By Luz Wendy T. Noble, Reporter
THE Financial Stability Coordination Council (FSCC) is evaluating the possibility of issuing securities linked to the country’s gross domestic product (GDP) as a new instrument to manage liquidity in the financial system, FSCC Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said.
“We continue to consider the prospects and timing of GDP-linked bonds (GLBs). But this has to also come hand in hand with the recent issuance of BSP securities and the evolving market conditions,” Mr. Diokno said in an e-mail to BusinessWorld.
“Our objective is to re-deploy liquidity that is already available in the market as part of our shared objective to address risk aversion and move further towards the New Economy,” he added.
In September, the BSP launched the 28-day BSP bills as part of its initiatives towards more market-based monetary operations.
Pressed for details, Mr. Diokno said the GDP-linked bonds, if issued, will have a longer tenor than the Treasury bills, by nature.
“The prospect of issuing GDP-linked bonds is under review, but there is no firm commitment for its adoption,” he said in a Viber message.
Analysts said the risks of such bonds lie on the volatility of the economy.
“GDP-linked bonds will be both an advantage and disadvantage depending on the volatility of GDP indicators which as of now are moving in the opposite direction (e.g. unemployment, foreign direct investments, inflation, etc.). This opposite movement may jeopardize the value of bond share,” Colegio de San Juan de Letran Graduate School Dean Emmanuel J. Lopez said in a text message.
Despite this, Mr. Lopez said such bond issuance could stimulate spending and investment, which could then create a “semblance of normality, at the same time, induce GDP growth.”
From an investors’ perspective, a faster pace of recovery will provide higher interest rate returns, said Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort.
“Since the Philippine GDP growth (before the pandemic) had been one of the fastest-growing among relatively larger countries around the world, this would provide greater incentives for investors,” Mr. Ricafort said in a text message.
The economy shrank by 11.5% in the third quarter, bringing the nine-month GDP contraction to 10%. The government expects the GDP to slump by 8.5% to 9.5% this year.
In 2019, the country’s GDP rose by 6%.
Meanwhile, a softer economic bounceback will still be favorable from an issuer’s point of view, said Mr. Ricafort.
“[Such] conditions would allow lower borrowing costs for GDP-linked bonds, thereby providing greater support in terms of lower debt-servicing costs as the resulting savings may be re-allocated to pump-priming other support measures when needed most to resuscitate the economy,” he said.
Economic managers maintained its GDP growth outlook for 2021 at 6.5-7.5%, and for 2022 at 8-10%.
UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the GDP-linked bonds could be a welcome development if the government decides to push through with the issuance.
“If these were used in other countries, why not ours? The good thing here is that investment instruments are growing and varieties are expanding,” Mr. Asuncion said in a Viber message.
THE inflation environment is expected to remain “manageable” in the next four years, with the central bank taking into account the economy’s recovery trajectory after the pandemic.
“The DBCC (Development Budget Coordination Committee) in consultation with the BSP (Bangko Sentral ng Pilipinas), decided to retain the current inflation target range at 3% plus or minus one percentage point (ppt) for 2021 – 2022 and set the inflation target range at 3% plus or minus one ppt for 2023 – 2024,” the BSP said in a statement on Friday evening.
“Moreover, inflation expectations are expected to remain firmly anchored to the National Government’s target.”
The inflation rate from 2023 to 2024 will be dependent on the pace of economic recovery from the current coronavirus disease 2019 (COVID-19) crisis.
“The Philippine economy is expected to regain momentum as the health crisis is sufficiently addressed, while macroeconomic policies gain full traction in reviving the economy,” the BSP said.
Economic managers are pinning their hopes on a strong economic recovery starting 2021.
In its meeting earlier this month, the DBCC lowered its 2020 gross domestic product (GDP) outlook to 8.5-9.5% contraction this year (from 4.5-6.6% in July) but kept its growth forecast at 6.5% to 7.5% for 2021.
