S&P cautions BSP against excessive bond buying

MANILA, Philippines — S&P Global Ratings has cautioned emerging market central banks, including the Bangko Sentral ng Pilipinas (BSP), against pushing too far their bond buying programs that could lead to price stability and other risks.

In a report, Andrew Wood, 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-buying programs may impair the ability of emerging-market central banks to respond to future crises, with rating implications for the respective sovereigns,” Wood said.

Wood said the sovereign-bond purchases by emerging market central banks have not spooked the markets, because investors accept these operations as emergency actions amid the COVID-19 pandemic.

The debt watcher said the central banks of the Philippines and India have purchased an additional $24 billion in government bonds, while Indonesia started its bond purchasing in July to counter the pandemic-induced economic pain.

Wood said the policy developments have so far not triggered high inflation or spikes in financing costs in these economies.

“We believe this reflects the credibility of the central banks concerned, and investors’ patience for aggressive action in the face the pandemic. However, 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,” he warned.

In this scenario, Wood said the central banks are effectively monetizing the fiscal deficit by using money creation as a permanent source of government funding.

In some cases, this could weaken monetary flexibility and economic stability, which could increase the likelihood of sovereign rating downgrades.

For his part, S&P credit analyst Kim Eng Tan said there are risks to sovereign credit metrics associated with central bank’s large accumulations of government 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 maintain large government bond holdings without losing investor confidence, creating fear of higher inflation, or triggering capital outflow.

On the other hand, S&P said 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.

“This may trigger large capital outflows, devaluing the currency and prompting domestic interest rates to rise, as seen in Argentina over parts of the past decade,” the debt watcher said.

Meanwhile, ING Bank Manila senior economist Nicholas Mapa said Republic act 11494 or the Bayanihan to Recover as One (Bayanihan 2) raised the cap on the amount the BSP can advance to the national government to 30 percent from 20 percent.

Mapa said the BSP could increase its bond purchases to P850 billion, opening the door for a more hefty burden sharing arrangement between monetary and fiscal authorities.