Debt market activity to remain strong next year on steady need for funds

THE LOCAL debt market will likely see equally brisk activity in 2019 to match this year’s level amid a steady need for funding for both government and corporate players, bond traders said.

Officers of the Money Market Association of the Philippines, Inc. (MART) said yesterday that the Philippines may see more bond issuances next year, reflecting sustained demand for funding.

“This year…the government was borrowing to fund the deficit program of the administration, the banks were borrowing because of the new regulations implemented by the BSP (Bangko Sentral ng Pilipinas) for liquidity forced us to need to be more active in the capital markets, and corporates continue to expand. If you put all of those together, that means there is just constant demand in the market,” MART Vice-President Steven Michael T. Reyes told reporters yesterday.

“Obviously, the demand for money and funding seems more likely will be sustained in 2019 rather than a reduction.”

Mr. Reyes, who also serves as head of commercial trading for Rizal Commercial Banking Corp., said lenders would likely again tap the capital markets as they raise more loose cash to meet the net stable funding ratio (NSFR) requirement set by the BSP, on top of funds raised this year to meet other regulatory standards.

The NSFR requires universal and commercial banks to hold enough liquidity or “reliable” sources of funding to cover their “expected and unexpected cash flows and collateral needs” during day-to-day operations projected over a one-year period.

This is on top of the liquidity coverage ratio which requires buffers for a 30-day period. These form part of tighter regulatory standards under the Basel 3 regime which seek to improve risk management among banks to prevent a funding crunch.

The national government is also expected to be a constant issuer in the debt market to fund increased government spending. The state has programmed a wider budget deficit worth P624.4 billion or 3.2% of gross domestic product in 2019, coming from P523.7 billion this year to accommodate increased state spending particularly for infrastructure projects.

However, players are watchful about inflation as well as possible risks drawn from the upcoming May 2019 elections as potential risks, along with the blossoming trade war between the United States and China as key concerns, Mr. Reyes added.

Inflation has averaged 5.1% as of October, well above the BSP’s original 2-4% target amid rising food and world crude prices. However, authorities are working to bring inflation back to below four percent next year through a mix of policy rate hikes and non-monetary measures to plug gaps in food supply, which has driven rising consumer prices.

The government is looking to float a fresh set of retail Treasury bonds as well as another dollar bond issuance within the remaining months of 2018.

However, MART Director Cristina P. Arceo said tighter liquidity in the market could stand as a constraint for large bond issuances. Limited money supply could in turn push yields higher for these debt papers. —