Seventeen Asian countries including the Philippines have increased pre-emptive talks on how to deal with the diverging levels of COVID-related recoveries between advanced or rich economies such as the US and emerging markets. 

“The questions have sharpened as we now see clearer, but apparently more divergent paths (are) in front of us,” according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. “Knowing how these different paths affect each one of us will require a lot of discussion to fully appreciate its holistic interactions,” he said. 

“What is clear,” added Diokno, “is that there remain systemic risks, both risks to the financial system and risks by the financial system itself.”

 Diokno, who is the co-chair of the Regional Consultative Group for Asia (RCGA), on Tuesday conducted a virtual meeting of the Financial Stability Board (FSB). The Switzerland-based FSB is a global venue for financial system reforms to achieve and sustain global financial stability. The RCGA, in the meantime, is one of six regional committees created by the FSB. 

 Diokno noted that the RCGA discussions remained focused on the “damages caused by the economic fallout from COVID-19” and what central bank and financial authorities such as the BSP has done to cushion its impact.

 Asian central banks consider it another layer of complication how advanced countries’ faster recovery will affect emerging nations. “Multilateral agencies have noted that the prospects of the advanced economies are diverging from that of the emerging markets, and this has spillover effects,” said the BSP.

Diokno has said previously that advanced economies’ faster recovery and possible early start towards normalization will not mean a similar monetary policy stance for the Philippines. He said while the economy is in recession, they intend to keep interest rates low to spur a recovery.

Despite the uneven growth across countries depending on how fast and efficient COVID-19 vaccines will be deployed, Diokno said the BSP will stick to its data-dependent accommodative monetary policy settings until GDP shows convincing signs of a recovery. He’s said this could happen by mid-2022. 

“The BSP does not need to calibrate its policy settings in sync with the US Fed’s (Federal Reserves) policy decisions,” he said in April. Diokno also said that timing is crucial in the face of some future pressures to move interest rates following major central banks’ actions to normalize policy settings.

RCGA, to address this divergence, discussed communication initiatives and macroprudential stress tests during the meeting last May 18 and it was agreed that the region at least, should be informed and updated on how different economies’ recovery from economic recessions are being panned out.

Macroprudential stress tests is a tool that the Asian central banks are using to pre-emptively identify possible vulnerabilities, said the BSP. Results from stress tests are basis for early action, it added.

Diokno said that at this point, the region is at “that crucial stage where actions today will more so define the market landscape of the future.”

The BSP said the RCGA members are balancing their responses to what the market needs right now versus any possible longer-term implications. “While there is absolute recognition that this crisis is different, the authorities also appreciate that the unconventional interventions needed today could affect market conditions over time,” said the BSP.

The RCGA’s 17 jurisdictions are the Philippines, Brunei Darussalam, Cambodia, Malaysia, New Zealand, Pakistan, Sri Lanka, Thailand, Vietnam. The Reserve Bank of India is also co-chair of the RCGA. In a meeting in April, Diokno said they have discussed the “scars” of COVID-19 pandemic on corporate viability and debt servicing. They also talked about market support for “possible unintended longer-term risks from these support measures.”