FSCC: Philippines needs to prepare for ‘new economy’

MANILA, Philippines — The country needs to prepare for the transition to a “new economy” to mitigate the systemic risks posed by the COVID-19 pandemic, according to the Financial Stability Coordination Council (FSCC).

In its 2nd semester 2020 Financial Stability Report (FSR), the FSCC has identified the various systemic risks faced by the country due to the economic and health crisis created by the virus outbreak.

For one, Bangko Sentral ng Pilipinas (BSP) Assistant Governor Johnny Noe Ravalo said incomes of both households and the business sector have been impaired.

“The second point is that financial risk aversion remains elevated. This is a natural response in the financial markets in the face of uncertainty,” Ravalo said.

The BSP official also said COVID-19 gives rise to welfare and inequality issues.

Since incomes are affected and preferences changed, Ravalo said there was also a shift in how consumers behave and how investors manage their risks.

“Our current models of how humans behave and what type of choices they make are all premised on normal times behavior. So the challenge that COVID-19 presents is that forecasting the future is going to be very difficult, given the uncertainties, many moving parts, and given that there will be changes in consumer behavior,” he said.

But while the pandemic has brought upon changes and complications in the Philippine economy, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said there is a need to prepare for the future.

He said the FSR defines the new market landscape in the future, taking into consideration the fundamental changes brought about by the pandemic.

“We believe that the future will continue to carry a premium on physical space and the trend towards digitization is irreversible,” Diokno said. We also believe that there will be more granular changes in risk behaviors and consumer preferences.”

The BSP chief said these would have significant effects on how products and services would be produced and consumed.

Diokno then emphasized that the “new economy” should not just be defined as a “post-COVID” world where the country will go back to old norms.

“Rather, we expect it to be defined by a different set of market arrangements, changed business models, and distinguished by new behaviors. And for the authorities, it also means adjusting our lens to account for systemic risks when we oversee the functioning market,” he said.

Finance Secretary Carlos Dominguez said the FSR highlights the importance of crafting responsive fiscal and monetary policies to support economic recovery.

“On the protracted impact of COVID, this is not surprising because it is a pandemic. But it just highlights my earlier point that we should give our interventions more time to work themselves through the system, because these are responding to a long-term problem,” he said.

The finance chief said the government’s fiscal response, at this point, also remains on track, with the government’s top focus on reinforcing confidence of the consumers.

Asked about the BSP’s exit strategy from an expansionary policy, Diokno said the timing of such a move should be anchored on domestic conditions.

“That said, I cannot tell you in advance the day and the month of an exit, but our assessment of systemic risk factors prominently into that thought process,” he said.