Moreover, the DBCC upwardly revised the growth estimate for 2022 to 8-10% (from 6.5-7.5%).
The economy remained in a recession after GDP shrank by 11.5% in the third quarter. Year to date, the GDP contracted by 10%.
“The COVID-19 pandemic could lead to structural changes in supply and demand factors that determine the level of inflation as well as affect the country’s future productive capacity,” the BSP said.
“This reinforces the important role of the inflation target as an important guidepost for the BSP in ensuring inflation remains low and stable, which will be conducive to long-term economic growth,” it added.
In its December policy meeting on Thursday, the Monetary Board raised its inflation forecast for 2020 and 2021 to 2.6% (from 2.5%) and 3.2% (from 2.7%), respectively. BSP Deputy Governor Francisco G. Dakila, Jr. said the outlook was updated due to the faster increase in food and global oil prices.
Meanwhile, the BSP maintained its 2022 inflation forecast at 2.9%.
In November, the consumer price index rose by 3.3%, quicker than the 2.5% in October and the 1.3% a year ago. The month’s print is also the fastest in 21 months or since the 3.8% logged in February 2019. — L.W.T. Noble
THE Asian Development Bank (ADB) estimated at least two million Filipino workers may have lost their jobs by the end of the year as the pandemic continued, with the steepest drop in employment seen in services sector that depend heavily on tourism.
“Our analysis shows that by the end of 2020, around 2.1 million workers may have lost their jobs, relative to the pre-COVID baseline scenario. About 1.5 million of these workers (about 68%) may become unemployed, raising the unemployment rate from 5.1% in 2019 to 8.5% in 2020,” ADB Southeast Asia Department technology and innovation specialist Sameer Khatiwada and economist Rosa Mia Arao said in a blog post published on Friday.
They noted another 389,000 workers may drop out of the labor force, while around 288,000 workers may look for work in other sectors, mainly agriculture.
“Such labor reallocation following economic shocks is typical in the context of developing economies. Without adequate social protection, displaced workers cannot afford to remain unemployed and, therefore, shift to lower productivity employment in agriculture or informal employment in low productivity services,” they said.
However, there are “signs that a pickup in the job market is underway,” the ADB analysts said.
In October, the unemployment rate stood at 8.7% which represents 3.813 million jobless Filipinos, data from the Philippine Statistics Authority showed. This eased from the 10% jobless rate in July when 4.571 million Filipinos are unemployed.
Based on ADB’s estimates, a decline in employment is seen in tradable sectors such as manufacturing and transportation due to the drop in global demand. However, job losses were higher in non-tradable industries such as construction, wholesale and retail, accommodation and food, and public administration, because of strict lockdown measures.
“We estimate job loss north of 500,000 in wholesale and retail, 265,000 in accommodation and food, and a drop of about 100,000 jobs in transport, public administration, and other services,” the ADB analysts said.
There is also a sharp increase in employees that reported they had a job but did not work during the year. The ADB analysts noted some of these workers likely did not get any salary at this time.
“Indeed, the COVID-19 pandemic had significant labor market impacts, including massive job losses and unemployment, a decline in labor force participation, and reductions in hours worked. Moreover, our analysis indicates that job loss disproportionately affected low productivity sectors such as construction, transport, tourism, and wholesale and retail that employ many low-skilled workers,” they said.
Moving forward, the government’s infrastructure push, stable inflation and low interest rates, as well as the upcoming availability of vaccines should boost economic recovery and increase jobs.
“Over the medium-term, policies to spur and save jobs, help struggling firms, help displaced workers to find reemployment, and to boost spending, will be critical to ensure a resilient and robust recovery,” the analysts said.
“Moreover, intensified efforts to improve education and training will help to enhance the skills of workers whose livelihoods have been affected by the pandemic. Together, these measures are encouraging signs that workers will not only find employment but thrive in the post-COVID-19 labor market.”
