"The crisis created by the pandemic is long-term."
For my column today, I edited the press release from BSP on the Nov. 18 launch of the second, or second semester Financial Stability Report, of the Financial Stability Coordination Council (FSCC).
The 45-page report highlights the council’s assessment of the “systemic risks” because of the COVID-19 pandemic. Basically, what the report says, without saying it, is this: Be careful, be wary, adapt. For the can-afford, go digital. The crisis created by the pandemic is long-term.
The report cites initiatives to mitigate the adverse consequences and take the country to the “New Economy.”
In brief, amid the worst health and economic crisis in a century, the council was worried about money, the simpler word for the technical term “liquidity,” particularly when it is borrowed and goes to the wrong hands or mishandled by its user, or is not repaid at all.
The FSCC has under its wings government agencies that have to do with all the country’s businesses, government finances, the banking system, and indeed, the entire economy – Bangko Sentral ng Pilipinas, Department of Finance, the Securities and Exchange Commission, the Philippine Deposit Insurance Corp., and the Insurance Commission. Without these agencies, companies cannot prosper and do business. People in general cannot live in peace without fear of being swindled, shortchanged or stolen money from.
BSP has something to do with credit and money supply, the DOF with how the country’s largest corporation, the government raises and spends money; the SEC, with the registration and regulation of corporations and how they behave; IC when business or persons incurs losses, and PDIC when deposits of the public are stolen or waylaid.
At the report’s launch, FSCC Chairman and BSP Governor Benjamin Diokno explained why there have to be two reports, instead of one, in a year: “as a response to the fast-changing conditions in 2020.”
Finance Secretary Carlos Dominguez said this FSR is "a picture of strength in the face of adversity. While it may not be as glowing as last year’s report, it shows how years of work in fortifying our financial sector have prepared us well for this difficult time."
"This report highlights the importance of crafting responsive fiscal and monetary policies to support our recovery and help Filipinos return to their means of livelihood," Dominguez said. "More importantly, we are effectively mitigating the adverse effects of the pandemic on our domestic economy."
PDIC President Roberto B. Tan asserted that “the good news for the banking industry is that it remains strong despite COVID-19.” Although deposit insurance as a critical safety net is in place, Tan also reminded everyone not to be complacent.
Tan noted the effect of COVID-19 on household and corporate incomes. The FRS is concerned about debt servicing, a global concern. He revealed the council’s concern about what it calls “slow burn contagion where vulnerabilities at the firm level could spread to other firms.” These are reminders to PDIC that liquidity risk takes on a more immediate role, he said.
Liquidity was also the concern of SEC Chairman Emilio B. Aquino. He said: “Liquidity is coveted, credit has slowed, and risk premiums have risen.” This, he said, is “rational risk-aversion for a market under uncertainty.”
From the viewpoint of the capital market, Chairman Aquino believes that there is a notable upside but “issuers are facing discerning investors who are searching for yield, the same investors who are deciding between mobilizing or retaining liquidity.”
IC Commissioner Dennis B. Funa reiterated that the council’s policy intervention has always been geared towards the enhancement of the welfare of financial consumers. He was quick to add though that the stakeholders of the contingent market are arguably unique because they are naturally longer-term investors.
Funa then said that they “must rely on the stability of markets, the availability of their underlying instruments, and the reliability of risk valuations.” Pointing to the need to continuously adapt to changing market conditions, he highlighted that “we should not confuse stagnation for stability or look at having systemic risks as basis to stay by the sidelines.”
The FSCC principals agreed on the need to move forward.
On liquidity, Diokno has often stated that the authorities moved early and quickly to provide liquidity to the financial market. “The magnitudes and methods are unprecedented but met its purpose in calming the local market,” the BSP chief said.
SEC Chairman Aquino said that “to redeploy liquidity, the FSCC (must) strengthen risk valuations.”
This is a familiar message of the council since issuers and investors can come together only when prices fairly value risk and reward.
PDIC President Tan said the FSR reinforces the “symbiosis between the real economy and financial markets … weaknesses in the former would eventually impact on the latter and could create adverse ‘spillback’ effects on the rest of the economy.”
The bigger picture that the FSR presents is that the changes imposed by the pandemic are more likely to impose fundamental changes.
Secretary Dominguez pointed out, "As the global pandemic continues, we must implement timely and effective monetary and fiscal policies. These policies are crucial to the management of evolving systemic risks during this period of general uncertainty. They are also the very tools we are using to build a new and more resilient economy."
"Every crisis presents both challenges and opportunities. We will continue to be vigilant against the risks posed by the pandemic while taking advantage of opportunities that will help restore our country’s growth trajectory," he said.
Dominguez thanked both chambers of the Congress in helping the government accelerate economic recovery by passing the Financial Institutions Strategic Transfer (FIST) bill, which will allow banks to dispose of their non-performing loans and assets so they can help more businesses. "We hope the bicameral conference committee in the Congress will finalize the bill within the year," he said.
FSCC Chairman Diokno said “facets of our daily lives have changed since the pandemic” but he added that we should not dwell on the past and instead look ahead. This, the BSP Governor said, should be “our mindset [because] doing so gives us direction and purpose.”