Central banks around the world should have more focus on resolving the debt problems of both businesses and households resulting from the COVID-19 pandemic, according to a Bangko Sentral ng Pilipinas (BSP) official.
“COVID is a heavy cost to society but, in the financial markets, debt exposures are governed by private relationships and contracts. How we address the public burden from debt arrangements that are typically private needs to be managed well,” said Assistant Governor Dr. Johnny Noe E. Ravalo, the head of the office of systemic risk management of the BSP. He talked about “Dealing with Debt” during a high-level International Monetary Fund (IMF) conference to assess financial stability risks from COVID-19.
Ravalo said that in as far as the role of central banks in debt problem resolutions are concerned, the crucial issue is that private corporations have been made vulnerable by the pandemic-cum-recession.
“This problem, its surprise occurrence, and its sheer magnitude are uniquely different and require creative interventions from the authorities,” he said. He stressed on a whole-of-market problem and why it needs holistic solutions, not only for corporates but also on households.
“We need to actively communicate so that people can make informed choices. And we should be concerned with welfare changes within society because this is what financial stability is all about after all,” he added.
The BSP is part of the Asia and Pacific Department of the IMF or IMF-APD conference. It is a gathering of senior policymakers in Asia to assess the ongoing challenges faced by the region and discussed what should be done to address the financial stability risks, said the BSP.
The IMF-APD has recently released a paper “Policy Advice to Asia in the COVID-19 Era.”
During the conference, Ravalo said interventions adopted by central banks and governments are not surprising or are “already well-known” since these are “defined by the effects of the recession.”
“We know that we have to manage the servicing of existing debts and we know that some firms may no longer be as viable in the New Economy,” he said. But the real challenge was in the execution of the interventions, he added.
The BSP-led Financial Stability Coordination Council (FSCC) has already shifted the way they assess, review and forecast systemic risks because the global COVID-19 pandemic has changed consumer preferences and market risk behaviors.
This was one of the assessment of the most recent Financial Stability Report (FSR) of the FSCC which was presented by Ravalo last November.
Ravalo has said that the pandemic is unquestionably a systemic shock, and it is crucial to communicate its challenges to the market. He called for a more granular and timely data because the evolving situation and conditions amid the pandemic is unprecedented.
Ravalo said it is not just a question of the direction of change but more of how and where the critical changes are happening.
Based on the FSR, central banks must now address the pandemic-cum-recession spillovers, from the real economy to the financial market, and that now more than ever, out-of-the-box interventions are needed.
The FSCC has set out its vision of the New Economy to help markets transition in a post-COVID world. Based on the report, among the challenges brought about by COVID-19 is how the Philippines can sustain a recovery when it comes, especially since this will be a changed economy.