[ad_1]
S&P warns BSP against excessive bond buying
Lawrence Agcaoili (The Philippine Star) – September 15, 2020 – 12:00 am
MANILA, Philippines – S&P Global Ratings has warned emerging market central banks, including Bangko Sentral ng Pilipinas (BSP), not to push too hard on their bond buying programs that could lead to price stability and other risks.
In a report, Andrew Wood, a credit analyst at S&P, said central banks in the Philippines, Indonesia and India could undermine investor confidence if their sovereign bond purchases result in debt monetization.
“Bond purchase programs can affect the ability of emerging market central banks to respond to future crises, with rating implications for the respective sovereigns,” Wood said.
Wood said sovereign bond purchases by emerging market central banks have not spooked markets, because investors accept these trades as emergency actions amid the COVID-19 pandemic.
The debt watcher said the central banks of the Philippines and India have bought an additional $ 24 billion in government bonds, while Indonesia began bond purchases in July to counter pandemic-induced economic pain.
Wood said policy developments so far have not led to high inflation or spikes in financing costs in these economies.
“We believe this reflects the credibility of the central banks involved and the patience of investors for aggressive action in the face of the pandemic. However, if investors begin to see the government’s dependence on central bank financing as a long-term structural feature of the economy, these monetary authorities could lose credibility, ”he warned.
In this scenario, Wood said central banks are effectively monetizing the fiscal deficit by using money creation as a permanent source of government financing.
In some cases, this could weaken monetary flexibility and economic stability, which could increase the likelihood of sovereign ratings downgrades.
For his part, S&P credit analyst Kim Eng Tan said there are risks to sovereign credit metrics associated with large accumulations of central bank public debt over a long period.
Advanced countries typically have deep domestic capital markets, strong public institutions, low and stable inflation, and transparency and predictability in economic policies.
These attributes allow their central banks to hold large holdings of government bonds without losing investor confidence, creating fear of higher inflation, or triggering an outflow of capital.
On the other hand, S&P said that sovereigns with less credible public institutions and less monetary, exchange and fiscal flexibility have less capacity to monetize fiscal deficits without risking higher inflation.
“This can trigger large capital outflows, devalue the currency and cause domestic interest rates to rise, as seen in Argentina for part of the last decade,” said the debt watcher.
Meanwhile, ING Bank Manila senior economist Nicholas Mapa said that the Republic Law 11494 or the Bayanihan to Recover as One (Bayanihan 2) raised the limit on the amount that the BSP can advance to the national government from 20% 30%.
Mapa said the BSP could increase its bond purchases to P850 billion, opening the door to a stronger burden-sharing agreement between the monetary and fiscal authorities.
[ad_2]
