THE CENTRAL BANK may adjust monetary policy further to support the government’s limited fiscal space and strong balance of payments (BoP) position, Nomura said in a report, but this would result in loose liquidity, a stronger peso and slightly higher government bond yields.
In its latest scorecard of 20 emerging markets, Nomura lumped the Philippines with Brazil, India, China, Poland and Thailand as economies having a strong BoP but weak fiscal position.
“Here there are fairly strong incentives for central banks to intervene in both the FX market and government bond market. We would expect liquidity to be loose, local currencies to be stable to stronger against USD, and government bond yields to be stable to higher,” Nomura said in its Emerging Markets Special Report dated Oct. 28.
It said central banks can also limit currency appreciation and preserve the competitiveness of exports to help with the limited fiscal space.
“The weak fiscal position justifies central banks continuing their government bond purchase programs to avoid a spike in bond yields, especially for countries with very weak GDP (gross domestic product) growth and if public debt and bond yields are relatively high,” it added.
The Bangko Sentral ng Pilipinas (BSP) has released some P1.9 trillion in liquidity into the financial system so far this year through monetary actions rolled out to help cushion the economy from the effects of the coronavirus pandemic.
To aid the government and its limited fiscal space, the BSP approved a P540-billion provisional cash advance last month. This came after the government settled its outstanding loans worth P300 billion.
The BSP can provide the government provisional advances of up to P850 billion only.
However, Nomura warned of the potential risks that may arise from these interventions.
For instance, it said central banks have the option to lower the amount of government bonds they buy, which could be due to the fear of losing monetary policy autonomy or if the potential increase in bond yields is constrained as this attracts more capital flows to the local bond market.
It said it could help manage a possible sharp appreciation of currency through reduced bond purchases and more foreign exchange intervention.
“A perhaps small but possible tail risk of the central bank stepping back from its government bond purchases amid a weak fiscal position is that it may raise investor concerns over public debt sustainability, stoking capital flight instead of capital inflows,” it said.
Nomura expects the six countries with weak fiscal positions to maintain loose liquidity and a stable to stronger currency against the greenback, with government bond yields seen to be stable or inch up.
The country’s BoP surplus widened to $2.104 billion in September from $38 million in the same month last year. Year to date, the BoP surfeit climbed 24% year on year to $6.88 billion.
The BSP expects the overall BoP position to yield a surplus of $8.1 billion by yearend.
Meanwhile, the government’s budget deficit narrowed by 22% to P138.5 billion in September, bringing the nine-month gap to P879.2 billion, up 194% from the year prior. — B.M. Laforga