More bonds to boost growth

Published December 28, 2020, 6:00 AM

by Lee C. Chipongian

The government will continue to explore the issuance of securities indexed to inflation and the gross domestic product (GDP) to amplify economic growth and ensure liquidity.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said index-linked bonds – these are securities indexed to highly visible economic variable such as inflation-linked bonds or GDP-indexed bonds — are on the table but when it will be executed is a matter of timing.

 There were some issues that were discussed last year but when the COVID-19 outbreak was declared a pandemic in March, the government was sidetracked and had to turn to emergency measures as funding source. But the BSP-led Financial Stability Coordination Council (FSCC) has talked about issues that are on the longer-end of the curve that give investors fair return, such as index-linked bonds.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno (MB file)

 As the Philippines gradually reopens the economy, Diokno who is also the FSCC chairman, said issuance of index-linked bonds will happen “at the appropriate time.”

“2020 took us into a different direction (but) we have since prioritized addressing the uncertainties brought about by the COVID-19 pandemic-cum-recession. At this point, all interventions that can strengthen our transition to the ‘new economy’ are on the table,” said Diokno in an email.

GDP-linked bonds as new instrument will be issued to mobilize and re-deploy banks’ liquidity, and Diokno said it should come hand in hand with the BSP securities facility and evolving market conditions.

The extent of funding has traditionally been made available through bank credit but the FSCC has been looking for alternative funding source.

 The FSCC wants a market with a variety of issues at different tenors, and a diverse credit profile, not just a small circle of issuers, to expand the term funding that are in the market.

Besides index-linked bonds, the FSCC has proposed fewer but deeper benchmark tenors and tenor-based pricing.

  “All market initiatives identified in FSCC’s Financial Stability Report were recommended for a purpose and were thus for implementation at the appropriate time,” said Diokno.

Amid the pandemic, Diokno said the FSCC has changed assessment and monitoring, as well as forecast systemic risks to reduce market uncertainties. He said systemic risks – which are disruptions in the financial system and negatively affects the economy — come from constantly evolving market conditions and FSCC has always been into out-of-the-box interventions. These proposed interventions such as index-linked bonds, intends to “boost growth and to increase/direct private saving for term funding while ensuring liquidity.”

The inter-agency FSCC, first established in 2014, also includes the Department of Finance, the Philippine Deposit Insurance Corp., the Securities and Exchange Commission and the Insurance Commission. Since the pandemic began, the focus of discussion is the new economy and how to reboot the economy post-COVID-19. But since its creation six years ago, the FSCC’s function is to “identify, monitor, manage, and mitigate the build up of systemic risks” in the local financial system.