Philippine central bank ready to lend more to government

Bloomberg

The Philippine central bank is prepared to lend more to the government, helping to boost state funding to counter the impact of the coronavirus pandemic, Governor Benjamin Diokno said on Monday.
The comments come days after President Rodrigo Duterte signed into law a measure providing 165.5 billion pesos ($3.4 billion) for pandemic relief. The law allows Bangko Sentral ng Pilipinas — which already lends some money to the government — to extend additional credit worth as much as 10% of the government’s average revenue in the last three years, which Diokno said is equivalent to about 282 billion pesos.
Asked if the central bank is prepared to lend more to the government, Diokno said, “Yes of course.”
The move comes as other central banks in Asia are coming under pressure to finance expanded government deficits amid the pandemic. Bank Indonesia has agreed to buy about $27 billion of bonds directly from the government in what has been described as a one-off move, but President Joko Widodo said recently the bank’s help may be needed to finance budget deficits through 2022.
So far, markets have been willing to accept emerging market central banks’ purchases of sovereign bonds as emergency actions to fight the pandemic. However, if central banks in countries including the Philippines progress to debt monetisation, that could undermine investor confidence, S&P Global Ratings said in a report on
Monday.
“Bond-buying programs may impair the ability of emerging-market central banks to respond to future crises, with rating
implications for the respective sovereigns,” S&P said.
The Philippines expects its budget deficit to swell to a record this year as it sets a
3-trillion peso borrowing plan for 2021 to help the economy
recover.
The government proposed raising the maximum amount it can borrow from the central bank to help “fund requirements against Covid-19 and pursue a quick recovery,” Philippine Treasurer Rosalia de Leon said in a chat message to reporters on Monday. The funds are “adequately covered by debt service savings and additional income,” she said.
The BSP bought zero-interest government securities from the Bureau of the Treasury in March under a three-month repurchase agreement that was renewed for another three months. The Treasury is prepared to pay that debt by the end of this month.
The new law effectively raises the amount the central bank may lend the government to 30% of average revenue, from the previous 20% limit. The additional amount must be borrowed within two years and repaid within one year, although the deadline can be extended by another year.
Passage of the new law “opens the door for a more hefty ‘burden-sharing’ arrangement between the fiscal and monetary authorities,” said Nicholas Mapa, senior economist at ING Groep NV in Manila. Raising the limit for BSP funding “could signal that the central bank and the national government are readying an upsize of the budget in the near term.”
There might not be any immediate impact on inflation or the currency, but “repeated rounds of these ‘burden-sharing’ arrangements may begin to erode precious central bank credibility, with BSP independence questioned as the line between fiscal and monetary authorities begins to blur considerably,” Mapa wrote in a
research note.