The Philippines’ local bond market has posted strong growth in the third quarter of the year, driven by the Bangko Sentral ng Pilipinas’ (BSP) increasingly dovish monetary policy stance and a surge in corporate bond issuance.

Based on the Asian Development Bank’s (ADB) latest Asia Bond Monitor report, total local currency bonds outstanding reached P13 trillion at the end of September 2024, a 3.8 percent quarter-on-quarter jump.

ADB said this growth was fueled by a strong rebound in bond issuance, which surged 11 percent quarter-on-quarter to P2.9 trillion.

The Manila-based lender attributed this to the BSP’s recent rate cuts, which have brought the policy rate down to six percent amid cooling inflation.

With inflation remaining within the government’s target range of two percent to four percent, the BSP has signaled its willingness to further ease monetary policy to support economic growth.

Corporate bond issuance has been a key driver of this growth, more than tripling to P165.4 billion.

According to ADB, this was largely due to major issuances from BDO Unibank and Bank of the Philippine Islands, both of which launched 1.5-year sustainability bonds.

The lower interest rate environment has reduced borrowing costs for corporations, making bond issuances a more appealing funding option.

The report also noted the continued dominance of banks and investment houses as the largest investor group in the Philippines’ bond market, holding 45.7 percent of outstanding bonds.

Meanwhile, the government’s increased borrowing led to a 34 percent quarter-on-quarter increase in the issuance of government bonds amid a large number of maturities.

While the sustainable bond market remains relatively small, it showed strong growth, expanding by 20.3 percent quarter-on-quarter to $10.9 billion.

The ADB noted that the market is dominated by foreign-currency-denominated instruments, with sustainability bonds accounting for 83.8 percent of total sustainable bonds outstanding.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC), stated that the growth of the local bond market is attributed to the government’s increased reliance on domestic borrowings due to a widening budget deficit in recent months.

“Weaker peso exchange rate recently also encouraged more local borrowings vis-a-vis foreign borrowings/debt that entail forex risks, thereby increasing the share of local borrowings in the total borrowing mix,” Ricafort said.

The decline in local bond yields has also made domestic borrowing more attractive. Ricafort added, “The decline in local bonds yields in recent months also made local bonds cheaper as a funding source, thereby encouraging more hedging in view of savings in long-term peso borrowings in recent months, in view of the Fed and local policy rate cuts in recent months.”

Looking ahead, further cuts in both Federal Reserve and local policy rates could reduce borrowing costs, he said.

However, potential protectionist policies by US President-elect Donald Trump could lead to higher US inflation and wider US budget deficits, potentially limiting the extent of future rate cuts.

Ricafort noted, “Further Fed and local policy rate cuts would reduce financing costs/borrowing costs, though mitigated by possible protectionist policies by U.S. president-elect Trump that could lead to higher US inflation and wider U.S. budget deficits, thereby could lead to fewer Fed rate cuts and local policy rate cuts.”