[ad_1]
MONEY Emerging market authorities, including the Philippines, are risking their credibility if investors convince themselves that governments rely heavily on their central banks to get the economy back on track, according to S&P Global Ratings.
The credit rating agency noted that the central banks of the Philippines and India have purchased a total of $ 24 billion in government bonds to provide relief to their economies that are currently battling the adverse impact of the coronavirus pandemic. Meanwhile, Bank Indonesia also started buying bonds in July.
“Bond purchase programs can affect the ability of emerging market central banks to respond to future crises, with rating implications for the respective sovereigns,” said S&P Global Ratings credit analyst Andrew Wood.
Such a move is believed to lead to debt monetization, which can trigger increases in inflation and financing costs. However, S&P clarified that this has yet to happen so far, noting that it means that central banks have maintained their credibility and investors have been patient for “aggressive action.”
However, he added, “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.”
The debt observer explained that “in this scenario, central banks are effectively ‘monetizing’ the fiscal deficit using money creation as a permanent source of government financing.”
Debt monetization refers to the process in which central banks buy bonds from the market to generate liquidity.
Early warning
In a previous report, ING Bank Manila economist Nicholas Antonio T. Mapa warned that the Philippine peso may weaken and inflation may rise if the Bangko Sentral ng Pilipinas (BSP) allows its P300 billion buyback agreement with the Treasury Office (BTr). to be renewed.
“If the BSP allowed continuous renewals of larger buyback agreements, it is possible that they are participating in the monetization of de facto debt, which is probably not well received by the market,” he said.
Mapa said the “practice of having the central bank buy debt to help reduce costs has generally been frowned upon as it generally leads to inflation and currency weakness.”
S&P said advanced countries generally have strong local capital markets, strong public institutions, low and steady inflation, and predictable economic policies. These allow central banks to hold large holdings of government bonds without fear of dampening investor confidence and causing higher inflation, among others.
“On the contrary, sovereigns with less credible public institutions and less monetary, exchange and fiscal flexibility have less capacity to monetize fiscal deficits without running the risk of higher inflation,” he added.
