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Financial stability council backs proactive moves vs risks to system

THE FINANCIAL Stability Coordination Council (FSCC) said certain industries will undergo transformation in transitioning to the New Economy, and recommended proactive measures to head off risks to the system due to the pandemic.

“We have been arguing that with the uncertainties created by COVID-19, it will be useful to (lay out) what the future arrangements would be so that stakeholders can work backwards to identify what needs to be done today,” Bangko Sentral ng Pilipinas (BSP) Governor and FSCC Chairman Benjamin E. Diokno said in an online briefing.

“Having a better understanding and view of brewing risks is necessary for calibrated action and policy interventions. This is the way modern governments should operate. We should anticipate threats rather than merely react to problems after they have broken out,” Finance Secretary Carlos G. Dominguez, III, who is also a member of the FSCC, said in the briefing.

The FSCC’s Financial Stability Report for the first semester concluded that debt servicing remains the primary concern after personal incomes and business opportunities were badly affected by the economic downturn. The economy contracted by a record 9.6% in 2020 and continued to decline 4.2% in the first quarter.

The FSCC noted that borrowers particularly projected payments of their debt based on their incomes prior to COVID-19. In this case, those that were already vulnerable prior to the crisis will take even much longer to recover to a point where they can repay.

“Growth will eventually be the norm which will alleviate the income compression, but the timing and terms of the debt repayment cannot be addressed by growth alone,” the report found, noting the possibility of a return to pre-pandemic economic output by late 2022.

The FSCC warned that the emerging scenario is uneven recoveries, where advanced economies will likely rebound faster, while the Philippines as a small open economy will find itself disadvantaged.

“Debts will be more expensive to service (raising even further risks of default) and an abruptly weaker local currency makes the higher foreign currency exposures more costly to carry,” it said.

The FSCC is an inter-agency body composed of representatives of the BSP, the Department of Finance, the Insurance Commission, the Philippine Deposit Insurance Corp., and the Securities and Exchange Commission.

In July, Executive Order 144 institutionalized the FSCC to focus on assessing and implementing policies to prevent systemic risk factors or particular company or industry-level events with the potential to trigger severe instability within entire industries or even the economy.

CHANGING MARKET ENVIRONMENT
The transition to the New Economy will mean big changes to many industries, including education, retail trade, and commercial real estate, the FSCC said.

For one, education is the path for future employment and the skill sets that will lift the economy, BSP Assistant Governor Johnny Noe E. Ravalo said. After the pandemic, the needs of the economy will be changing and students will also experience a different way of training, as already manifested by the disruption of face-to-face classes, he said.

“We believe that there will be a cohort of about five to seven years of students that will be directly affected,” Mr. Ravalo said.

Meanwhile, the retail trade sector is directly affected by the pandemic’s impact on incomes. Mr. Ravalo said businesses have been categorized as essential or non-essential and retail spending can either be in-store or online.

The FSCC said the retail trade will continue to face risks as more infectious variants emerge and with incomes devoted largely to essentials.

“The challenge is that there are costs for remaining open throughout this transition. This will include the carrying cost of fixed assets, the costs of maintaining a workforce, the cost of shifting towards an online presence, and for those with debts, the cost of borrowed capital,” it said.

Another industry which is expected to undergo significant change is the commercial real estate industry, as it adjusts to new health protocols and work-from-home arrangements.

“Here the issue is timing, because it takes time for developments to be completed. And there have been developments have already been delayed and new developments that have to be rethought as a consequence of the engineering and health concerns,” Mr. Ravalo said.

The new normal calls for a need to retrofit existing spaces and improve ventilation in order to comply with physical distancing and health protocols, it said.

It also noted the exodus of foreign workers as a growing concern. It cited data from Colliers International which showed that Philippine Offshore Gaming Operators (POGOs), which had boosted demand for office space prior to the pandemic, vacated a total of 468,000 square meters in the second half of 2020.

“As POGOs tend to concentrate in certain locations, the impact of the vacated space is geographically amplified rather than broadly dispersed. This exacerbates the reduced prospects for commercial real estate in the short- term,” it said. — Luz Wendy T. Noble

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