The Bangko Sentral ng Pilipinas (BSP)-led Financial Stability Coordination Council (FSCC) will run its first report on the macroprudential stress test (MaPST) in the next two-three weeks to help financial regulators to have a more granular assessment of emerging systemic risks amid the COVID-19 pandemic.

BSP Governor Benjamin E. Diokno said the MaPST which is the BSP’s newest macroprudential tool, is developed specifically with a whole-of-market approach, and is an effective pre-emptive test to improve financial stability monitoring. “We’re almost done with the macroprudential stress test. In developing said stress test, we have taken a whole-of-market approach, given the pressures of outside the financial system and this is why the initiative is being undertaken under the umbrella of the FSCC,” said Diokno during the presentation of the first semester Financial Stability Report (FSR).

The FSCC has more authority to use such system-wide stress test after it was given legal power by Executive Order No. 144, signed just this month.

BSP Senior Assistant Governor for Monetary Policy Sub-Sector, Johnny Noe E. Ravalo, also head of the Office of Systemic Risk Management​, said the EO has strengthened the FSCC’s financial stability agenda, in terms of its surveillance framework, communication strategy and the MaPST.

The pre-emptive stress test is “a first of its kind in the country” and it is a system-wide stress test focusing on non-financial corporations (NFCs), other firms and industries.

“Our macro-prudential stress test is nearly complete ... just give us two-three weeks, and we should be able to share with you some of those results,” said Ravalo. The stress test will also include scenarios where lockdowns are again implemented due to the COVID Delta variant that are being reported in key cities.

The MaPST include results of an algorhythm that allows the BSP to map who is related to whom across firms, across industries, and across countries, explained Ravalo. He describes it as a network guide for assessing spillover effects, and to examine where there is concentration and contagion. “We will be able to present the full analysis (soon),” he said.

The MaPST is a two-phase stress testing, with the first part focused on corporates’ capacity to service financial obligations and their productive capacity through a cash flow deficit approach. The second phase will determine linked financial agents that are “most adversely affected by NFC income shocks and measures” via credit, liquidity, and market risk stress tests.

In the meantime, Diokno said in light of the EO, and with the MaPST, the FSCC will be meeting again in two weeks, reiterating that vigilance and pre-emptive thinking is crucial because of the uneven pace of recovery across countries.

“We are definitely better off today than a year ago. However, the ongoing recovery from old risks can generate a new set of potential risks (while) many aspects of the future remain uncertain and with uncertainty, risk aversion in financial markets may not be too far behind,” said Diokno. While he also noted clear signs of stability, he said market conditions remain very fluid.

The latest FSR report still note that COVID-19 has raised systemic risk issues which the BSP and other financial regulators need to address. However Diokno said the underlying changes and the nature of the pandemic makes it difficult to forecasts financial stability, but that definitely, systemic risk “has risen”.

The FSR points to three industries that are especially at risk, such as education, retail trade and the commercial real estate sector. Debt servicing and debt prepayment remain primary concerns, given that the pandemic has eroded incomes and business opportunities.

Still, the FSR, as noted by Diokno, is confident that GDP will return to positive growth rates within 2021 but that incomes “will be permanently below its trajectory in the pre-COVID-19 period, with this permanent loss uneven across economic activities.”

The BSP said that to “act early and deliberately” the MaPST is crucial, as it is “anchored” on NFCs, using the network model at the centerpiece of the real economy.

“This reflects our judgement that the key risk over the medium-term is the health of the NFCs, both in terms of their viability in a New Economy and in settling maturing obligations which were contracted even before SARS-CoV-2,” according to the FSR.

The MaPST, which will basically test for vulnerabilities, will develop over time as it captures the interaction between financial and NFCs. The results are expected to be very different from the existing bank-related stress testing.