Philippines needs to have more ‘guardrails’ against systemic risks
THE FINANCIAL Stability Coordination Council (FSCC) is looking to put in place “added guardrails” to help mitigate systemic issues, its chair said, amid the market’s growing appetite for “risky” investments on the back of an improving economic outlook.
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr., who also chairs the FSCC, said the government must balance fueling the positive market outlook this year and taking a cautious stance against systemic risks.
“Indeed, financial market participants often make risky investments based on rosy scenarios. The more widely shared the scenario, the more dangerous it is,” he said in his remarks at the release of the 2023 Financial Stability Report on Tuesday.
“If something goes wrong, these scenarios sometimes lead to mass panic. There is a rush for the exits, causing massive investments to collapse,” he said.
The FSCC in its report said the Philippine financial market is “squarely in Risk-On territory” since November last year, where stakeholders are open to taking more risks, increasing demand for liquidity.
Risk-on and risk-off are used to describe the attitude and appetite of investors towards taking risks during different economic scenarios.
“The Risk-On situation provides a window to put in place added guardrails that may be useful for future use,” Mr. Remolona said. “No market is entirely reflecting positive signs, just as there is no market that is absolutely without positives.”
These guardrails can be policy tools such as bank capital instruments, borrower-based measures, and liquidity-related tools, the FSCC said.
The Philippine financial system must guard itself against disruptions, Mr. Remolona said.
“This is not an onus exclusively for the macroprudential authority. This requires collective action, which starts with a better understanding of the pluses and minuses in the market and the possible channels of contagion,” he said.
Risks may arise from both local and foreign markets, the BSP chief said, and turn out to be contagious, leading to wider disruptions.
“The macroprudential policy issue is determining the extent to which liquidity fuels more risk-taking today, sustaining momentum without endangering longer-term inflationary and growth prospects,” the FSCC noted.
DEEPER MARKETS
Meanwhile, Mr. Remolona reiterated that he wants to help deepen the domestic capital market by developing a credible benchmark yield curve, making the corporate bond market more accessible to lower-rated issuers, and make the Philippines a part of global equity indices.
“I think if we can deliver on those three things, it will help us with two things. One, it will help us with the transmission mechanism (of monetary policy changes),” he said.
The BSP’s target reverse repurchase rate currently stands at 6.5%, the highest in 16 years, after the Monetary Board hiked borrowing costs by 450 basis points from May 2022 to October 2023.
“Second, there’s a spare tire idea. We’re too heavily dependent on our banking system. If something goes wrong, there are no alternative sources of financing. In other countries, the corporate bond market is the alternative source in financing,” he said.
In its report, the FSCC said banks have long been the major funding source for the Philippine economy.
“But bank loans must price credit risk and liquidity risk because the money they lent out is itself borrowed from the public. Provisioning takes the conservative view by adjusting the size of the balance sheet, but it does not rectify the liquidity gap should a loan account become payment-impaired,” it said.
Thus, deepening the country’s capital markets is crucial, the FSCC said.
“Several initiatives have already been put in place. We look forward to more initiatives and, in particular, our attention is to provide corporates from different credit backgrounds with access to this market,” it added.
Based on FSCC data, market capitalization was at P13.1 trillion at the end of 2023, slightly lower than the P13.3 trillion recorded at end-2022.
The FSCC is an interagency council composed of the officials of the BSP, the Department of Finance, the Securities and Exchange Commission, the Insurance Commission, and the Philippine Deposit Insurance Corp.
The council’s Executive Committee is chaired by the BSP chief and is composed of the top officials of member agencies.