2015.

The drop in prepayments, according to BSP’s deputy governor, Diwa Guinigundo, was due to two reasons: the debt owed by foreign sources are decreasing, and existing payers want to avoid paying prepayment charges.

There are loan contracts, he said, that do not allow prepayments; and if there are prepayment provisions, there are prepayment charges too.

So, he pointed out “what can you save in terms of prepaying it, in terms of lower interest savings versus the prepayment charges that you will have to pay to be able to prepay your loans.” On that basis, he said, the stock of debt that can be prepaid would diminish overtime.

That is the reason for the decline, he said and adding: “That’s billions of dollars already that we have prepaid in the last eight years.”

The data pertains to foreign-denominated debs payable in at least five years and were settled ahead of schedule. Prepayment is done to make debts more manageable. Doing so for foreign loans, the central bank said, would be a prudent exercise when the local currency showed strength.

The public sector—which includes the national and local governments as well as state-owned- and -controlled corporations—accounted for some two-thirds of the total prepayments made in the first semester of 2016.

These payments totaled $1.132 billion for the period, which was equal to the amount of prepayments recorded a year ago.

Meanwhile, private corporations prepaid a total of $408.5 million, which is 20 percent lower than the $512.5 million logged in 2015.

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