SLOW-BURN CONTAGION UNSEEN RECOVERY RISK
WHILE the economy already saw a back-toback double-digit contraction in the last two quarters, economic managers are working on a national strategy to prevent a possibly worse-case scenario for the Philippines: a “slow-burn contagion”.
In a news conference on Wednesday, the Financial Stability Coordination Council (FSCC) released its latest assessment of the local financial system operating in the midst of an ongoing pandemic.
The FSCC is an interagency body composed of the Bangko Sentral ng Pilipinas, the Department of Finance, the Insurance Commission, the Philippine Deposit Insurance Corporation and the Securities and Exchange Commission.
The report reflected the economic managers’ concern about the possibility of a slow- burn contagion in the economy, where the shocks of the economic crisis may extend even after the crisis is over because each sector’s vulnerabilities may spread to another sector and each economic facet is interdependent on one another’s recovery.
The FSCC explained that damage from the pandemic may be “amplified” after the initial shock, because some sectors will impact the condition of other sectors, especially those with natural economic linkages.
“This is the point of looking at the system as intertwined chains of related and sequenced transactions. Each chain branches off to other transactions, effectively creating a network where the shocks can amplify or dampen, depending on how the chains are structured,” the FSCC said.
For example, if the financial sector destabilizes after the government- mandated stimulus is pulled out, the negative effects of this may spread to other sectors, like real estate, wholesale and retail trade and other areas, thereby hampering overall economic recovery long after the global health crisis is over.
“As significant and, thus far, as protracted the effects are of Covid-19, the likely outcome is that there is some degree of amplified vulnerabilities that is percolating without evident data at this juncture. This is the notion of slowburn contagion,” the FSCC said in its report.
As such, the local economic managers are teaming up to craft strategies to prevent this from happening.
“Collective action calls for a longer-term view on how the economic activity fits into the New Economy. Together with the discussion on possible slow-burn contagion, this raises the need for ‘systemic-ness’ to be an additional credit element,” FSCC said.
Thus the economic managers announced a seven-point policy recommendation to retain financial stability while the economy tries to recover from the global health crisis.
The report concluded on a seven-point recommendation for the financial sector. These are: (1) Defining the market landscape for the New Economy as the prerequisite condition; (2) Deciding the extent to which the New Economy reflects fundamental changes in the behaviors and confidence of both households and businesses, which will then impact the way fiscal, monetary, banking and economic policies are currently framed and executed; (3) Institutionalizing the interconnections between industries and between firms when assessing economic prospects and in managing the unfolding credit concerns; (4) Distinguishing welfare support expenditures from conventional fiscal policy accounting; (5) Assessing the viability of a multiyear perspective for our fiscal policy stance; (6) Managing risk aversion by addressing the uncertainty premium by institutionalizing spot yields which can be used in either credit or securities markets; and (7) Engaging all stakeholders on emerging systemic risks, including the need for more timely and granular data as well as the more frequent exchange of information.
“To move forward, there must be a vision of the future, against which economic agents can craft their transition. That vision anchors expectations and the transition must address the underlying effects of Covid-19,” the FSCC said.
“Absent of this, the economy may be facing a slow- burn contagion that no one would prefer,” it added.