Gov't mulls fresh BSP bond purchases for COVID-19 fight
Bangko Sentral ng Pilipinas Governor Benjamin Diokno
STAR/KJ Rosales/ File

Gov't mulls fresh BSP bond purchases for COVID-19 fight

Prinz Magtulis (Philstar.com) - September 14, 2020 - 5:15pm

MANILA, Philippines — The Duterte administration is “studying” a new round of bond purchases from the central bank when existing securities mature this month, National Treasurer Rosalia de Leon said on Monday.

The amount involved is yet to be determined, but De Leon said the government “has limits” on Treasury papers that can be sold to the Bangko Sentral ng Pilipinas (BSP). Under existing repurchase contracts entered last March, BSP purchased P300 billion in 3-month securities, renewed last June and will mature this month.

In a separate Viber message, BSP Governor Benjamin Diokno also expressed openness to lend further to the government. “NG (National Government) will settle the P300 billion it got from the repo arrangement before it can enter into another such arrangement,” he said.

The likelihood of BSP funneling money to the government anew adds to the central bank’s growing role in what appears to be a long and winding pandemic recovery. But is also raises risks of damage to the central bank’s inflation-fighting credibility, according to S&P Global Ratings, a debt watcher.

Since by buying securities the central bank is essentially adding money to the financial system, at the risk of stoking inflation, S&P said investors may view long-term bond purchases contrary to the BSP’s mandate to keep prices stable. As it is now, the central bank continues to buy government papers from the secondary market.

“In our view the recent purchase programs in some emerging markets are not guided by price-stability objectives. Rather, they are chiefly motivated by concerns that large sovereign issuances amid pandemic-related disruptions may cause excessive financial market volatility,” S&P said pertaining to central banks in India, Indonesia and the Philippines.

The bond-buying experiment also has the potential of being politicized, especially by governments who see central banks as a cash machine. The mechanism may also breed moral hazard for states facing huge budget gaps in fighting the pandemic.

“The initially benign consequences of monetizing part of the fiscal deficit could create complacency, potentially boosting calls for more government spending and delaying plans to reduce high fiscal deficits,” the credit rater said.

“Conversely, enlarging these purchases when investors are not expecting might lead to speculation that these central banks are de-emphasizing their role in maintaining price stability,” it added.

Since the pandemic struck last March, Diokno oversaw the BSP’s most aggressive easing to date in a bid to revive an economy that collapsed a record 16.5% in the second quarter. Apart from bond buys, BSP also cut benchmark lending rates by 175 basis points and mandated reserves by 200 bps this year— both in a bid to spur up consumer borrowing and spending. 

On this front, there is little success so far with bank lending up 6.7% as of July, the weakest in over a decade.

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