FSR2020 April
FSR2020 April
FSR2020 April
APRIL 2020
STABILITY
REPORT
FINANCIAL STABILITY REPORT
APRIL 2020
APRIL 2020 FINANCIAL STABILITY REPORT
Prepared by:
MAY 2020
APRIL 2020 FINANCIAL STABILITY REPORT
TABLE OF CONTENTS
LIST OF CHARTS i
LIST OF TABLES ii
LIST OF ACRONYMS, ABBREVIATIONS AND SYMBOLS iii
BIBLIOGRAPHY 30
The material in the April 2020 Financial Stability Report was finalized in May 2020. The report covers
available data up to end-April 2020. Meanwhile, the world map in the front cover is created by
Freepik and was modified accordingly.
Reproduction for educational and non-commercial purposes is permitted provided that the source
is duly acknowledged.
LIST OF CHARTS
MAIN CHAPTERS
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LIST OF TABLES
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T he global economy saw growth moderate in the second half of 2019 although financial markets
remained generally calm. The emergence of the coronavirus disease (COVID-19) at the onset of 2020
dramatically altered the market situation. What sets COVID-19 apart from the most recent crisis, the
global financial crisis (GFC), is the speed at which it has spread throughout the globe, imposing significant
human and economic costs in a matter of months. The International Monetary Fund (IMF) has judged
the global economy to be in recession and, more importantly, that they expect the full extent of the
dislocations to be close to those of the 1929 Great Depression.
As countries focus their efforts to containing the pandemic, government interventions have supported
the reflow of incomes, particularly to the most vulnerable sectors of society, while financial authorities
have been implementing measures to sustain funding and re-ignite stalled economic activity.
That human lives have been lost in this pandemic while measures to contain the virus have compromised
household incomes and suspended business activity only highlight the great costs that have been borne
by society thus far. Yet, there are still many challenges in front of us, as the country — as with all other
economies in the world — goes through the process of stabilizing the public health shock and then
making up of lost ground with an economic recovery.
At this juncture, we continue to believe that the financial system is stable, even if it is necessarily reacting
to the uncertainties from COVID-19 and to the instabilities brought about by a recession on the
macroeconomy. In this challenging time, the Financial Stability Coordination Council (FSCC) remains
steadfast in our commitment to maintain a system-wide view of present and emerging risks, with the
goal of preserving financial stability both today and in the future. Our end-goal has always been to
maximize the benefits of finance while minimizing the costs of instability for the public.
This April 2020 Financial Stability Report (FSR) is our maiden report that shifts from an annual to a
semestral calendar. We hope that, by doing so, we provide a timely analysis of the fast-changing market
developments and be more effective in proposing pre-emptive interventions. This should also help our
readers so that they are well positioned to make better-informed decisions.
We wish for everyone’s good health as we share this FSR and we welcome any inputs so that we can
enhance future reports.
BENJAMIN E. DIOKNO
FSCC Chairman and BSP Governor
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– FSCC
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EXECUTIVE SUMMARY
AND FINANCIAL STABILITY ASSESSMENT
T he ongoing public health crisis has escalated into a pandemic with severe human and economic
costs. World growth was already slowing since 2018, but the emergence of the COVID-19 pandemic
has put the global economy into a recession. That the virus emanated from China (the world’s factory)
and specifically from Wuhan (a transportation hub with direct access to five continents) underscores the
interconnections that define the world order.
Compared with the Severe Acute Respiratory Syndrome (SARS), COVID-19 is more contagious, with over
3.3 million confirmed cases1 (as of this writing) in 187 jurisdictions and a mortality rate of over 7 percent.
Measures to contain the spread of the virus, however, necessitated restricting cross-border travels and
suspending domestic economic activities, both of which effectively erode household income flows.
The social and economic costs have been high thus far, but one should expect more difficult times ahead
before the overall situation gets better.
