Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said they are reviewing the issuance of GDP-linked bonds as new instrument to mobilize banks’ liquidity.

Diokno said GDP-linked bonds could be used to expand or rearrange the distribution of liquidity circulating in the banking system as additional funding source.

 “Our objective is to re-deploy liquidity that is already available in the market as part of our shared objective to address risk aversion and move further towards the New Economy,” he said in an email.

 “We continue to consider the prospects and timing of GDP-linked bonds (but) this has to also come hand in hand with the recent issuance of BSP securities and the evolving market conditions,” added Diokno.

 The Financial Stability Policy Committee of the BSP is currently reviewing the issuance of GDP-linked bonds which, among other things, will improve pricing of bank credit along the lines of the securities market’s spot yields.

 GDP-linked bonds as new facility will be an effective additional monetary policy instrument under the interest rate corridor system. Basically, an investor buying GDP-linked bonds can expect higher yields when the economy is performing well and on a sustainable path because its pricing is tied to the GDP.

 The BSP is still studying assumptions on the issuance of GDP-linked bonds, including its risk, supply and demand.

 GDP-linked bonds is one of the central bank-led Financial Stability Coordination Council’s (FSCC) proposed funding alternatives for the government’s infrastructure development financing.

 While the extent of funding has traditionally been made available through bank credit, there is a need to look for alternative funding source that are – as described by the FSCC -- fewer but deeper benchmark tenors, indexed bonds, and tenor-based pricing.

 Indexed-bonds such as GDP-linked bonds, have been on the BSP table for a long time as part of creating new money for the “Build! Build! Build!” program. Discussions have included the Securities and Exchange Commission and the Bureau of the Treasury for its future execution.

 The BSP first issued its securities or the 28-day bills last September 18 after restoring this authority in 2019 through a charter amendment.  Diokno said the BSP’s ability to issue its own securities will improve both liquidity and inflation control. But it took the central bank some time to issue securities because it had to time it right using its inflation outlook and expectations since debt investors closely monitor inflation.