Philippine Central Bank Ready to Lend More to Government

(Bloomberg) -- The Philippine central bank is prepared to lend more to the government, as the “once-in-a-lifetime” coronavirus crisis requires coordination among all parts of government to counter the blow, Governor Benjamin Diokno said Monday.

His 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 that Diokno said is worth about 282 billion pesos.

“This unprecedented, once-in-a-lifetime pandemic requires an all-of-government approach,” Diokno said in texted comments to Bloomberg. “Hence, unavoidably monetary and fiscal authorities have to work hand-in-hand in order to calm down the market,” help businesses and fund government operations, including Covid-related spending.

The new law in the Philippines 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 was 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. If central banks in countries including the Philippines progress to debt monetization, however, that could undermine investor confidence, S&P Global Ratings said in a report 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.

Covid Relief

The government 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 new law effectively raises the amount the central bank may lend the government to 30% of average government revenue in the last three years, from 20% previously. Diokno said the government only has two years to access the additional monetary support and must repay within a year.

“In the case of the Philippines, the monetary measures are clearly time-bound,” he said.

The government proposed the step to help “fund requirements against Covid and pursue a quick recovery,” Philippine Treasurer Rosalia de Leon said in a chat message to reporters Monday. The funds are “adequately covered by debt service savings and additional income,” she said.

Philippine Central Bank Can Buy More Bonds Under Relief Bill (1)

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.

Sharing the Burden

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.

Diokno, in his texted comments, downplayed any concerns.

“Rating agencies have affirmed the Philippines’ credit rating amid a sea of downgrades,” he noted. “I’m confident that assuming we continue to learn to live with the virus, that the Philippine economy will emerge from this pandemic with less permanent scar than most other developed and emerging economies.”

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