Central Bank Friendly Fire Hits Aquino as Philippine Growth Sags

The Philippine 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, part of a broader push to influence market interest rates effectively and soak up excess cash supply, will allow lenders to compete for a fixed volume of deposit access to Bangko Sentral ng Pilipinas. BDO Unibank Inc., the country’s biggest lender, sees them helping to 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 Benigno 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 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.”

The central bank will offer term deposits with tenors from one month to a year, Deputy Governor Diwa Guinigundo said in April, without saying when the auctions will start. By soaking up excess cash, movements in the benchmark interest rate will more effectively convey policy to the market and interest rates will move closer to it, he said.

State Spending

The government sold 8 billion pesos ($180 million) of 91-day bills on Monday at an average yield of 2.14 percent. BDO Unibank’s Ravelas said he had revised his previous 2.5 percent year-end yield forecast up by 50 to 75 basis points.

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 implemented in coordination with the Treasury, National Treasurer Roberto 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 Societe Generale SA.

Spur Competition

“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’ 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.

“Yields on government securities could possibly go up,” said Astro del Castillo, managing director at First Grade Finance Holdings Inc. in Manila. “Although the market is so liquid nowadays, two institutions holding auctions in the future could spur competition.”

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