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Philippines must boost financial system’s resilience amid volatile conditions

THE PHILIPPINES needs to improve the financial system’s resilience and preparedness amid volatile and uncertain market conditions due to tighter monetary policy here and abroad, the Financial Stability Coordination Council (FSCC) said in its annual report.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla, who also chairs the FSCC, said even though the country has recovered from various disruptions caused by the coronavirus pandemic, it needs to be prepared for the challenges ahead.

“The supply and distribution of key commodities such as oil and food are still not where they were pre-pandemic. These bottlenecks would keep consumer prices high,” Mr. Medalla said in his remarks during the release of the FSCC’s Financial Stability Report (FSR) for 2022 on Tuesday.

“The policy response though of raising interest rates will eventually affect the demand side of economic activity. How these changing demand and supply patterns manifest in 2023 at the global stage remains to be seen,” he added.

The FSCC said in the report that elevated inflation and rising interest rates remain the primary concern in an interconnected global economy where risks and vulnerabilities can spill over from one country to the other.

“All these matter to emerging markets (EMs)/small open economies (SOEs) which (1) take global prices as a given and (2) rely heavily on imports to fuel domestic activity. This presents a policy challenge because the EMs/SOEs have to address their onshore issues while keeping an eye on offshore issues that they would not directly influence,” the report read.

“The crux of our systemic risk assessment is that the market is going through a storm. By their very nature, there is considerable uncertainty with storms and the extent of damage they can cause. Some will face more benign conditions, while others will feel the full brunt. However, none of this is known in advance. The question then is how prepared a community is for more rains, and more rainy days,” it said.

The FSCC said growth is at risk due to higher rates, which could translate to weaker currencies against the safe-haven dollar.

“What is important to keep top of mind is that the global rise in interest rates is largely referenced against the actions of the US Federal Reserve System. Other jurisdictions are also raising their policy rate, but it is the rise in the fed funds rate that is the focus of market players,” the report read.

“The effect is for pairwise currencies, particularly with the dollar, to revalue towards the dollar. This depreciation of the local currency, coupled with rising interest rates, fuels uncertainties,” the FSCC added.

The Fed delivered 425 basis points (bps) in rate increases in 2022 to curb rising inflation, bringing the fed funds rate to 4.25-4.5%.

The US central bank’s hawkish stance caused the peso to weaken significantly against the dollar in 2022. The local unit recorded a new record low of P59 in October last year, but has since rebounded, finishing at P54.87 per dollar on Tuesday.

Back home, the BSP raised benchmark interest rates by 350 bps last year, bringing its policy rate to 5.5%.

“The interest rate actions consider local inflationary pressures while keeping an eye for cross-border cross-currency implications of the actions taken by advanced economies. The challenge for SOEs, though, is that we are price-takers in the global market and our actions have onshore i.e., cost of doing business and growth consequences as well,” the FSR read.   

“Thus, calls have grown louder for non-monetary interventions to push and sustain growth. This will invariably require some further borrowings. The dilemma, however, is that fiscal space has been reduced when we responded to the needs from COVID-19 (coronavirus disease 2019). More importantly, ensuing borrowings will be subjected to the same tighter market conditions faced by the private sector,” it added.

Mr. Medalla said current policy issues are “systemic because of the interlinked cause-and-effect consequences they create.”

“This is why systemic risk analysis is particularly challenging. We need to scope the key connections among stakeholders, understand their interlinked behaviors, and only then assess how the economy is affected,” he said.

He said the FSCC’s goal of promoting financial stability is anchored on its commitment to safeguard the improvement of the welfare of Filipinos.

“Just as global risks play out, your financial authorities will always have the interest of Filipinos in mind both today and into the future,” Mr. Medalla added.

The FSCC is an interagency body composed of representatives of the BSP, the Department of Finance, the Insurance Commission, the Philippine Deposit Insurance Corp., and the Securities and Exchange Commission.

In July 2021, Executive Order 144 institutionalized the FSCC to focus on assessing and implementing policies to prevent systemic risk factors or company- and industry-level events that have the potential to trigger severe instability within entire industries, or even the economy. — K.B. Ta-asan

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