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By Karen Lema and Rosemarie Francisco
MANILA (Reuters) - The Philippines, grappling with the impact of two devastating typhoons, is looking to sell special bonds to fund rebuilding as well as tapping grants and low-cost loans, officials said on Wednesday.
Manila, one of Asia's largest sovereign debt issuers, has already raised $2.25 billion (1.40 billion pounds) from the dollar bond market to finance its 2009 budget deficit and is now looking at other funding sources to keep its debt from bloating further.
The government's higher spending was unlikely to stoke inflation, the central bank said, signalling interest rates were likely to stay at historic lows for now.
President Gloria Macapagal Arroyo said the National Development Corp may issue reconstruction bonds to finance typhoon relief. NDC has the mandate to sell up to 50 billion pesos ($1.08 billion) worth of bonds, but it was not clear how much it would raise for rebuilding and in which currency.
However, the risk that the government would need to raise more funds took the edge off local bonds, prompting a modest sell off.
Two typhoons in two weeks killed at least 700 people and caused more than 18 billion pesos in crop damage.
"We may issue reconstruction bonds, whether peso or dollar, to which the multilaterals such as the World Bank and the ADB (Asian Development Bank) may subscribe," Arroyo told an investor briefing.
"We will be pushing first for more grants and non-repayable inflows. Second, we will push for concessional loans. Commercial borrowing either through bonds or other instruments should be the last financing option."
Trade Secretary Peter Favila said reconstruction bonds may also be sold to government banks and the private sector, adding Manila had yet to decide on the size and maturity of the bonds.
The Philippines is also considering other financing needs.
Finance Secretary Margarito Teves said the country could sell dollar bonds worth at least $500 million this year to raise some of its 2010 debt needs ahead of national elections in May.
"That's a possibility, because we can take advantage of the (market) liquidity, the very low borrowing cost," Teves said.
SAMURAIS
Manila has previously said it could sell up to $500 million in Japanese government-backed yen bonds in the fourth quarter to fund part of its 2010 borrowing requirement.
"The mention of reconstruction bonds may be a game changer: it shows they may need to borrow more money even after the dollar and yen bond issues," said a Manila-based debt trader, adding that the yield on the 5-yr bond had risen to 6.16 percent from Tuesday's 6.06 percent.
To help finance a record 2009 budget deficit of 250 billion pesos, or 3.2 percent of GDP, Manila sold 114.4 billion pesos worth of domestic retail treasury bonds last month -- an offer that was not part of its original funding plan for the year.
Teves said Manila still hopes to hit its budget gap goal this year but the shortfall could slip to 300 billion pesos if revenues continued to fall and the sale of state assets failed.
The central bank said more spending on housing construction and higher food costs following the typhoons were unlikely to push inflation beyond the 2009 target of 2.5-4.5 percent.
"There's enough headroom in case there will be an uptick in the inflation rate," Governor Amando Tetangco told reporters. "The favourable inflation outlook gives us room to maintain the stance of monetary policy for now."
A Reuters poll showed the central bank's policy rate was expected to stay at 4.0 percent up to end of the second quarter of 2010.
Consumption -- fuelled by strong remittances -- is expected to largely offset losses from the storms. The government has targetted growth at 0.8 to 1.8 percent this year and Teves has said the typhoons could shave up to 0.4 percentage point off that figure.
(Editing by Neil Fullick & Kim Coghill)

Reuters