The Bangko Sentral ng Pilipinas (BSP) is ready to implement a policy response to address global financial spillovers that could weaken the peso further and interrupt the flow of capital into the country that will affect the growth trajectory.

The BSP is also prepared to time its exit strategy on global and domestic risks to the economy to “preserve the gains we have achieved thus far,” said central bank officials in an email to Manila Bulletin.

“We continue to assess and prepare for the spillover of risks from global developments,” said the BSP. “We are monitoring whether the developments in the oil market as well as the quantitative tightening being undertaken by the US Federal Reserve, Ukraine-Russia conflict, and domestic inflation will have ripple effects on the domestic economy,” it added.

These are the emerging systemic risks, especially Russia’s invasion of Ukraine which disrupted global supply chain and caused the extremely high prices of oil and non-oil commodities.

“You may recall that in 2020, we identified the COVID-19 pandemic, despite primarily being a health issue, as a source of systemic risk. Meanwhile in 2021, it is within growth, particularly the divergence in recovery, where we found risk. Nonetheless, the story of 2021 is primarily one of economic recovery which allowed us to enter 2022 on a stronger footing,” said the BSP.

Last week, while in Spain inviting investors to relocate in the Philippines, BSP Governor Benjamin E. Diokno said that even with a new administration by July 1, following the May 9 national elections, the BSP will ensure continuity in policy responses for macroeconomic management.

“On the whole, there are clear signs that the new administration will continue the key reforms and programs of the outgoing administration. As the economy recovers, the central bank recognizes the need to scale back its extraordinary measures,” said Diokno. “The timing and conditions of the BSP’s exit strategy will continue to be guided by the inflation and growth outlook over the medium term, the state of public health, and domestic and global risks to the economy,” he also said.

The Philippines is managing the health crisis, said Diokno who is the incoming finance chief under the Marcos government, with an 8.3-percent first quarter growth, up from 2021’s 5.6 percent. He said since the government is managing the spread of the virus, it is expected to relax mobility and activity restrictions more.

With high inflation amid a sustained recovery, plus employment rate nearing pre-pandemic levels, the BSP has started its normalization or exit process last May 19, when the Monetary Board raised the policy rate by 25 basis points to 2.25 percent, the first time the BSP moved the key rate since November 2020.

Meantime, the peso depreciated by 3.66 percent to P52.86 vis-à-vis the US dollar as of June 3 from end-2021 level of P50.99. According to Diokno, this reflects emerging markets’ sentiments across the globe due to the Russia-Ukraine conflict.

He reiterated that the BSP will keep its market-determined exchange-rate policy and that they will only intervene “to ensure orderly market conditions and to prevent excessive short-term volatility in the exchange rate.” In 2020 at P48:$1, the peso was one of the best performing currency in the region. It lost almost P3 by end-2021.

The Financial Stability Coordination Council (FSCC) which is chaired by the BSP governor, has assured investors and the market that financial regulators are prepared to take preemptive actions against “potential disruptions” from global developments.

The FSCC, which identifies, monitors, manages, and mitigates the build-up of systemic risk in the local financial system, likewise noted that the rest of the world is already feeling the pressure from rising fuel costs and the recent policy actions of the US Federal Reserve.

During its quarterly meeting, FSCC affirmed that there is still fluidity of market conditions but that they are taking steps to sustain the recovery of the economy.

The launch of the Systemic Risk Crisis Management (SCRM) framework on Monday, June 6, will help financial regulators to be prepared when systemic risk damages materialize. It outlines the coordination of FSCC members in case systemic risks escalate into a full-blown financial crisis. The SCRM enables the following: continuous surveillance of risk trends; review of infrastructures; conduct of systemic stress tests; and arrangements for communication, both under normal and stressed conditions.