The ADB expects the Philippine economy to shrink by 8.5% this year before growing by 6.5% in 2021. This compares with the government’s forecast of an 8.5-9.5% contraction in 2020 and a growth of 6.5-7.5% by 2021. — L.W.T. Noble
THE Philippine peso is seen notching a third year of gains in 2021 as the sluggish economic recovery curbs imports and with remittances expected to rebound.
The peso, which closed at 48.085 per dollar on Friday, will rise to 47.50 by the end of next year, according to a Bloomberg survey. The currency has risen 5.4% this year, the biggest gainer in Southeast Asia.
The Philippine economy is forecast to start growing only in the second quarter of 2021, putting it among the slowest to recover from the pandemic that has ravaged the global economy. Falling imports have crimped demand for dollars, with the peso surging to a four-year high in December.
“As long as domestic demand is far from a full recovery, we expect the peso to get even stronger,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. Among her company’s 2021 top trade recommendations is to sell the dollar against the peso with a target of 46.
Imports fell 19.5% in October from a year ago, its 18th month of declines. The narrower trade balance is boosting the current account, with the central bank raising its forecast for a surplus next year to 1.5% of gross domestic product.
The global growth rebound will also boost demand for Filipino workers abroad next year, with the central bank predicting remittances will advance 4% after an expected 2% drop in 2020. Remittances are the nation’s largest source of foreign exchange after exports.
The central bank remains committed to a flexible foreign-exchange rate policy as the improving economy could impact the currency’s supply and demand, Governor Benjamin E. Diokno said Friday.
Philippine peso bonds, Asia’s top performer this year, are expected to remain supported by the central bank’s accommodative policy. Bangko Sentral ng Pilipinas, which held its key interest rate on Thursday at a record-low 2%, has said it stands ready to use a full range of tools to boost growth.
“With BSP pledging an accommodative environment into next year, bonds will remain supported,” said Robert Dan J. Roces, chief economist at Security Bank Corp. in Manila. “A low interest-rate environment means moderate returns for bonds, with yields to slowly retrace to pre-pandemic levels on the back of more borrowing to fund pandemic expenses.”
The nation’s bonds have handed investors almost 19% this year. The yield on the 10-year debt has fallen to about 3% from more than 5% in March, even as the government increased debt sales and projected a wider budget deficit next year.
The Philippine Stock Exchange Index could climb to 8,300 by the end of next year, according to Julian Tarrobago, head of equities at ATR Asset Management, Inc. in Manila and whose ATRAM Alpha Opportunity Fund has beaten its peers with a 66% return since the trough in March.
The index, which closed at 7,272.80 on Friday, clocked a 41% year-to-date plunge in March before staging a rebound that cut its loss to 7% in 2020.
While 2021 corporate earnings will probably be only about 86% of the 2019 level, Mr. Tarrobago is optimistic that foreign funds will reverse course from this year’s exodus as the economy’s recovery leads to a sustained rebound in earnings. Spending for the May 2022 presidential elections could also provide a potential boost in the second half of next year.
“The market should be able to trade above its five-year historical average valuation,” Mr. Tarrobago said. “There will still be volatility but it won’t be like what we have seen this year.”
Foreign funds will help drive up stock valuations to 19 to 20 times 12-month forward earnings, he said. Mr. Tarrobago forecasts earnings per share to grow 45% in 2021 from an expected 39% contraction this year. — Bloomberg
LONDON — It didn’t seem like a revolution.
A botanical green smoothie and a snapper fish burger, it was. In a Bahamas health-food café.
But future generations might look back at this as a pivotal moment — the first national launch of a technology that could upend commercial banking and even shake the US dollar’s status as the world’s de facto currency.
The refreshments were among the first items bought using the “Sand Dollar,” a digital currency issued by the Bahamian central bank for use across the country via an app.
“It’s instant — I get a message, and it’s received,” said Dawn Sands, owner of NRG, the café in the capital Nassau, showing Reuters via video how sales work. “Once people get comfortable and educated, I think it’s going to be big.”
