A bank economist warned that the Bangko Sentral ng Pilipinas may lose its “sterling” credibility in the long run and its independence will be questioned with the implementation of Bayanihan to Recover as One Act, or the Bayanihan 2, which has a provision on de facto “debt monetization.”
ING Bank Manila senior economist Nicholas Mapa said in a report that Bayanihan 2 has a provision that will allow the BSP to buy up to P850 billion worth of bonds from the primary market to help in debt financing. Debt monetization occurs when the government borrows from the central bank, which eventually prints new money, resulting in inflationary pressures.
President Rodrigo Duterte is expected to soon sign Bayanihan 2 into law, after it was ratified by the Senate and the House of Representatives.
The BSP’s charter already allows the central bank to “advance” P300 billion to the national government through a repurchase agreement with the Bureau of the Treasury.
“Although not technically debt monetization, should the BTr simply roll over the repurchase agreement upon end, such a move could constitute a de facto debt monetization,” Mapa said.
Mapa said on top of the primary market repos, the BSP was active in the secondary bond market, buying up bonds worth roughly P800 billion over the course of the last six months to stabilize market yields while flooding the market with additional liquidity.
“The central bank continues to single-handedly provide the much needed stimulus to the economy while fiscal authorities stockpile funds and yet roll out modest stimulus packages,” Mapa said.
Mapa cited the move of Indonesia’s finance ministry early this year when it announced a “burden sharing” arrangement where Bank Indonesia would buy up bonds in the primary market to help finance the deficit in the fight against COVID-19.
He said authorities pledged the move would be a “one-off” incident given the extreme circumstances. He said Bank Indonesia faced a firestorm when a panel of experts from Indonesia proposed ceding more control of Bank Indonesia’s monetary board to the finance ministry, opening the door for successive rounds of debt monetization, once perceived as taboo in central bank circles.
“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,” Mapa said.
He said investor reaction to hints that Bank Indonesia would be asked to “burden share” again in 2021 and 2022 sparked a massive run on the currency but more importantly may have hit the credibility of the central bank as investors question their independence.
“Should BSP allow continuous rollovers of upsized repurchases agreements, they may be engaging in de facto debt monetization, which may likely not be well-received well by the market,” Mapa said.
“Judging from the investor reaction to the Bank Indonesia episode, we can expect extreme market pressure on the currency and fears of a pick-up in inflation. And although the peso remains strong and inflation subdued, the bigger casualty in a de facto debt monetization scheme will be BSP’s sterling credibility, built up over decades of admirable leadership,” he said.
Mapa said the BSP earned the distinction and credibility over the years with former Governor Amando Tetangco Jr. recognized internationally as one of the world’s best. He said to lose it at a time as precarious as now would be challenging to rectify.
“Desperate times do indeed call for desperate measures but for the most part, monetary authorities have thrown everything including the kitchen sink at the virus, perhaps it may be time for other sectors to complement BSP’s aggressive moves as it would be a pity to see the central bank lose its credibility for the sake of other accolades,” Mapa said.
