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Credibility risk raised in too-active BSP role

Jennifer Nabaunag, 37, from Muzon, Taytay, Rizal, sells bedsheets and pillow cases by consignment, literally carrying, on foot, an average of around 20 kilos of her items in Rizal towns, hoping to slowly regain what she used to earn pre-pandemic. Although she got P6,500 in government aid, the lockdowns have left her with only a net of P300 daily, not enough to buy her household’s food and other items, but she bears her burden, as she’s also saving up to buy even just a used tablet for her 16-year-old son’s virtual schooling. She hopes that as Christmas nears, more people will buy her stuff.

MONEY authorities of emerging markets, including the Philippines, are risking their credibility if investors become convinced that the governments are relying heavily on their central banks to put 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 bought a total of $24 billion worth of government bonds to provide relief to their economies currently battling the adverse impact of the coronavirus pandemic. Bank Indonesia, meanwhile, also began buying bonds in July.

“Bond-buying programs may impair the ability of emerging-market central banks to respond to future crises, with rating implications for the respective sovereigns,” S&P Global Ratings credit analyst Andrew Wood said.

Such a move is seen leading to debt monetization, which can trigger increases in inflation and financing costs. S&P clarified, however, that this has not happened yet so far, noting it means that the central banks have maintained their credibility and the investors have remained patient for “aggressive action.”

However, it added, “if investors begin to view government reliance on central bank funding as a long-term, structural feature of the economy, these monetary authorities could lose credibility.”

The debt watcher explained that “in this scenario, the central banks are effectively ‘monetizing’ the fiscal deficit by using money creation as a permanent source of government funding.”

Debt monetization refers to the process of central banks purchasing bonds from the market to bring about liquidity.

Early warning

In an earlier 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 repurchase agreement with the Bureau of the Treasury (BTr) to be renewed.

“Should BSP allow continuous rollovers of upsized repurchase agreements, they may be engaging in de facto debt monetization, which may likely not be received well by the market,” he said.

Mapa said that the “practice of having the central bank buy up debt to help lower costs has generally been frowned upon as it generally leads to inflation and currency weakness.”

S&P said that advanced countries usually have robust local capital markets, strong public institutions, low and steady inflation and predictable economic policies. These allow central banks to keep large government bond holdings without the fear of dampening investor confidence and triggering higher inflation, among others.

“Conversely, sovereigns with less credible public institutions and less monetary, exchange rate and fiscal flexibility have less capacity to monetize fiscal deficits without running the risk of higher inflation,” it added.

Image credits: Bernard Testa



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