The central bank’s plan to auction term deposits is coming at the worst possible time for a government reeling from surprisingly bad economic growth data.
The weekly sales, aimed at soaking up excess cash that could spur investments in risky assets, will allow lenders to compete for a fixed volume of deposit access to the Bangko Sentral ng Pilipinas (BSP).
BDO Unibank Inc., the country’s biggest lender, sees them helping push up the secondary-market yield on three-month government bills to as high as 3.25 percent by year-end, from 2.46 percent on Monday.
Rising borrowing costs may make it harder for President Aquino to revive an economy where growth slowed to a three-year low of 5.2 percent in the first quarter. The International Monetary Fund (IMF) said the “significant negative surprise” would force it to review its expansion forecasts, even as it predicted a pickup in exports and public spending.
“Both the central bank and the treasury will hold auctions,” said Jonathan Ravelas, chief market strategist at BDO Unibank in Manila. “Hands down, people would go to the one that can offer higher yields. The borrowing cost for the national government could go up.”
While the Philippine benchmark interest rate was raised from a record-low 3.5 percent last year to 4 percent currently, market rates have yet to catch up. The one-month bill used as a benchmark for pricing bonds and preferred shares was showing a yield of 1.96 percent on Monday, according to data from the Philippine Dealing & Exchange Corp.
Building boom
Manila is in the midst of a building boom that will add a record number of apartments over the next two years. Policy-makers introduced measures in 2014, including capping the collateral value of mortgages at 60 percent, amid concern prices were rising too fast. Property loans by Philippine banks rose 6.8 percent in the fourth quarter, accelerating from 4.5 percent in the previous three months, central bank data show.
The monetary authority wants to soak up excess cash so movements in the benchmark interest rate will more effectively convey policy to the market and interest rates will move closer to it, BSP Deputy Governor for Monetary Stability Sector Diwa C. Guinigundo said in April, when he unveiled plans to offer term deposits with tenors from one month to a year.
The government sold P8 billion ($180 million) of 91-day Treasury bills on Monday at an average yield of 2.14 percent. Ravelas said he had revised his previous 2.5-percent year-end three-month Treasury reference rate forecast up by 50 to 75 basis points.
Spur competition
First-quarter economic growth was well below the 6.6-percent median estimate in a Bloomberg survey, data showed on May 28. It’s slowed from as fast as 7.9 percent in the three months through June 2013, and has now fallen behind 5.6-percent growth in Malaysia. The IMF said it would review its 2015 Philippine growth forecast of 6.7 percent.
Slower public spending was partially to blame for the slowdown, along with flagging export growth.
The central bank’s auction plan is being mapped out in coordination with the Treasury, National Treasurer Roberto B. Tan said in a May 13 interview in Manila. The sales won’t necessarily push up government borrowing costs, said Frances Cheung, head of rates strategy for Asia ex-Japan at Société Générale SA.
“The new tool, together with existing ones, should be aiming at adjusting short-term liquidity and, hence, the impact on bond yields may be limited,” she said from Hong Kong. The yield on the Philippines’s one-year notes rose 46 basis points over the last three months to 2.48 percent on Monday, according to a Philippine Dealing & Exchange Corp. fixing. That compares with an 83-basis-point increase to 7.30 percent for similar-maturity Indonesian securities.
Bloomberg News