In the Philippines, COVID-19 has put a strain on the public health infrastructure, and the stay-at-home
preventive measure has disrupted people’s usual day-to-day practices. The government has responded
with an income augmentation and subsidy program, supported by the early action of Congress in crafting
the Bayanihan to Heal as One Act (Republic Act 11469).
As adversely affected as the economy has been, there are no indications that the financial market is in
peril. Risk behaviors have shifted though, as risk aversion has been heightened, asset prices have fallen,
and risk premiums have increased. Across borders, a rebalancing of portfolios has been noted towards
safe-haven, liquid, and often US dollar (USD)-denominated assets, just as there is evidence that shifts in
asset holdings have transpired within jurisdictions.
For the Philippine financial market, the preference for money market instruments has been notable
although one cannot say that this has been “funded” by withdrawals in other asset classes. There is also
no evidence of a liquidity squeeze, either in Philippine peso (PHP) or dollar terms, and the PHP/USD rate
has remained relatively stable.
Yet, risk premiums have risen and the impact of the recession on financial markets will depend on how
(and how quickly) the country can resolve the public health issue, bolster family incomes, and re-ignite
business activity. Over the near term, it is reasonable to expect increased difficulty with debt servicing
in the formal market as business activity has been put on hold and, arguably, in the informal market as
household cash flows have been disrupted. The regulatory reliefs on credit are critical and important,
but authorities also have to look ahead as the business and income dislocations may take time to
normalize.
What is to be avoided is a financial accelerator type of amplification. On this point, authorities should
manage risk premiums to eliminate as much of the panic add-on, which is the antithesis of stabilization
and recovery. In parallel, there is value to pricing risks off forward markets and then back to spot rates,
rather than rely on spot rates that price-in an unanchored future.
1 Based on 30 April 2020 data from the Johns Hopkins University & Medicine Coronavirus Resource Center.
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Soon, authorities will have to think of the post-COVID-19 environment. At this juncture, it is difficult to
imagine returning to the old status quo. The economy has to be re-fitted into the social distancing
guidelines, as well as preventive measures that rely less on face-to-face interactions. While governments
are in the best position to absorb the current burden of the relief efforts, sooner or later, the potential
overhang of increased national debt may require fiscal policy adjustments.
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CHAPTER
1
CHAPTER 1
GLOBAL AND DOMESTIC
DEVELOPMENTS
Global growth was already decreasing because of Figure 1.1: Real GDP growth rate
structural factors in advanced economies (AEs). In percent, year-on-year (YoY)
A study by the IMF has argued that structural factors
— aging population, demographic shifts, and the
subsequent decline in potential output and the
transition to a service-led economy — are slowing
economic activity in AEs (Bakker, 2019). As a result,
global growth has been declining since 2018, with the
decline turning out more than what was expected
over the last two years (Figure 1.1).2 Unemployment,
for instance, has declined very rapidly over the last
five years even though growth was itself modest
(Figure 1.2).3 Unemployment rates in AEs, Source: IMF
particularly in Japan, Europe, and United States (US),
are falling because of a decline in the working age
population rather than due to improving labor force Figure 1.2: Unemployment rate
participation. Investments have been slowing for a In percent, seasonally adjusted
time now as well, following the declines of the
working age population.
2 Growth declined by 0.7 percentage points between 2018 and 2019 alone (IMF, 2019 and 2020).
3 Gopinath, G. (2019). The World Economy: Synchronized Slowdown, Precarious Outlook. IMF Blog.
4 GVCs deal with the cross-border trade of intermediate materials for the production of a final good.
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Figure 1.3: Merchandise world trade economic developments, resource availability, and
In percent, YoY, seasonally adjusted, 2010=100 political shifts, have spilled over to trade
relationships, reinforcing the interconnectedness
of countries.
5 The production schedule was disrupted due to the requirement to certify different automotive models leading to bottlenecks at testing
agencies (IMF, October 2019).
