DOJ Opinion No. 001, s. 2001

DOJ OPINION NO. 001 , s. 2001 January 2, 2001 Secretary JOSE T. PARDO Department of Finance Roxas Boulevard corner Vito Cruz St. Manila Sir : Subject of herein request for opinion is the issue of whether or not the Republic of the Philippines (Republic), acting through the Department of Finance (DOF) and the Bureau of the Treasury (BTr), can enter into a commercial agreement to sell the option to convert its U.S. Dollars (USD) holdings to Euro (EUR) on maturity date and at a certain rate to a counter-party. As a backgrounder, the DOF, in its query, and the accompanying Memorandum dated October 12, 2000 of Prof. Leonor Magtolis Briones, Treasurer of the Philippines, states that, in 1999, due to the continuing depreciation of the EUR against the USD, the Republic, through the BTr, converted the proceeds of its Euro denominated RP bonds amounting to 350 million and maturing on September 17, 2004 into U.S. Dollars at an average conversion rate of 1.08 USD to 1 EUR. Come September 17, 2004, the Republic will have to convert back its USD holdings to 350 million EUR to pay the holders of its Euro denominated RP bonds. However, due to the fluctuations in exchange rate caused by market forces, it is uncertain whether the Republic can still convert its USD holdings at the same rate of 1.08 USD to 1 EUR on maturity date. Should the exchange rate of the USD to EUR be more than 1.08, the Republic will have to pay more USD to buy EUR than what it has received when it converted its EUR holdings to USD. On the other hand, if the rate is lower than 1.08, the Republic is in a much better position since it will have to pay less USD to buy EUR. This uncertainty in the exchange rate is the risk attendant in converting the Republic Euro bonds into the more stable US Dollars. Now, the DOF, through the BTr, seeks to protect the Republic's interest by hedging its principal (Euro bonds). Hedging, according to the BTr, refers to the acquisition of a financial contract designed to protect the purchaser, in this case, the Republic, against a future change in the price of commodity (Euro) in which the purchaser has an interest. According to the BTr, a number of foreign banks (counter-party) operating in the country are offering to enter into an agreement with the Republic to exchange a specified amount of EUR for USD at a future date and at a certain rate. In fact, taking advantage of the continuing downward trend of the Euro, a counter-party offers to buy the right to sell to the Republic, Euro worth 350 million at the same rate of 1.08 USD to 1 EUR on September 17, 2004. In consideration for the right to sell, the counter-party offered to pay upfront USD 30 million to the Republic. By hedging its principal, the Republic will be able to fix the cost of its purchase of EUR 350 million for its bond repayment due in 2004, at present, at the same rate as the original conversion and also receive the upfront payment of USD 30 million, which can be utilized to address the budget deficit. As such, the Republic will be protected from potential losses if the Euro appreciates against the Dollars. On the other hand, it will only suffer, at most, an opportunity loss if the Euro depreciates come maturity. Should the Republic decide not to hedge, it is in effect, speculating on what the value of the Euro would be on maturity date. This is tantamount to gambling with the exchange rates since potential gain and loss can be realized depending on what the direction of the rates will be. If the Republic incurs loss in this respect, the same is unnecessary and could have been avoided since it can lock on to the original exchange rate of USD 1.08 to EUR 1 by hedging its principal. It also violates the law on public interest which enjoins all officials and employees to utilize government resources in such manner as to avoid wastage or loss. IEcDCa It is the stand of the BTr that entering into a risk management transaction will ensure that there will be no unnecessary 1088 on the part of the Republic when it pays back its Euro bonds in 2004. Converting the USD holdings of the Republic into EUR at the same rate of 1.08 as the original conversion assures that it will be paying back its obligations at the same cost as when it was converted. The Republic will even gain from the transaction by receiving USD 30 million upfront, which can immediately be used by the NG. According to the BTr, as cash managers, it is tasked to service and redeem the public debt, which includes entering into contracts or transactions to manage said public debt in a prudent manner to avoid any kind of unnecessary loss to the NG provided that such contracts or transactions are not grossly disadvantageous to the NG and not contrary to existing laws, rules and regulations. It is also mandated to manage the assets of the NG through its Asset Management Service which, among others, is tasked to manage the Bond Sinking Fund, the Securities Stabilization Fund and the different Trust Funds mandated by law to be managed by the BTr, functions that were assumed by the DOF by virtue of Republic Act No. 7653 (The New Central Bank Act). To support its stand that the Republic, through the DOF and BTr, can enter into the above-described risk management transactions, the BTr, relied on the following laws, orders, rules and regulations: 1. Section 129 of R.A. No. 7653 by virtue of which, the DOF assumed the fiscal agency function of the Bangko Sentral which includes the servicing and redemption of public debt; 2. Section 1(5) of Executive Order No. 449 (Realigning the Organization of the Bureau of Treasury) dated October 17, 1997 which provides that the BTr, which is under the DOF, has the mandate to, among others, manage the National Government's (NG's) cash resources, as well as to control and service its public debt, both foreign and domestic; 3. Section 4(a) of Republic Act No. 6713 ( Code of Conduct and Ethical Standards of Public Officials and Employees ) which enjoins public officials and employees to employ and to use all government resources and powers of their respective offices efficiently, effectively, honestly and economically, particularly to avoid wastage in public funds and revenues; and 4. Section 3 (g) of Republic Act No. 3019 ( Anti-Graft and Corrupt Practices Act ), which makes it a corrupt practice on the part of any public officer the act of "entering, on behalf of the Government, into any contract or transaction manifestly and grossly disadvantageous to the same, whether or not the public officer profited or will profit thereby. Hence this query. With deep regret, this Department is constrained to decline rendition of the opinion requested. The request does not present the complete factual situation from which this Department may draw its premises and conclusions. As a matter of policy, the Secretary of Justice does not render opinion on factual issues and questions the resolution of which hinges on factual matters which are not readily discernible from the query ( Secretary of Justice Opn. Nos. 93 and 14 current series; No. 6, s. 1999; and No. 98, s. 1998 ). Moreover, the resolution of the issue raised would inevitably involve technical and policy matters which properly fall within the jurisdiction and mandate of the DOF and of the BTr. As Attorney General, the Secretary of Justice renders opinion only on questions of law and not on technical and/or policy issues. Finally, the issue herein necessarily involves matters which call for financial and technical expertise of economic managers who are familiar with the nature and consequences of hedging transactions. Since, as stated in the Memorandum of the BTr, under Section 129 of R.A. No. 7653 or the New Central Bank Act, the DOF assumed the fiscal agency function of the Bangko Sentral ng Pilipinas (BSP), it would be advisable to seek the advise of the BSP on this matter. Very truly yours, (SGD.) ARTEMIO G. TUQUERO Secretary