Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno has expressed confidence that domestic banks and local corporations can hold out against tighter global financial conditions, subdued fund flows and exchange rate pressures with policy normalization.
“It is the BSP’s view that the banking system’s level of capital and liquidity buffers as well as strong performance will enable it to withstand the impact of an asynchronous global recovery,” said Diokno in an online press chat on Thursday, September 30.
He said that based on the BSP’s internal stress test estimates, bank capital can withstand and buck the impact of “assumed adverse movements in Philippine and US market rates as well as US dollar to peso exchange rate on banking system exposures.”
Diokno also said the central bank is prepared to provide dollar liquidity to “ensure that legitimate demands for foreign currency are satisfied.”
“The BSP has enough policy instruments to address potential capital flow volatility,” he said. Its flexible exchange rate system is the BSP’s first line of defense in absorbing external macroeconomic shocks. “As you know, the BSP maintains a market-determined exchange rate and will only participate in the foreign exchange (FX) market in case of excessive FX volatility and to minimize any undue impact on inflation and inflation expectations.”
Diokno said that repricing of risks of financial assets will have peso depreciation pressures. “Depending on the proportion of external debt exposure of nonfinancial corporates, depreciation pressures could, in turn, weaken corporate sector recovery.”
But, he said that most corporates in the Philippines “can still service interest payments that are due in the near term based on their interest coverage ratios.”
Diokno noted that in 2020, about 57 percent of bond issuances are mostly denominated in local currency. “This is an indication that firms could be, to some extent, insulated should there be depreciation pressures linked with the potential rise in interest rates,” he said.
Diokno said the BSP is prepared for any potential volatility in capital flows and exchange rate movements that could arise from the normalization process.
As such, monetary policy stance will remain supportive of sustained recovery amid the uneven rate of growth across the world.
Diokno also said the stronger rebound in advanced economies such as the US will benefit the “tentative recovery in emerging economies” through increased global trade activity. “Any improvements to global demand will have positive spillovers to the domestic economy,” said Diokno.
However, policy normalization by major central banks ahead of emerging-economy counterparts could also lead tightening pressures.
“An earlier-than-expected normalization in major central banks could lead to a sharp tightening of global financial conditions, with adverse effects on emerging markets. Similar to what happened during the ‘taper tantrum’ in 2013, a sudden reversal in global risk sentiment could trigger capital outflows from emerging markets, including the Philippines,” said Diokno.