6 Gross output is the sum of its value added and intermediate consumption.
7 Due to digitalization, the internet and low-cost telecommunications, services — such as finance, software development, outsourced business
processes, education, healthcare, entertainment, and retail — can now be delivered remotely over long distances and at more affordable
prices in lieu of being done face-to-face in a fixed location (WTO, 2019).
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This last point is telling in part because present-day China is very different
from what it was during the SARS outbreak in 2003.8 Today, China is the
second-largest economy, accounting for 16.4 percent share of the 2019
global gross domestic product (GDP) while about one-fifth of global trade
in manufacturing intermediate products originates from China
(Sim, 2020). Though the Purchasing Manager’s Index (PMI) for China has
improved in March 2020 after a record slump in February, the outlook is
still gloomy as new export orders may not be replicated in the succeeding
months (IHS Markit, 2020).
As the epicenter of the virus shifts from China to Table 1.1: Top-7 COVID-19 infected economies
Europe and now the US, it has triggered a global Cases in actual number of individuals, shares in percent
Share Share to 2018
supply-chain disruption and demand shock. Total
to 2019 world value
With more than 180 countries with confirmed Confirmed
Country world addedc
COVID-19
cases of COVID-19, it is clear that the world is Casesa
nominal
Mfg. TRH* TSC+
GDPb
facing a global shock (Baldwin, 2020).
US 1,039,909 24.8 16.6 25.9 30.1
Moreover, the seven nations (USA, Spain, Italy, Spain 236,899 1.6 1.1 2.1 1.5
France, Germany, United Kingdom (UK), and Italy 203,591 2.3 2.3 2.6 2.4
China) most affected by the virus account for 55.8 Germany 166,543 4.5 5.8 3.6 4.5
France 166,441 3.1 1.9 2.9 3.4
percent of global GDP in 2019 and their shares to
UK 161,539 3.2 1.8 3.0 3.9
the value added of selected economic activities China 117,589 16.3 28.4 13.2 8.6
are also significant (Table 1.1). Hence, the freeze Top 7 2,092,511 55.8 57.9 53.3 54.5
in economic activity in these jurisdictions will Note: *wholesale and retail trade, restaurants, and hotels;
+transport, storage, and communication
substantially influence the direction of world Source: aData as of 30 April 2020 from Johns Hopkins University;
supply, demand, and, in turn, growth. b
IMF October 2019 WEO; cUNSTAT, staff calculations
8 In 2003, China was less-integrated to the world, accounting for only 4.2 percent of the global economy and the outbreak SARS already led
to a USD40 billion reduction in global GDP, equivalent to a 0.1 percent growth reduction (Feuer, 2020).
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Figure 1.5: JPMorgan world manufacturing PMI Latest trade figures have already captured the
In index points, seasonally adjusted, 50+= expansion fallout in economic activity. Manufacturing PMI
moved a little to 47.6 while new export orders
further contracted to 43.3 in March 2020
(Figure 1.5).9 In addition, analysts are already
expecting a slump in auto sales this year, with global
auto manufacturers announcing production
shutdowns and switching to liquidity protection
mode (S&P Global, 2020).
The confluence of events has inevitably pushed the global economy into
a recession. In end-March 2020, the IMF declared that the world has
entered into a recession – worse than 2009. This follows after the
pandemic triggered a standstill in global economic activity and many
advanced and developing economies are already entering downturns.
The IMF further stated that recovery is possible in 2021 but is dependent
9 The PMI is a composite indicator of the manufacturing sector’s performance, with 50.0 as the threshold. A reading above 50 indicates growth,
while below 50 is a contraction.
