Felipe M Medalla: Creating a resilient financial system amid
interconnected risks - balancing growth and inflation while
minimizing disruptions
Speech by Mr Felipe M Medalla, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the release of the 2022 Financial Stability Report,
Manila, 9 January 2023.
* * *
Good afternoon, everyone, especially all my colleagues in government. And it is still not
too late to say, "Happy new year!"
As we release the 2022 Financial Stability Report, I am pleased to note that the
economy has demonstrated its resilience despite a year of challenges and global
turmoil. Over the past few months, we have returned to some form of normalcy. Of
course, the "new normal" is quite different from the "old normal," but it is still normal:
businesses are opening; the malls are full again that parking has become a challenge;
students are trooping back to schools; consumers are spending more; and tourist
arrivals are increasing.
What we have today, some of it is called "pent-up demand" or "revenge spending." The
people who did not buy cars because they were not needed during the lockdowns are
now, of course, catching up.
But while we cherish all these positive strides, we cannot overlook the challenges to the
global market and, of course, geopolitics. Indeed, if you listen to the most pessimistic
people, they are thinking, "What if something happens to Iran? What if North Korea
becomes a problem again? What if globalization, as we know it, is completely gone?"
We have terms like reshoring and friend-shoring. Where you locate is now also affected
by geopolitics.
Moreover, inflation remains a problem worldwide. In our case, as the joke goes,
"Sibuyas could now serve as your earrings." As the authorities respond with higher
policy rates, which are necessary to control second-order effects, what we in the central
bank want is that the supply-side effects do not generate inflationary expectations that
make inflation keep rising-even after the supply shocks have gone. There are risks to
the real economy, which, thankfully, we [the economy] were able to absorb, and we do
believe we will be able to absorb this [impact of the BSP's rate hikes] as well.
But these spillover effects are critical-just as we are worried about any spillback risks
from financial markets into the real economy.
By the way, one of the questions we will always ask is: Are the things we do to stabilize
the economy eventually planting the seeds for the next crisis? For instance, we stabilize
the exchange rate, so people will now say, "Baka naman safe nang manghiram sa
dolyar kahit ang kita [profit] mo ay peso." Every time the economy weakens, we [in the
central bank] come in and try to save it. [So, people start thinking,] "Ah! Wala palang
risk because, after all, the central bank will save the economy."
You could see that happen in the United States. What caused the Global Financial
Crisis? Too much liquidity that chased assets. So, inflation was not a problem; asset
prices were the problem.
What was the solution? Even more money. So, it is like an alcoholic. "What is your
problem?" "I am drinking too much." "Okay. To stabilize you, in the meantime, I will give
you alcohol so you can function." The problem is when you do that, then people would
say, "Central banks and other regulators will save us."
And, therefore, to use the favorite words of [Senior Assistant Governor] Noe [Ravalo],
"The seed of instability is stability." Without knowing it, as we try to do good things, we
created expectations that certain prices never go down. And, as long as prices never go
down, default is low because all you have to do is sell the assets that you have. What
will happen? Default rates are low until they are high. There is no gradual increase, just
a sudden one. By the time you know it, it is too late. This is what we want to prevent.
Of course, I would like to thank the OSRM [Office of Systemic Risk Management] for all
the efforts, notwithstanding the manpower problems.
And it is quite important that new methods of [systemic risk] analysis come up, like
"What is too big to fail?" Of course, the simple answer is, you can be too interconnected
to fail. For instance, Meralco is too big to fail kasi brownout tayong lahat. Anong
solusyon doon? The government will take over. But that will create more problems than
it solves.
Therefore, all these things-counting minuses and pluses and adding them and making
many problems disappear ... just because, right now, there is no problem.
And if these are not challenging enough, we heed the reminder of Hyman Minsky who
argued that "It is in periods of stability that we sow seeds of instability." What I just
described earlier-good times, which we regulators cannot let go of so easily. In fact,
when the good times are turning bad, we do our best to prolong it even longer. It can lull
us into a wrong sense of complacency.
This is the answer to the question I posed earlier: We work on systemic risks, report our
analysis-thank God for our staff and for our colleagues-and engage the public because
we avoid the expected shocks and better manage when the unexpected ones happen.
This is a point of resilience.
For instance, we in the central bank know that the policy rate affects [market] interest
[rates]. But it does not affect the foreign borrowing costs of conglomerates from abroad.
In a sense, the conglomerates live in a financial sector that is quite different from the
financial sector that we all live in. The government is the same thing. This explains why
the T-Bill [Treasury-Bill] rate is lower than the policy rate.
So, these are all the things we are asking. The extent to which these things that look
like solutions to any problem that we do not like, eventually, unintentionally become the
root of instability. So, our benchmark is not whether the risks do materialize but rather
how prepared we are for them.
It could be that none of them [risks] ever happen. But that does not mean we should do
it. My analogy is always the typical fire extinguisher. It looks like a waste of money
[because] it has never been used. But, clearly, it is a bad idea not to have them.
In closing, let me invite everyone to download your copy of the 2022 Financial Stability
Report. Tell us what you think, and we are more than happy to engage. In this way, we
can manage the risks ahead and shape present and future outcomes-together.
Thank you very much at magandang hapon sa inyong lahat.