EMERGING MARKETS will largely continue to have access to funding this year but their timid spending risks prolonging the collapse in demand, think tank Oxford Economics said.
“A large-scale emerging market funding crisis will likely be averted this year, but the fiscal policy response to the pandemic has been timid, threatening to entrench weak demand and low inflation,” Oxford Economics said in a note issued Nov. 3.
It said most economies are on track to meet their overall funding needs for the year, defying the fears that many may struggle to access financing due to competition for the pool of funds as more governments report declining expenditures and tax collections during the pandemic.
It said quantitative easing measures rolled out by central banks to cushion the fallout have also been generally successful, while funding costs have fallen for many countries as bond yields decline.
“With COVID-related global risks still elevated, our funding vulnerability scorecard highlights those most at risk of funding problems that could see yields spike,” Oxford Economics said.
The funding outlook projects downside risks for emerging markets with the biggest fiscal response to the pandemic such as Kuwait, Brazil, South Africa, Saudi Arabia, Romania; those with the biggest funding needs like Pakistan, Egypt, Brazil, South Africa; countries with shallow domestic financial markets such as Uruguay, Ukraine, Indonesia, Romania, Peru; and those whose bond yields have soared including Turkey, South Africa, Hungary, and Indonesia.
It also flagged countries that have fallen behind the pace of their bond issue timetables such as South Africa, Malaysia, Turkey and the Philippines.
Oxford Economics also warned that bond yields in the Philippines “are too low for comfort.”
National Treasurer Rosalia V. de Leon said the Bureau of the Treasury is on track to hit the targeted number of bond issues for the year, saying Oxford Economics’ estimates, which cited the International Monetary Fund, might have not taken into account government borrowing from the central bank.
“We are not behind our programmed local issues. (The report maybe did) not consider (recent transactions with) the BSP (Bangko Sentral ng Pilipinas),” she said in a Viber message Wednesday.
“Strong bid to cover ratio in auctions shows rates remain attractive to investors,” she added.
The government plans to issue P1.67 trillion worth of Treasury bonds and P48 billion worth of Treasury bills this year. It also aims to raise P500 billion from the central bank through repurchase agreements and advances.
The government’s economic team also decided to tap the domestic bond market for most of its borrowing program this year, with a domestic borrowing target of P2.2 trillion out of P3 trillion overall.
It issued P300 billion worth of securities to the central bank in March under a repurchase agreement. This was settled in October but another P540 billion of provisional advances was extended by the BSP to the government that month.
The government borrows from domestic and foreign sources to plug its budget deficit, which is expected to be equivalent to 9.6% of gross domestic product this year.
Oxford Economics said emerging markets, like advanced economies, should “learn to live with higher debt” to fund fiscal stimulus packages and to pump-prime their economies.
“Fiscal measures now are timid, though so will be future fiscal adjustment. But widespread emerging market crises will likely be averted. Weak demand, low inflation, and high savings suggest low yields imply a slow recovery with rumbling vulnerabilities,” Oxford Economics said. — Beatrice M. Laforga