10 The IEA said that the oil market was already heading into the first half of 2020 with a bit of a supply surplus.
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on the governments’ response to contain the virus Table 1.2: 2019 growth estimates of multilateral
and implement economic policies to avoid a agencies for the Philippines
further slowdown (IMF, 2020). Growth in percent, change in percentage points
Earlier Latest
Report Change
Version Report
1.2 Domestic developments Asian Development
6.9 5.9 1.0
Outlook a
Throughout 2019, forecasted full year growth was Global Economic
6.7 5.8 0.9
Prospects b
revised downwards repeatedly for the Philippines World Economic
like most jurisdictions. The downward revisions 6.8 5.9 0.9
Outlook c
aApril 2018 vs. April 2020 update
that began in 2018 continued into 2019 as bJanuary 2018 vs. January 2020 report
multilateral agencies updated their forecasts c
April 2018 vs. April 2020 report
(Table 1.2). This was not unique to the country as Source: Asia Development Bank (2018 and 2020), World Bank (2018
and 2020), World Economic Outlook (2018 and 2020)
even the IMF was revising their estimates of world
growth (Figure 1.7).
With the COVID-19 pandemic, 2020 growth Figure 1.7: WEO world growth forecasts
estimates have been revised sharply. In their April In percent
arrivals came from Korea, China, and the US, which Philippines 0.6 7.6
totaled to 58.1 percent of total tourists Source: IMF
(Figure 1.8). In order to contain the spread of
COVID-19, the government has imposed travel
bans specifically to and from China, South Korea,
US, and other countries with COVID-19 local
transmission.12 These measures limit tourism-
related expenditures such as accommodation,
11The entire island of Luzon was placed on a month-long ECQ to contain the spread of the virus. It was due to end on April 12 but was extended
by the President up to April 30 as recommended by the Inter-Agency Task Force for the Management of Emerging Infectious Diseases (Ibanez
and Noble, 2020).
12 The travel ban period for China began on 5 February 2020, Korea on 3 March 2020, and the US on 12 March 2020. The exceptions to the ban
are Filipino citizens, their foreign spouse and children, permanent residents and holders of diplomatic visas (BI, DFA & CNN, 2020).
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Figure 1.8: 2019 visitor arrivals of top 10 transportation, shopping, and food and beverage,
markets among others. In fact, the NEDA estimated a loss of
In thousands PHP23 billion a month for the tourism sector
(Laforga and Espedido, 2020).
13 For the period of February 1 to 18, 2020 inbound shipments from China dropped by 62.2 percent in volume.
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14 The 36 survey respondents came from shipping and logistics; chemicals; electronics; food; footwear; leather and travel goods; furniture;
garments and textiles; holiday decors, gifts and premiums; housewares; IT products and services; metals; and resource-based sectors. Small
enterprises dominated at 41.7 percent of total respondents.
15 The implementation of an FWA for businesses is better than to totally close shop or retrench laborers according to Labor Secretary Silvestre
Bello III (Yee, 2020).
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Figure 1.11: 2019 OFW remittances of top 10 Overseas employment is also affected especially in
markets COVID-19 affected countries, which in turn, lowers
In USD million remittances. Overseas Filipino Workers (OFWs)
cash remittances reached USD30.1 billion in 2019,
with 37.6 percent coming from the US. The top ten
sources of remittances have already reported
increasing cases of COVID-19 (Figure 1.11).
Moreover, the Department of Labor and
Employment stated that a thousand of OFWs were
deported, while 1,500 and 521, were displaced and
stranded, respectively (Yee, 2020). NEDA estimates
that a 30.0 percent decline in OFW jobs in tourism
Source: BSP related sectors will displace approximately 100,000
workers and translate to PHP5.7 billion losses in
potential remittances (NEDA, 2020).
On the whole, the dislocations from COVID-19 are already evident but
arguably its full effects still lie ahead. Authorities then face the difficult
task of addressing the current difficulties while keeping an eye towards
the future. Systemic risks must now be directly confronted. The effects of
COVID-19 are already substantive and market updates are literally a
day-to-day event. This chapter alone has been re-written and updated
repeatedly so that it reflects a reasonable accounting of the latest
developments. Numbers aside, however, no one can dispute that the
global economy is in the midst of a systemic risk that has been realized.
This is not because of the magnitude of the damage but rather by the fact
that the world has been affected through channels of contagion,
connectedness, and correlations. This reiterates that action needs to be
organized and collective, not only to contain the spread of the virus but
also to mitigate further systemic risks to the macroeconomy, their people,
and to the financial market.
