PH has ‘greater control’ over its macro-financials, growth – FSCC

The central bank-led inter-agency Financial Stability Coordination Council (FSCC) remains confident that amid a low global market volatility, the Philippines can sustain its growth path this year as the country has more control when it comes to its overall macro-financials.

“We find comfort in the broad indications of stability and their effects on the economy,” said Bangko Sentral ng Pilipinas (BSP) and FSCC chair, Governor Eli M. Remolona Jr. on Wednesday, May 29. “These are issues that the FSCC will continue to monitor,” he added.

The FSCC recently concluded its 39th Executive Committee meeting to review offshore market developments and assess their impact on the stability of the country’s financial system. The council includes, besides the BSP, the Department of Finance, the Insurance Commission, the Philippine Deposit Insurance Corporation, and the Securities and Exchange Commission.

Remolona said among the issues they continue to closely monitor are inflation, price pressures and the government debt.

“The volatility in the price and supply of energy-related products can affect economic activity, while a high-for-long global interest rate situation will weigh on debt servicing in general,” he explained.

Meanwhile, the FSCC in general said it has “recognized that global indicators of market volatility have remained low.”

However, FSCC also underscored the volatility in global oil prices. "US inflation has come down but remains stubbornly high by the Fed’s (US Federal Reserve) own characterization. This suggests a high-for-long policy rate environment, which will likely affect the global economy. In addition, geo-political risks have been protracted and, in recent cases, escalated,” said the FSCC.

Still, as commented by Remolona, the local economy remains strong while the inflation path is expected to stay within the government target range for this year and in 2025.

“These are reassuring indicators that allow the Philippines greater control over its macro-financial path forward,” said FSCC.

Based on the FSCC’s 2023 Financial Stability Report or FSR, which was released in February, the market is under a risk-on financial cycle since late last year and there is evidence and momentum that the market optimism will continue in 2024.

The risk-on risk-off or RORO sentiment is a measure of the trading activity and sentiments of market participants. A risk-on financial cycle means there is more market appetite and optimism to take on higher risks. In contrast, a risk-off environment is when there are significant uncertainties such as sharp interest rate hikes.

Remolona said regulators such as the BSP should “strike a careful balance between fueling the momentum further and taking a cautious stance against the build up of excesses.”

The FSR stressed the opportunities in a risk-on situation but also emphasized that regulators should put additional safety nets to manage liquidity.

“The risk-on situation provides a window to put in place added guardrails that may be useful for future use. (Since) fluidity defines financial markets … no market is entirely reflecting positive signs, just as there is no market that is absolutely without positives. The task, however, is to guard against those risks that can disrupt the system and to better position the system against likely risks,” said Remolona.

Based on the report, the market finished 2023 in risk-on territory and the switch started from risk-off to risk-on started in November last year following the US Federal Reserve’s announcement that it will pause its tightening bias.

The FSR said this optimism will continue this year as companies “act and sustain this positive perception” which will lead to demand for both liquidity and term funding to increase.

“The banking industry has enough space for this increased leverage, subject to regulatory limits. But the capital market could take an increasing role,” said the report.

With the expectation that the BSP will reduce its current 6.5 percent benchmark rate this year, firms’ defensive strategy is to go for shorter maturities.