Bangko Sentral mulls alternative to infrastructure financing

The central bank-led Financial Stability Coordination Council (FSCC) is improving the bond market landscape to expand the funding alternatives for the government’s “Build, Build, Build” (BBB).

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said that better infrastructure is key. “From the standpoint of the FSCC, one of our objectives is to make infrastructure financing viable and this is why we are focusing in particular on deepening the capital market,” said Diokno.

The BSP on Wednesday released the FSCC’s second Financial Stability Report (FSR) which covered a long period from the first half of 2018 until this year’s first six months. “A stronger capital market is good banking policy, good systemic risk management and good for the Philippines as we move forward with our ASEAN colleagues,” said Diokno.

In his FSR presentation, BSP Assistant Governor Johnny Noe E. Ravalo of the Office of Systemic Risk Management disclosed three so-called interventions that will respond to the financial stability risks that they see.

“Risks are brewing and we know what those risks are, we know where they are coming from, we have ways how to address them. We think we have strength in the Philippine economy,” said Ravalo. “We want to use that strength to be able to address (these risks). When we say we have buffers – we’re talking about growth, that it’s higher than the rest of the world, inflation is low… there’s no immediate macro-shock.”

Based on the FSR report, to sustain economic growth, and one that is undertaking a huge infrastructure development program, this will “require new alternatives geared towards term funds.”

While the extent of funding has traditionally been made available through bank credit, this FSR has made the case that leverage and liquidity considerations in the bank books warrant a fresh look as a source of brewing risks, according to the report, adding that it is in this context that the FSCC sees a more holistic financial market that extends beyond developmental and into a systemic risk mitigant.

Ravalo said the interventions that are being considered are: fewer but deeper benchmark tenors, indexed bonds, and tenor-based pricing.

In his presentation, the BSP official said “fewer but deeper” tenors entail consolidating liquidity which “creates depth at key tenor benchmarks.”

Indexed-bonds, such as inflation-linked bonds or GDP indexed bonds, which have been long discussed in the BSP, are also being reviewed and studied at the FSCC level. “There are proposals raised and discussed in the FSCC and we are coordinating with the SEC and BTr in terms of the execution of all these things,” said Ravalo. “So, the actual details are a work in progress at this point.”

The third intervention is tenor-based pricing. “Rates that fairly represent risks for each tenor” allow more choices for investors and market players.

The latest FSR has six main themes, according to Ravalo. These are: World growth has been moderating since 2018; rate hikes in 2018 became rate cuts in 2019 with market sentiments changing all the time which saw a lot of risk aversion and countryspecific vulnerabilities; banks rebalanced their portfolios; funding is still largely coming from banks; Philippine growth has moderated but infrastructure is key; ASEAN integration is another facet to consider.

In terms of ensuring financial stability, Ravalo said the Philippines “have an advantage… we’re still growing at six percent.” He also said that BBB is not a risk concern because they are looking at infrastructure development as a necessity to expand the economy. “(The) question on how to fund the BBB is central to the FSR,” said Ravalo.