16 YoY inflation continued to soften for March 2020 as it posted 2.5 percent from the previous month’s 2.6 percent. It should be noted that this
is within the BSP’s target range of 2.0-2.8 percent for March 2020. Likewise, the year-to-date average inflation rate of 2.7 percent falls within
the year 2020 Government target range of 3.0 percent ± 1.0 percentage point (BSP, 2020).
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CHAPTER
2 FINANCIAL VULNERABILITIES
CHAPTER 2
seen since the Great Depression. As countries grappled to control the
highly infectious virus, policy measures that inevitably lowered economic
activity had to be in place to contain the spread, eroding incomes and
financial conditions. The current dislocations are indeed systemic and
FINANCIAL VULNERABILITIES
have likewise triggered a change in behavior among investors.
In particular, it resulted in a rebalancing of portfolios that consequently
heightened risks and the pricing of risks.
COVID-19 is causing a global recession and Figure 2.1: Market stress and asset price
financial market investors have rebalanced their volatility
In index points
portfolios towards more liquid assets.
The markets are seeing a spike in financial stress
indices, reaching levels that have not been seen
since the GFC (Figure 2.1). The IMF has suggested,
however, that the world should be prepared for
worse as their prognosis points to declines not
seen since the Great Depression of 1929.
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The rush for liquidity and safe-haven assets raised the demand for the
USD. The rebalancing saw the shift towards USD money market funds
(Figure 2.4), US treasuries, and gold (Figure 2.5). With the rebalancing
cutting across borders and currencies, the result is unsurprising — that is,
the USD strengthened in trade-weighted terms (Figure 2.6).
This conservative stance is expected to continue until the outbreak is under
better control and the cross-currency price of risks becomes more tangible.
Figure 2.3: Emerging markets capital flows Figure 2.4: Top and bottom global fund flows
In USD billion In USD billion, daily cumulative since 31 January 2020
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The tightening in the global capital and foreign Figure 2.7: PSEi
exchange (FX) markets prompted various In index points
governments to take further action. On 16 March
2020, the European CB announced the
coordinated action of several CBs to enhance the
provision of liquidity in USD swap arrangements by
lowering its price.17 In addition, the US Fed eased
the USD liquidity crunch by launching the
Commercial Paper Funding Facility and Primary
Dealer Credit Facility, both aimed at meeting dollar
demand for the short-term (Westbrook, 2020).
17 The Bank of Canada (BOC), Bank of England (BoE), Bank of Japan (BoJ), Federal Reserve (Fed), and the Swiss National Bank (SNB)
18 The circuit breaker rule halts trading for 15 minutes if the main index drops by 10 percent. It was triggered on March 12, 13, and 19. The last
time the circuit breaker was triggered was on 27 October 2008, just when the GFC was unfolding.
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With no immediate shift towards foreign currencies, the PHP has been
relatively stable compared to its peers. In February, portfolio investments
actually posted a net inflow after several months of outflows (BSP, 2020).
Recent imports data shows a drop in YoY growth to –11.6 percent in
February 2020 from 2.0 percent in February 2019 (PSA, 2020), reducing
demand for the USD. Likewise, the high level of gross international reserves
(GIR)19 seems to provide some assurance for the market. All these eased
any downward pressure on the PHP while most EME currencies weakened
sharply in the first quarter of 2020 (Figure 2.10). Spot prices show a stable
PHP in April 2020 amidst low trading volume since the ECQ (Figure 2.11).
