By Lee C. Chipongian
With a global recession, the central bank and the inter-agency Financial Stability Coordination Council (FSCC) remains confident that the local financial market is strong despite that the health crisis has stalled economic activity and will derail growth this year.
The virus outbreak “has been a direct hit on the economy and is already causing systemic dislocations,” said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno in an online press briefing on Tuesday.
Diokno said the BSP and the FSCC will try to contain emerging market “difficulties” and that these will not “spillover into our financial system.”
COVID-19, said Diokno, already “epitomizes” systemic risk.
In response, the FSCC is soon releasing a national Macroprudential Policy Strategy Framework for a “clear narrative of the policy mindset that we have in place when thinking of systemic risk issues” and another initiative is the formalization of a Systemic Risk Crisis Management Framework, said Diokno, to assess and to take action if a systemic disruption is detected.
“We are pursuing this not because we see any imminent vulnerability that rises to the threshold of being ‘systemic. Rather, the framework is a pre-emptive initiative, fully cognizant that its best use is when it is not in use but fully prepared nonetheless when the times call for it,” said Diokno.
The FSCC on Tuesday released its first semestral Financial Stability Report (FSR), previously an annual release, to make it more responsive to the requirements of the banking sector. The April 2020 FSR has recognized the global recession and expects “further dislocations”. Still, despite the “increase in risk premiums and heightened risk aversion” the FSR said that there is “no reason to believe that the local financial market is in a state of instability. Not yet.”
Head of FSCC Technical Secretariat, BSP Assistant Governor Johnny Noe E. Ravalo, who presented the highlights of the FSR, said the global economy has been in a struggle for the last two years. “COVID-19 actually exaggerated this slowdown and created a new layer of complications,” said Ravalo.
Between the pandemic and the global recession is the financial markets. “When you have a public health issue that requires governments around the world to suspend economic activitiy, incomes are lost and supply chain are actually magnified and that creates financial risks and therefore elevates risk aversion which would then eventually effect output as well. We see these linkages as the ones driving the financial market scenarios,” he explained.
Ravalo said when there are income loss, and economic activity needs to be rebooted while obligations need to be refinanced, risks need to be re-priced, where do FSCC comes in? “We feel at the FSCC that the capital market has a particular role to play (of) mitigating systemic risks.” He also said that the group’s “ability and commitment to look at the inter-linkages between markets, transactions and players, allow us to have a wholistic view of the various channels of risk so that we can intervene early … We take comfort that our financial market is strong but the key initiative of the FSCC is to make sure we remain vigilant to what may be.”
In assessing current financial market conditions, Diokno said the local market is not only strong but resilient and such strength “gives the economy an anchor for the recovery efforts by making sure that the financial needs of the general public continue to be met. It would be so much harder to move forward if we compound the macro-difficulties with another layer of financial market disruptions,” he said.
The FSR reported on the emerging risks amidst the COVID-19 pandemic. “The world is facing the deepest global recession whose effects the IMF (International Monetary Fund) says have not been seen since the 1929 Great Depression.
Yet, our present situation is different because it was not caused by a stock market crash like ‘Black Tuesday’ in 1929 or from excessive credit as was the case in 1997 and 2007. Rather than financial market vulnerabilities affecting the macroeconomy, COVID-19 has directly impacted the macroeconomy itself. While we address the public health issues, we want to ensure that these difficulties do not contaminate our financial system and trigger a negative feedback to the real economy,” said Diokno.
The FSCC which includes the BSP, Department of Finance, the Securities and Exchange Commission, the Insurance Commission, the Philippine Deposit Insurance Corporation, and the Bureau of the Treasury, regularly examine the risk behaviors of the financial market to the end goal of systemic risk early detection.
According to the FSR: “As adversely affected as the economy has been, there are no indications that the financial market is in peril. Risk behaviors have shifted though, as risk aversion has been heightened, asset prices have fallen, and risk premiums have increased.”
“On the whole, the dislocations from COVID-19 are already evident but arguably its full effects still lie ahead,” the report said.
The report warned that risk pressures “will continue to build because debts will be increasingly difficult to service, banks will find it harder to source new deposits, and risk perceptions draw in further risk perceptions.”
“Looking ahead, it would be a major oversight to expect that the economy could still go back to business-as-usual. COVID-19 is leaving scars that even a proven vaccine may not remove,” the report said. “The old economy has to ‘re-fit’ into the new normal of social distancing. Business paradigms that relied on scale (incurring high fixed costs and catering to the retail market in mass) will have to rethink how they can operate in the post-COVID-19 world.”