The Bangko Sentral ng Pilipinas’ (BSP) pandemic-related monetary financing must be something that the central bank will only consider as a last resort, an International Monetary Fund (IMF) official said.
IMF Resident Representative to the Philippines Yongzheng Yang said this stressing that the BSP’s bond purchases should be well defined.
“Like with other central banks providing monetary financing in response to COVID‑19, the BSP’s bond purchases or advances should be guided by a well-defined last resort criterion, linked to unfavorable bond market and broad financial conditions,” said Yang.
Extending provisional advances to the National Government (NG) is allowed in the BSP Charter up to a max of 20 percent of the government’s average revenue for the last three years, or in this case 2017 to 2019, which was P2.8 trillion. The 20 percent is about P564 billion and this is short term, just three months and renewable for another three months. The NG has used up P300 billion of this amount in March and paid it back in September.
The limit is raised to 30 percent with an additional 10 percent provided for under the Bayanihan to Recover as One Act or Bayanihan 2. This is about P282 billion more and has a longer term of one year. But this is time-bound and slightly long term at one year.
BSP Governor Benjamin E. Diokno said these are the two possible types of repo arrangements with the NG. “Both are available only under extraordinary circumstances,” he said. The global coronavirus health crisis and its resulting lockdown to contain the infections which led to a stalled economy, is an extraordinary event.
With the BSP Charter provisions and Bayanihan 2, it raises the amount that the government can loan from the BSP to about P846 billion from P564 billion. A fresh P540 billion provisional advances was granted this month.
Economists said the BSP’s provisional advances is no different to debt monetization.
“Our understanding is that the BSP has sought to reduce risks of bond market instability from higher government deficit financing through temporary repo financing to the government and secondary market purchases of government bonds,” said Yang.
But, he added, that “further monetary policy accommodation of government deficits should be clearly circumscribed to the early recovery phase and remain compatible with the BSP’s monetary policy objectives.”
No matter how it was called, advances or a repo deal, it still constitutes loan from the BSP to NG, and debt monetization is when governments borrow money from central banks.
The BSP capital is P250 billion of which paid up is only P50 billion. The amended BSP law – signed just last year – increased the BSP’s capitalization which will be solely funded by its dividends starting from its 2019 net income. But the BSP in March remitted P20 billion to the NG to help its COVID-19 response. The P20 billion is based on a projected P23 billion BSP net income for 2020. As of end-August, its net income is down by 35 percent year-on-year to P21.77 billion.
So far, the BSP-has infused P1.9 trillion, equivalent to 9.6 percent of GDP to help a pandemic-hit financial system. It is higher than the 3.8 percent to GDP fiscal stimulus from the government.
ING Bank economist Nicholas Mapa said that while the NG cash advances is “not technically debt monetization” it could be considered as de facto debt monetization. He did worry that BSP’s credibility as an independent central bank might take a hit.
But, he said that the NG “has enough options for financing” with BSP’s P1.9 trillion infusions to the financial system and a recovery in revenue collections. He noted that the “need for the cash advance with BSP (is) not as urgent as the situation in March” and there is now less “risk to BSP’s credibility.”
MUFG Bank Ltd. analyst Sophia Ng said debt monetization is currently the BSP’s main policy tool to keep the economy afloat since it might have already exhausted its scope for additional interest rate cuts. Since February, the Monetary Board has reduced key rates by 175 basis points and Diokno has said that they are done in their rates' cutting for this year.
Ng said that compared to other central banks with debt monetization as part of its anti-pandemic strategy, the BSP is “handling” monetary financing better since there are built-in limits in its provisional advances. She said the BSP’s qualitative easing has increased its holdings of domestic bonds but this will not have an impact on portfolio flows or lead to credit rating downgrades.
Mapa said however that debt monetization has "probable" negative implications on the peso and inflation.
The BSP is not alone, Bank Indonesia has its own version of “burden sharing” with its own government but unlike BSP, it is open-ended and has no apparent exit mechanism. “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,” said Mapa.
With more than P800 billion purchases in the secondary bond market in just six months to stabilize market yields, plus its role in providing excess liquidity, Mapa said the BSP is “single handedly (providing) the much needed stimulus to the economy”.