Source: FRED, PDS Group, staff calculations Source: Refinitiv, staff calculations
Figure 2.11: USD/PHP spot rate and volume Figure 2.12: Global risk aversion macro index
Rate in PHP/USD, volume in USD million In index points
To support funding markets, CBs infused liquidity Figure 2.13: Policy rates as of 17 April 2020
while reinforcing lower-for-longer yields. As the cumulative change in basis points, rate in percent
pandemic threatened macroeconomic and
financial stability, CBs re-used their monetary tools
deployed during the GFC, such as the reduction of
the policy rate to near — if not, at — zero and the
resumption of bond-buying programs
(Figure 2.13). The challenge, however, is that if the
adverse effects linger further and worsen beyond
GFC levels, as suggested by the IMF, financial
authorities will have to consider new and
additional interventions.
Source: Bank for International Settlements (BIS)
A particular concern is debt-at-risk. For some time
now, risk prognoses have pointed to the build-up
of debt in the low-for-long era. While the level and
growth of debt had been frequently cited as Figure 2.14: Loans to residents
In PHP billion
possible vulnerabilities, the strains imposed by the
pandemic will cause debt servicing difficulties.
This will primarily be driven first by reduced
income due to suspended economic activity and,
then second, through the interlinkage of the
income fallout from one entity to another. This is
the case between industries, among firms and
even among household debt in the informal sector.
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Figure 2.16: Corporate debt maturity profile It should be pointed out that the debt repayment
In PHP billion capacity of some PSE-listed non-financial
corporates (NFCs) was already declining before the
emergence of COVID-19. The interest coverage
ratio (ICR), which is a measure of the firm’s ability
to service the interest obligations of their debt, has
been decreasing in recent periods as interest
expense has grown by an annualized rate of 20.9
percent, while earnings before interest and taxes
(EBIT) has only grown by 9.0 percent over the past
three years (Figure 2.17). Stress test estimates
suggest that the ICR declines from 6.44 in Q4 2019
Note: Sample based on 200 listed companies with debt capital to 4.01 (at 10 percent EBIT decline) or further to
structure data as of Q3 2019. 2.23 (at 50 percent EBIT drop). Although the policy
Source: S&P Capital IQ, staff calculations
rate has been reduced starting April 2019, the
impact of lower rates on existing bank debts would
Figure 2.17: Interest coverage ratio of 45 PSE- not be felt until the repricing of those loans usually
listed NFCs
Indexed December 2016 = 1, weighted average based a year later.
on total debt, 4-quarter moving average
The strain on the banking books will come
through a further impairment in past due loans
(PD). The pressure on income increases the
likelihood of missed debt payments.
However, even before 2020, PD were already
trending upward, both in absolute amounts and as
a percentage of loans (Figure 2.18). Some caution
is warranted in assessing the PD numbers since the
new definition20 calls for a loan to be classified as
Note: Based on 45 companies with Q4 2019 disclosure
PD one day after it misses a due payment. A cure
Source: S&P Capital IQ, staff calculations period is, nonetheless, provided for by current
regulations and in this context, any volatility in
reported PD needs to be understood alongside the
Figure 2.18 Philippine Banking System past due trend of non-performing loans (NPL), in terms of
loans both absolute amounts and as a percentage to
Levels in PHP billion, ratio in percent total loans. Further to this, Figures 2.19 and 2.20
show that PD but not yet NPLs exhibit a faster pace
of growth compared to NPLs for both consumer
and corporate loans. Despite the fact that the
share of the impaired accounts to total loans
remain minimal, there is a need to closely monitor
the PD but not yet NPLs alongside the outright
NPLs, and its respective proportion to outstanding
loans, to determine the eventual impact of
COVID-19 on the banking books especially in the
event of a more protracted contraction in
Source: BSP economic activities.
20 Circular 941 brings back the pre-AFC standard of classifying an account as PD one day after the missed payment. Although a cure period is
provided, the reckoning period was shortened to one day after due date from three missed monthly payments or one quarterly missed
payment. Under the new guidelines, the new NPL definition is an account that has been PD for 90 days.
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There may be vulnerabilities elsewhere in the Figure 2.19 Non-performing and past due
system. For insurance companies (InsCos), consumer loans
massive and sudden shifts in market yields can Indexed January 2015=100
cause a mismatch between the long-term returns Circular 941
takes effect
promised in the policies sold to clients versus the
yields realized by their investments.
