PH markets now in 'risk-on' mode

RISK appetites have risen as expected threats failed to materialize last year, the Financial Stability Coordination Council (FSCC) said, opening up opportunities not only for businesses but also regulators to prepare for and prevent future shocks.

“To borrow from investment terminology, we believe that we are squarely in the risk-on part of the financial cycle,” Bangko Sentral ng Pilipinas (BSP) Governor and FSCC Chairman Eli Remolona said in a foreword to the 2023 Financial Stability Report released on Tuesday.


Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. Photo from BSP

“There is momentum, and that is something that should be nurtured and its opportunities maximized,” he added. “And yet, as the macroprudential authority, we must strike a careful balance between fueling the momentum further and taking a cautious stance against the build up of excesses.”

The FSCC, which is comprised of the BSP, Department of Finance, Philippine Deposit Insurance Corp. (PDIC), Insurance Commission, and the Securities and Exchange Commission, first met in 2011 as part of a voluntary initiative to assess systemic risks and decide on policy interventions.

Its activities, powers and responsibilities were formalized in 2021, and it now has the legal personality to set guidelines and regulations in line with the country's financial stability agenda.

Last year, the FSCC said, “was the year that everyone expected… until it was not.”

With inflation still stubbornly high across the world and bank collapses in the United States, 2023 was supposed to be a year of recessions and economic malaise. The US was particularly expected to see its economy contract given aggressive monetary tightening but this did not materialize, which had a follow-on effect on sentiment in the Philippines.

Given a market that “essentially runs off dynamic changes in perceptions,” the FSCC said that measuring risk-on risk-off sentiment would provide a better gauge about what market players were anticipating.

“This measure can still be tweaked in several respects,” it added. “What it does tell us though is that we finished the year in risk-on territory after shifting into that mode at the start of November.”

“That this arises from both expected downside risks not materializing as well as from truly positive developments in the macro-financial market offers a good balance. It also provides an opportunity for market calm which can be leveraged to strengthen, if not build, guard rails against too much euphoria and/or unexpected shocks.”

The challenge, Remolona said, is that “systemic risk is inherently difficult to comprehend. Markets are fluid and things can change very quickly. There are risks arising from our own markets… risks coming from foreign markets that can spill over onto our shores.”

“These are the things we worry about. Indeed, financial market participants often make risky investments based on rosy scenarios. The more widely shared the scenario, the more dangerous it is,” he added.

“If something goes wrong, these scenarios sometimes lead to mass panic. There is a rush for the exits, causing massive investments to collapse.”

Among the risks tagged by the FSCC was the perception of how soon key interest rates would be lowered. It said that this would largely still depend on how the US Federal Reserve moves and added that “any expectation of an early rate cut is optimistic.”

Interest rates in the US will likely stay higher longer than expected, it added, also noting that the possibility of more rate hikes remained on the table.

A rise in real estate loans in the Philippines despite higher interest rates was also noted and bears watching, the FSCC said.

PDIC President Roberto Tan highlighted the need for banks to guard against risky behavior and said that they were now in “the process of studying how we will be increasing our insurance coverage, and what measures we need to instill market discipline and avoid moral hazards or riskier behavior by banks as well as depositors in this respect.”

Risk-on, the FSCC said, “is ultimately an indicator that liquidity is much more willingly deployable. Stakeholders are open to taking more risks, and this is reflected in the increased demand for and release of liquidity.”

“What risk-on cannot do is determine in which economic activities that liquidity will be used. This is inherently and remains a private sector decision,” it added.