Emerging market central banks could risk their reputations, sovereign credit ratings and even full-blown economic crises if their bond buying is pursued beyond the coronavirus crisis, S&P Global said in a report.
Top S&P analysts said in Wednesday’s report that although there was no indication that investors had lost faith in the central banks of India, Indonesia or the Philippines, risks would rise if post-pandemic sovereign debt purchases looked likely.
“Pushed too far… the programmes may impair the ability of central banks to respond to future crises, with rating implications for the respective sovereigns,” the report said.
“If investors begin to view government reliance on central bank funding as a long-term, structural feature of the economy, these monetary authorities could lose credibility.”
S&P’s concern is also that the buying is not guided by inflation controlling objectives, but by worries a COVID-19 debt issuance surge will hit borrowing costs and currencies.
“Sovereigns with less credible public institutions and less monetary, exchange rate and fiscal flexibility have less capacity to monetise fiscal deficits without running the risk of higher inflation,” the analysts said.
“This may trigger large capital outflows, devaluing the currency and prompting domestic interest rates to rise, as seen in Argentina over parts of the past decade.”
S&P has downgraded more than 50 government ratings since the coronavirus pandemic took hold, while debt levels are set to continue to spiral.
Indonesia’s central bank has come under particular scrutiny in recent weeks over proposals to give government ministers voting rights at its meetings and allow the bank to use the tactic of buying government bonds direct, rather than in secondary markets as most central banks do.
BI has also pledged to buy $28 billion of government bonds while relinquishing interest payments, as part of a $40 billion fiscal financing deal with the government to fight the health crisis in 2020, though President Joko Widodo has pledged it will remain independent.
Meanwhile, the Philippines has said it will carry out its 300 billion Philippine peso ($6.2 billion) government bond repurchase agreement with the country’s Treasury Bureau for six months at most.
“The relatively mild market impact of central bank purchases of government bonds in these countries could change if the institutions increased their purchases, or if investors no longer saw the buying as temporary,” S&P said.
