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Fitch warns of stability risks of central banks’ asset purchases

ASSET PURCHASES may remain a staple in central banks’ policy toolkit going forward, but these could become risky in case global financial measures tighten, Fitch Ratings said.

The debt watcher said while asset purchases are not directly involved in its ratings assessment, it could pose a downside risk to sovereigns’ grades, particularly in policy indicators.

“A weakening of the credibility of policy frameworks is a negative rating sensitivity for a number of emerging markets, including some of those that began asset purchases last year,” Fitch Ratings said in a note on Tuesday.

In May 2020, Fitch affirmed its “BBB” rating for the Philippines but downgraded its outlook to “stable” from “positive” as it factored in the impact of the pandemic on the economy. A stable outlook means the rating is likely to be maintained within the next 18 to 24 months.

The Bangko Sentral ng Pilipinas (BSP) started its asset purchases at the onset of the pandemic in March 2020 when it bought P300 billion in short-term securities from the Bureau of the Treasury (BTr).

In October, the central bank granted another P540-billion zero-interest loan to the National Government that was paid in full in December. The BSP lent another P540 billion in January for the government’s pandemic response.

Republic Act (RA) 11494 or the Bayanihan to Recover as One Act allowed the BSP to lend 30% of its average revenue to the government, an increase from the 20% limit under RA 7653 or The New Central Bank Act. This allowed the BSP to lend up to P850 billion from the previous cap of P540 billion.

“Indonesia and Philippines were the only sovereigns outside of the ‘B’ category that implemented primary market purchases in 2020, and in both they were targeted and transparent, with the authorities emphasizing their temporary nature amid exceptional pandemic-related conditions,” Fitch said.

The ratings agency said primary market purchases appear to be a greater threat to institutional credibility compared with buying from the secondary market.

For now, however, Fitch said macroeconomic risks from quantitative easing of central banks have not materialized.

“However, it may lead to fiscal dominance and has a record of reinforcing macroeconomic instability,” it said.

BSP Governor Benjamin E. Diokno has said they will carefully assess the timing of unwinding the policy measures it rolled out during the crisis to safeguard financial stability. — L.W.T. Noble

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