While actuarial estimates are still being
recalibrated, there may also be a fair amount of
unscheduled claims that may be redeemed by
policyholders and it is not clear if liquidity is also at
risk, given market conditions.
For households, we cannot directly estimate the Source: BSP, staff calculations
impact on debt servicing from the erosion of
incomes. On paper, salaries and wages account for
about 36 percent of GDP (based on 2018 data). Figure 2.20 Non-performing and past due
This, however, includes professionals who are corporate loans
Indexed January 2015=100
under contract and will be paid on a monthly basis
regardless if a pandemic materializes. The most
vulnerable are the workers who are part of the
informal sector or whose wages depend on the
occurrence of events, that is, those who are on
no-work-no-pay arrangement in the
“gig economy”. This aspect has not been assessed
and would not benefit from the current relief
program extended in the formal financial market.
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CHAPTER
3 OVERALL STATE OF STABILITY
AND ACTION ITEMS
COVID-19 is unprecedented on many levels. The economic damage caused
by the containment measures has pushed the world into a recession, with
the shape of the recovery still unknown. Likewise, the events in the real
economy have partially spilled over to the financial market, as shown by
the changing risk premiums, falling asset prices, and pronounced shifting
to safe-haven assets. The immediate response of authorities has curtailed
CHAPTER 3
some of the pressure points faced by both the domestic economy and
financial market, yet there remain some vulnerabilities that warrant policy
response. To this end, additional measures are proposed, some of which
have more immediate impacts while others intend to instill resiliency
The easy answer is that the economy is in a state of instability. This can be
qualified further by noting that the macroeconomy is vulnerable and one
can see portfolio shifts in the financial market in response to heightened
risk premiums. The more difficult discussion is the prognosis of what lies
ahead, with the IMF expecting that the damage will exceed those of the
GFC and comes closer to those seen during the 1929 Great Depression.
As of this writing, the Federal Reserve of St. Louis reports a
quarter-on-quarter US GDP decline of 4.8 percent for Q1 2020 and a YoY
nowcast of minus 16.6 percent for Q2 2020. From all accounts, one should
reasonably expect more instability in the market before one can see any
stabilization, let alone a recovery.
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Figure 3.2: Impact on the real economy This does not change the fact that COVID-19 is
principally a public health issue, and its
containment requires the suspension of business
activity, and instilling prohibitions on local and
cross-border travels, both of which result in
significant erosions in incomes and cashflows
(Figure 3.2). To move forward then, one cannot
escape dealing with rebooting large segments of
the macroeconomy while risk aversion remains
elevated and addressing the erosion of incomes at
a time when the economy cannot be
“business-as-usual.”
Source: FSCC
Several analysts though are already looking ahead
to the recovery. It certainly is difficult to forecast
the path of the recovery given that so much of
Figure 3.3: Impact on the financial market COVID-19 remains uncertain. Past crises though
suggest that it could be a “V”, “W”, “U”, or “L”
(Kennedy and Jamrisko, 2020). These differ in terms
of whether the shock is temporary (“V”) or
permanent (“L”), or whether a second wave is likely
but readily addressable (“W”) or the adverse impact
lingers (“U”).
On the whole then, the country must address the public health issue,
re-ignite economic activities, provide bridge funding to support eroded
incomes, and manage the changing risk premiums in the financial market.
All these come together and dictate the state of stability, both now and
moving forward.
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21 Prior to the enactment of the Bayanihan law, the NEDA released their proposed plan to counter the spread and economic damage of the
virus (NEDA, 2020).
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ii. Securing facilities and resources for the health sector and
other frontliners. This focuses on the programs that boost
and augment the capacity of the health sector to address
the public health crisis. Key programs are the COVID-19
testing and contact tracing measures, provisions of
healthcare resources, and the improvement of the
quarantine facilities.
