Moneycontrol PRO
Check Credit Score
Check Credit Score
HomeNewsBusinessMarkets

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

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.

September 16, 2020 / 07:35 PM IST

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.

COVID-19 Vaccine

Frequently Asked Questions

View more
How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

View more
Show

"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.

Follow our full coverage of the coronavirus pandemic here.

Reuters
first published: Sep 16, 2020 07:33 pm

Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!

Advisory Alert: It has come to our attention that certain individuals are representing themselves as affiliates of Moneycontrol and soliciting funds on the false promise of assured returns on their investments. We wish to reiterate that Moneycontrol does not solicit funds from investors and neither does it promise any assured returns. In case you are approached by anyone making such claims, please write to us at grievanceofficer@nw18.com or call on 02268882347