Byline: LEE C. CHIPONGIAN

The government will float more Local Government Unit or LGU bonds to increase funding for public projects and to encourage development of the LGU debt market.

LGUs' demand for funds is growing and the Department of Finance wants to tap this debt market

In 2004, LGUs posted a surplus of P18.4 billion when government owned and controlled corporations continue to post deficits.

The local banking industry, for one, is being encouraged to purchase LGU bonds as an alternative compliance to the AgriAgra Law. This law requires banks to reserve 25 percent of their loanable amount to the agriculture and agrarian sectors.

The Bangko Sentral ng Pilipinas consider LGU bonds as alternative compliance with Presidential Decree No. 717 in line with Section 4 of said order, which allows banking institutions to invest in eligible government securities recognized by the BSP.

Failing to comply with the 25 percent requirement, most banks especially foreign banks just pay the small penalty for not following rules. Observers said foreign banks are too limited by the law, considering they are only allowed to open an x-limit of branches plus lending to farmers is not their target market.

"The alternative compliance is to buy LGU bonds," banking sources said. However with increased demand, there are not enough LGU bonds to purchase, at the moment.

The BSP reiterates that LGU bonds are considered alternative compliance with Agri-Agra requirements, based on central bank Circular No. 226 issued on February 2000.

Many banks sell bonds issued by LGUs, which are 100 percent secured by the LGU Guarantee Corp., thus they offer premium above regular Treasury bills.

LGU bonds, also known as municipal bonds in other countries, are a big debt securities market. In the United States for example, these bonds raised $420 billion in 2004 alone.

LGU bonds currently offered in the market include the Princesa Green Bonds, Boracay-Aklan Provincial Bonds and the Tagaytay City Tourism Bonds.