Improving public health infrastructure, especially the logistics side, and resolving supply bottlenecks and climate change issues are crucial factors in dealing with emerging systemic risks amid the still ongoing COVID-19 pandemic, according to the central bank-led Financial Stability Coordination Council (FSCC).

The FSCC's latest Financial Stability Report (FSR), which covered the second semester of 2021, said the Philippines’ GDP performance will only get stronger this year but to sustain growth, it has identified four issues that the country must address to ensure a full recovery for the long term. These issues include growth-at-risk and equity as one of the “looks ahead” to strengthen recovery, aside from public health infrastructure, among others.

“There will always be improvements we can pursue, while maintaining a watchful eye over changing market conditions,” said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno during the FSR’s release on Wednesday, Feb. 2. “While this pandemic has been a heavy burden, it has provided us the opportunity to come together and take collective action (and) now that we have our growth momentum back, we can pause, to take the opportunity to learn from this crisis,” he also said.

Diokno said that in previous FSRs where the focus is on transformative measures as course of actions to deal with the unprecedented public health crisis, the latest FSR talks about what the Philippines and the world have learned in the two years of the pandemic and what needs to be done such as in resolving supply and demand issues due to mobility restrictions.

“For financial authorities, it is and will always be about the financial system as a whole and that whole has to be appreciated as being more than the sum of its parts,” said Diokno. In pursuing anti-pandemic measures, the FSR refocused on the more immediate COVID-related challenges of public health, access to goods, socio-economic equity, and through a greener future environment, the BSP chief added.

BSP Senior Assistant Governor for Monetary Policy Sub-Sector, Johnny Noe E. Ravalo, also head of the Office of Systemic Risk Management​ and FSCC Secretariat, said that in sustaining GDP recovery which started last year, public health infrastructure is the foremost issue.

During his presentation of the FSR, Ravalo said they came up with a three-pillar approach on how to address issues such as the core pillar or the “going concern” of testing-vaccination-tracing-hygiene protocols, and the pre-requisite pillar or building capacity including adequate information, social benefits and medical facilities. The last pillar is perhaps the most crucial which is the logistics pillar.

“The pre-requisite pillar talked of increased hospital care capacity, consistent research, and the production of vaccines. These cannot be done without funding. The core pillar, on the other hand, is the going concern protocol. Tests, vaccines, the need for possible contact tracing, and the operation of the underlying big data behind all these come at a cost. And while production can be coordinated to better reach consumption, logistic arrangements are not without costs,” noted Ravalo, citing the FSR. “This may be the immediate challenge. Public health and social welfare are public goods which are needed if the recovery is to take deep roots. But, as with any public good, how the costs are to be borne is a difficult policy issue.”

Two years into the pandemic, Ravalo said market conditions have remained “quite fluid.” This year though, he said markets will see divergence risks. The BSP and other central banks have been preparing for these divergence risks.

He said that while 2021 is “a bounce back year” for the Philippines with a 5.6 percent GDP growth which is a “remarkable recovery and quite notable and sustained in the last three quarters”, the year 2022 will see further upward trajectory. However, the FSR projects that a pre-pandemic GDP growth will only be seen again by the fourth quarter of 2023.

“Market conditions remain fluid, but divergence risks will play out this year,” said Ravalo. FSCC needs to take a preemptive stance, he added.

While markets have remained fluid, with COVID-19, the world now has supply chain problem because of the lockdowns. Based on the latest FSR, the current supply bottleneck issue and its impact on prices “will not simply fade any time soon (as this) has implications on global inflation” and thus will affect recovery.

On inequality concerns, the FSR noted that “COVID-19’s underlying scars may not be fully reversed by recovery” because of the socio-economic gap which the pandemic forced to the surface. To address the inequality issue, it goes back to the public health infrastructure and the restoration of the purchasing power for the “poor” or vulnerable sector. “Without this, vulnerable families will not have the wherewithal to move forward and would instead have to depend on national support. This is not a viable option,” said the FSR.

The FSR also emphasized the data, information, and systemic risks ahead. “There will always be the urge to generate new regulatory information,” it said.

“Unfortunately, even before COVID-19, data has been a perennial challenge for systemic risk analysis. We have argued before that systemic risks cannot exclusively rely on stylized macrofinancial data because these reflect the underlying interaction between stakeholders only after the fact,” said FSR.

The FSR further said there remains data gaps in the following: shadow-banking and non-banking financing; capital flows; corporate borrowing: granular and micro data; real estate markets; insurance; and households.