Cuts on rates, RRR to bring cheaper credit for gov’t
The projected rate cuts by the Bangko Sentral ng Pilipinas (BSP) and the extra shot of liquidity from planned reductions to the reserve requirement ratio (RRR) of banks would help the government lock-in cheaper debts to bridge its budget shortfall.
In a commentary, ANZ Research said yields on government bonds are expected to “consolidate before resuming a downtrend” as the BSP starts its easing cycle, lowering the borrowing costs for the Marcos administration.
Going to the international debt market would also be less costly for the government once the US Federal Reserve starts its rate-cutting cycle, which can affect the yield on US Treasury securities, ANZ said. This, as yields on Philippine government securities tend to follow movements in US Treasuries.
At the same time, ANZ said BSP Governor Eli Remolona Jr.’s plan to further cut the RRR from the current level of 9.5 percent may unleash billions of peso in domestic liquidity that would eventually look for viable investment outlets to grow.
But while some of those extra money supply would find their way to government debt securities, ANZ said much of it would likely be absorbed into the BSP’s monetary operation tools.
“We expect the BSP’s rate-cutting cycle to continue into early 2025, threfore opening another 25-basis point (bp) downside to bond yields if the downtrend in inflation continues in the coming months,” ANZ said.
At its Aug. 15 policy meeting, the powerful Monetary Board (MB) had decided to slash the BSP’s target reverse repurchase rate for the first time in nearly four years to 6.25 percent.
In a statement, the MB said the BSP will aim for a “calibrated” shift to an easy monetary policy stance. That means the current easing cycle would be a “gradual” one, Remolona said without ruling out the possibility of another 25-bp reduction either at the October or December policy meeting of the MB.
‘Comfortable’ funding position
Finance Secretary Ralph Recto—who represents the Cabinet of President Marcos in the MB—had wanted an early rate cut as the government seeks to raise cash at cheaper cost and as fast as it can to pay maturing debts, including the pandemic-era borrowings it inherited from the previous Duterte administration.
The Marcos administration projected a budget deficit of P1.5 trillion for this year, or equivalent to 5.6 percent of gross domestic product. To bridge that fiscal gap, the government is planning to borrow P2.6 trillion from creditors at home and abroad.
For now, ANZ Research said the government looks on track to meet its revenue collection targets and borrowing program.
”Funding positions look comfortable with revenue slightly above the run-rate, while (government bond) issuance has met 56 percent of the net and 63 percent of the full-year issuance target by June 2024,” it said.
