Policy makers eye GDP-linked bonds

The government is hoping a pickup in consumer spending ahead of the holidays will help boost economic growth. — PHILIPPINE STAR/MICHAEL VARCAS

By Luz Wendy T. Noble, Reporter

THE Financial Stability Coordination Council (FSCC) is evaluating the possibility of issuing securities linked to the country’s gross domestic product (GDP) as a new instrument to manage liquidity in the financial system, FSCC Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said.

“We continue to consider the prospects and timing of GDP-linked bonds (GLBs). But this has to also come hand in hand with the recent issuance of BSP securities and the evolving market conditions,” Mr. Diokno said in an e-mail to BusinessWorld.

“Our objective is to re-deploy liquidity that is already available in the market as part of our shared objective to address risk aversion and move further towards the New Economy,” he added.

In September, the BSP launched the 28-day BSP bills as part of its initiatives towards more market-based monetary operations.


Pressed for details, Mr. Diokno said the GDP-linked bonds, if issued, will have a longer tenor than the Treasury bills, by nature.

“The prospect of issuing GDP-linked bonds is under review, but there is no firm commitment for its adoption,” he said in a Viber message.

Analysts said the risks of such bonds lie on the volatility of the economy.

“GDP-linked bonds will be both an advantage and disadvantage depending on the volatility of GDP indicators which as of now are moving in the opposite direction (e.g. unemployment, foreign direct investments, inflation, etc.). This opposite movement may jeopardize the value of bond share,” Colegio de San Juan de Letran Graduate School Dean Emmanuel J. Lopez said in a text message.

Despite this, Mr. Lopez said such bond issuance could stimulate spending and investment, which could then create a “semblance of normality, at the same time, induce GDP growth.”

From an investors’ perspective, a faster pace of recovery will provide higher interest rate returns, said Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort.

“Since the Philippine GDP growth (before the pandemic) had been one of the fastest-growing among relatively larger countries around the world, this would provide greater incentives for investors,” Mr. Ricafort said in a text message.

The economy shrank by 11.5% in the third quarter, bringing the nine-month GDP contraction to 10%. The government expects the GDP to slump by 8.5% to 9.5% this year.

In 2019, the country’s GDP rose by 6%.

Meanwhile, a softer economic bounceback will still be favorable from an issuer’s point of view, said Mr. Ricafort.

“[Such] conditions would allow lower borrowing costs for GDP-linked bonds, thereby providing greater support in terms of lower debt-servicing costs as the resulting savings may be re-allocated to pump-priming other support measures when needed most to resuscitate the economy,” he said.

Economic managers maintained its GDP growth outlook for 2021 at 6.5-7.5%, and for 2022 at 8-10%.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the GDP-linked bonds could be a welcome development if the government decides to push through with the issuance.

“If these were used in other countries, why not ours? The good thing here is that investment instruments are growing and varieties are expanding,” Mr. Asuncion said in a Viber message.


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