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b. Reducing the policy rate and reserve requirement. The BSP has
reduced the policy rate thrice in 2020, resulting in a cumulative
change of 125 basis points and bringing the overnight borrowing
rate down to 2.75 percent. It also reduced the reserve
requirement by 200 basis points, which took effect on
30 March 2020.
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APRIL 2020 FINANCIAL STABILITY REPORT
i. Relaxed Know Your Customer requirements for both over the counter
and electronic or online transactions. This is to help facilitate the
delivery of welfare funds to identified beneficiaries of the
government.
a. The PDIC announced the grant of payment relief for corporate and
closed banks' clients whose payments for loans, real property
purchases, and lease fall due during the community quarantine
period. Under the relief measure, borrowers who have scheduled
payments, including down payments, were not obligated to settle
their accounts during this period. They can thus settle their
payments due, without penalty charges, one month from the lifting
of the quarantine period. All subsequent amortization schedules will
also be adjusted by a month.
Apart from the government, the private sector has also been up to the
task of bridging the gap and pitching in the needed assistance of the
frontliners, their employees, and the most vulnerable sector.
The Philippine Disaster Resilience Foundation’s Project Ugnayan, a
fundraising program composed of private business establishments, was
able to raise over PHP2 billion and has so far reached 2 million families as
of 23 April 2020 (de Guzman, 2020). Apart from Project Ugnayan,
independent assistance from large-scale private corporations and
individuals were reported to accumulate more than PHP13 billion worth
of cash and in-kind donations, majority of which came from
conglomerates.23 In addition, the implementation of tax incentives for
providing donations during the ECQ has also encouraged the private sector
to help against COVID-19 (de Vera, 2020).
As extensive as the interventions have been thus far, there remain some
vulnerabilities that warrant policy response.
If risk premiums and risk aversion are left to passively react to the principal
stress from eroded incomes and reduced business activity, then one’s view
of the future will remain clouded by the uncertainties of today. This would
only hamper the stabilization and recovery efforts. The alternative is to use
the ability of financial markets to price the future as a way to assess current
developments. It is along this line that the recommendations below are
provided, that is, to calm the surge in risk premiums and put the financial
authorities in a better position to address current vulnerabilities.
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● Mitigate solvency and liquidity risks at the industry level. Having fair
market prices is the necessary pre-condition for funding viable but
troubled industries. Interventions such as Troubled Asset Relief
Program (TARP) in the US and Special Purpose Vehicle (SPV)-type
arrangements are often constrained by risk aversion, either because
banks hesitate to take an equity risk with credit losses (in the case
of TARP) or because the parties have a widely different view of the
risk haircut (in the case of selling assets to the SPVs). These issues
can be addressed, for example, by rediscounting or limited-life
preferred shares arrangements.
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The same macroeconomic difficulties are faced by the Philippines, with the
public health infrastructure fully strained. Yet despite this and the
commensurate increase in risk premiums and heightened risk aversion,
there is no reason to believe that the local financial market is in a state of
instability. Not yet.
The caveat is offered because one cannot tell yet how the public health
issue will be resolved and how the corresponding stress points of eroded
incomes and suspended business activities will be handled. The three
cannot be dissociated, and in turn, these are symbiotic to the state of the
financial market. Risk pressures will continue to build because debts will
be increasingly difficult to service, banks will find it harder to source new
deposits, and risk perceptions draw in further risk perceptions.
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The key element now is that NGs are taking on the burden for funding the
needed relief program. There is no other entity in place that can absorb
the ultimate risks and the corresponding financing. This will certainly mean
higher debts, much less fiscal space. Intertemporally, this debt can be
bridge-financed with more debt just to sustain liquidity.
Ultimately though, taxes will have to adjust intergenerationally to make
up for the gap. This is a policy issue that, for the moment, is pushed down
the road but is unlikely to be avoided.
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Bangko Sentral ng Pilipinas
5th Floor Multi-storey Building, BSP Complex,
A. Mabini Street, Malate, 1004 Manila, Philippines