CASE STUDYReducing the Philippines' exposure to interest rate volatility
The World Bank helped the Philippines
protect $11.13 billion against interest rateincreases by using the conversion feature ofthe IBRD Flexible Loan (IFL).
At the request of the Philippines' government, the World Bank
executed more than $11 billion of interest rate swaps with themarket to fix the rate of its USD loan portfolio. Such a sizeable
transaction was carried out in a few days, eliminating mostglobal interest rate uncertainty in their IBRD debt portfolio.
The World Bank Treasury provided the cost-effective execution
without the need for the country to face market counterparts
directly, avoiding the need for them to negotiate
documentation, use credit lines, or post collateral with market
counterparts. From an economic standpoint, this transaction
has significant relevance. The Philippines is embarking on amultiyear fiscal consolidation effort, and IBRD loans represent
the third largest source of international debt for the country(see Figure 1).

Photo Credit Adobe Stock

In 2022, as part of these prudent policies, the authorities
published a robust medium-term fiscal framework1 with
explicit fiscal anchors and expanded six-year policy horizon,
including: (i) three percent National Government deficit to GDPby 2028, (ii) less than 60 percent National Government debtto-GDP by 2025.
The roadmap entailed a strong multi-year fiscal effort,
reinforcing the country’s hard-earned credentials (see figure2).

Source: World Bank IDS Database
Moreover, the Government of the Philippines is bound by aregulatory ceiling of 7 percent interest rate for loans to qualify
as Official Development Assistance (ODA) from International
Financial Institutions (IFIs), Thus the need to act to avoid
breaching such ceiling.

Background
The Philippines' economy emerged strongly from the COVID19 pandemic, but since then, it has faced a series of external
shocks, ranging from volatile commodity prices to higher
global rates. Their prudent policies and prompt decisionmaking to manage these shocks allowed the country tomaintain their investment grade credit rating.

1

MTFF Senate Document

Source: IMF WEO October 2023
According to the October 2023 IMF Article IV Mission fiscal
consolidation as envisaged under the Medium-Term FiscalFramework is on track. This reflects a strong revenue
performance and lower current spending while maintaining
infrastructure outlays at or above five percent of GDP.”2
In this context, containing external risks such as uncertain
global interest rates, was of utmost importance to thePhilippines. Currently, about 16 percent of national
government revenues are dedicated to servicing the interestbill.
2IMF Staff Completes 2023 Article IV Mission to the Philippines

CASE STUDY
Debt Management Objectives• Reduce the interest-rate risk of the debt portfolio.
• Improve predictability of debt service obligations.

IBRD Financial Solution
The IBRD Flexible Loan (IFL) includes options to manageinterest rate risks over the life of the loan. These options arepart of the General Conditions for IBRD Financing and can be
executed at any time at a borrower’s request. Conversion
Provisions allow the borrower to fix and unfix, cap, or collar thevariable reference rate of all or part of the disbursed andoutstanding balance of an IBRD loan. Borrowers can establish
a pre-specified schedule of rate fixings (e.g., on each interest
payment date, annually, or some other frequency) at loan
negotiation or request conversions on an ad-hoc basis anytime
during the life of the loan. Such orders may have a predetermined limit so that fixing never occurs above a desired
level. Furthermore, the client can also unfix or refix the rate on
disbursed amounts at any time during the life of the loan.
The Philippines Department of Finance requested the WorldBank to work with its Bureau of Treasury to fix the interest rateon its IBRD loan portfolio to reduce exposure to interest rate
volatility. Leveraging its triple-A credit rating and large networkof market counterparties, the World Bank executed $11.13
billion of interest rate swaps with the market, providing thePhilippines with the needed hedging solution at competitive
terms in line with their expectations.

Transaction Structure
World Bank Treasury’s Role
• The World Bank Treasury analyzed the Philippines IBRD
portfolio and shared various options, including caps andcollars, conversions to other currencies, full and partial

maturity conversions, indicative quotes, and various
scenario analyses.
• Once the financial product was selected, the teamworked with the Bureau of Treasury to provide guidanceon the process for fixing the reference rates.
• Finally, the Treasury, working with the World Bank
Finance and Accounting team, provided the best costeffective execution for the swap transactions withcounterparty banks, transacting $11.13 billion notional ofinterest rate swaps in a few days.

Outcome
The interest rate conversions significantly reduced interest raterisk in the Philippines’ external debt portfolio. The liability
management exercise will mitigate the impact of unforeseen
increases in interest rates on the budget, bringing morepredictability to the implementation of priority expenditures.
The Conversion Provisions made the process administratively
cost-effective and straightforward for the Philippines.3
They were also able to avoid exposure to counterparty risk,
avoid posting collateral on derivative positions, or pay
additional fees.

Other risk management solutions from IBRD
Interest rate conversions are among the many ways theWorld Bank helps member countries become more
resilient to economic shocks. IBRD provides multiple
Financial Risk Management solutions to help clients.
IBRD’s triple-A credit rating, market presence, andconvening power allow the World Bank Treasury team todevelop innovative new products to help clients maximize
financing and mitigate risk.

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.

3

Department of Finance Press Release