While this experiment in the archipelago nation of around 390,000 people is modest in itself, it is likely being closely watched by major central banks across the world, from the US Federal Reserve and European Central Bank to the People’s Bank of China and Bank of England.
They have been looking at issuing their own digital coins, having found themselves in a tricky position as the use of physical cash dwindles.
They are wary of a blockchain-based technology like bitcoin conceived to banish central banks, but reluctant to miss the boat on a potential game-changer and cede the field to Big Tech offerings like the Facebook-backed Diem, formerly Libra.
Smaller nations such as Cambodia have also, meanwhile, forged ahead with their own projects in digital currencies, which promise to extend financial services to people currently lacking access to banking, especially in the developing world.
The Bahamian scheme offers clues for other economies on how central bank digital currencies (CBDCs) can be introduced and work in practice — from getting users on board to helping businesses avoid costly payments fees.
“Everybody is interested in it — I think it’s arguably the first step,” said Philip Middleton, deputy chairman of the OMFIF central banking think-tank in London.
“If I’m looking for lessons learned for the big boys, it’s the whole education piece — if this is successful, how have you persuaded the population to use this?”
The Sand Dollar was launched in October, with users coming aboard in the subsequent weeks.
One of its core aims is to boost access to financial services to people in the archipelago, whose complex geography of 700 islands and remote keys throws up challenges in securely distributing cash. Payments are also a key area.
At the NRG café, Ms. Sands said the technology would help smaller business avoid fees charged by credit card companies. She said she was charged around 4% on credit and debit card sales of omelettes, panini and the like: “For a small business, 4% is a very big hit.”
The virtual coin is issued by the Central Bank of The Bahamas to digital wallets held by an initial tranche of six licensed money-transfer and payment firms. Through them, people and businesses can then access, hold and spend coin via an app.
Three other companies, including a commercial bank, are undergoing checks for entry to the scheme, the central bank said, without giving further details.
The early signs are positive, though there are only $130,000 worth of Sand Dollars in circulation at present, central bank data show, compared with $508 million worth of traditional Bahamas dollars.
Interviews with the Central Bank of The Bahamas, Sand Dollar users and three of the financial firms offering the tech suggest that, so far, it is functioning as a way to pay.
“We have merchants right now that have come on board in terms of integrating it into their system for persons to be able to purchase products for them,” said Deirdre Andrews of Omni Financial Group, a money transfer firm.
“The start of it is the movement of money back and forth.”
‘SAFE IN AGE OF COVID’
To introduce the virtual currency, the central bank launched a social-media campaign on Instagram, where its workers discuss their experience of the pilot scheme.
“A key lesson is that stakeholder engagement is important,” said John Kim, general counsel for NZIA, the tech firm that developed the Sand Dollar. “You can say, ‘adoption is important,’ but people need to use it — people need to get integrated into this.”
CBDCs are different from cryptocurrencies like bitcoin, though both are based on blockchain technology. They are issued by a central bank while bitcoin is produced by “miners” solving maths puzzles, with no central authority.
They are a complete replacement for notes and coins, also differing from electronic cash used to pay with cards or PayPal, which is merely a representation of physical money. If there is a major shift from credit and debit cards to CBDCs, big payments firms and banks could see lucrative fees charged to process transactions evaporate.
Bigger tests await with other larger CBDCs, with China the most advanced among major economies with it digital yuan — something it hopes could reduce its dependence on the global dollar payment system.
The Bahamian coin also doesn’t allow individuals to hold accounts directly with the central bank — which could drain deposits from commercial lenders and shake their business models.
As such the project offers few clues to the impact of CBDCs on traditional financial firms, a key area of interest for major economies as they weight the risks of the technology.
Kimwood Mott, who is overseeing the project at the central bank, said one attraction for many business owners had been the prospect of avoiding physical cash during the pandemic.
“It’s fast, seamless and — in the age of COVID — it’s safe.” — Reuters
