Emerging market central bank bond buying puts credibility at risk, S&P Global says

By Marc Jones
LONDON, Sept 16 (Reuters) - Emerging market central banks
could risk their reputations, sovereign credit ratings and even
full-blown economic crises if their bond buying is pursued
beyond the coronavirus crisis, S&P Global said in a report.
Top S&P analysts said in Wednesday's report that although
there was no indication that investors had lost faith in the
central banks of India, Indonesia or the Philippines, risks
would rise if post-pandemic sovereign debt purchases looked
likely.
"Pushed too far... the programmes may impair the ability of
central banks to respond to future crises, with rating
implications for the respective sovereigns," the report said.
"If investors begin to view government reliance on central
bank funding as a long-term, structural feature of the economy,
these monetary authorities could lose credibility."
S&P's concern is also that the buying is not guided by
inflation controlling objectives, but by worries a COVID-19 debt
issuance surge will hit borrowing costs and currencies.
"Sovereigns with less credible public institutions and less
monetary, exchange rate and fiscal flexibility have less
capacity to monetise fiscal deficits without running the risk of
higher inflation," the analysts said.
"This may trigger large capital outflows, devaluing the
currency and prompting domestic interest rates to rise, as seen
in Argentina over parts of the past decade."
S&P has downgraded more than 50 government ratings since the
coronavirus pandemic took hold, while debt levels are set to
continue to spiral. Indonesia's central bank has come under particular scrutiny
in recent weeks over proposals to give government ministers
voting rights at its meetings and allow the bank to use the
tactic of buying government bonds direct, rather than in
secondary markets as most central banks
do. BI has also pledged to buy $28 billion of government bonds
while relinquishing interest payments, as part of a $40 billion
fiscal financing deal with the government to fight the health
crisis in 2020, though President Joko Widodo has pledged it will
remain independent. Meanwhile, the Philippines has said it will carry out its
300 billion Philippine peso ($6.2 billion) government bond
repurchase agreement with the country's Treasury Bureau for six
months at most.
"The relatively mild market impact of central bank purchases
of government bonds in these countries could change if the
institutions increased their purchases, or if investors no
longer saw the buying as temporary," S&P said.
($1 = 48.3600 Philippine pesos)