Emerging-market (EM)central banks across Asia require more policy tools to deal with rising financial volatility across the economic group due to the divergence of monetary policy and growth in different advanced economies affecting EMs.
At the 51st Governors’ Conference of Southeast Asian Central Banks (Seacen), hosted by the Philippines this year in Makati City, the monetary authorities of the member-economies in the region agreed that central banks in the region need to be more
united to deal with challenges in financial markets.
“Governors noted that the shifting dynamics of global economic conditions have given rise to increased uncertainty for Seacen economies, particularly in two aspects—growth and financial stability. The governors recognized that risks to Seacen economies’ growth may be transmitted mainly through the trade channel—while risks to financial stability may be propagated through the exchange rate, interest rates and capital flows channels,” the official statement from the Seacen read.
“Toward this end, the governors highlighted that the pursuit of wide-ranging policy reforms should be a continuing process for Seacen economies to cope with episodes of global economic stress,” it added.
In the Philippines the Bangko Sentral ng Pilpinas (BSP) owns a wide array of monetary-policy tools other than the policy rates, such as the special deposit account (SDA) rate and the banks’ deposit reserve ratio. Such are seen as more sophisticated antiliquidity tools than the more blunt policy instrument that Governor Amando M. Tetangco Jr. uses with refined hesitation from time to time.
Likewise, the central bank is crafting a new framework called the interest rate corridor (IRC) to increase the efficiency of the main policy rates. The IRC is scheduled for implemention by the second quarter next year and should help make monetary policy operations more effective.
The IRC, the governor also earlier said, makes use of the BSP’s policy rate and special deposits account (SDA) rate. The BSP’s lending or repurchase (RP) rate forms the ceiling and the SDA interest rate represents the floor of the corridor.
Central bank governors in the region also said there is a need to maintain vigilance against the arising risks to monetary policies in the region through the clear identification and management of risks and how these might feed their way into the real sector.
Enhancing domestic sources of resilience, as well as proper communication of monetary policy moves were also said to be important in building up defenses against the negative effects of a more globalized market for central banks.
In a related event, the United Nations Conference on Trade and Development (Unctad) urged countries, including the Philippines, to institute financial reforms to prevent the recurrence of external debt crises.
In the Trade and Development report 2015, Unctad said improving financial governance includes reforming the external debt of countries, as well as improving transparency in financial instruments.
“A major driver of this growing indebtedness is the push factor of fast-rising financial capital in flows in the context of rapid and excessive global expansion of liquidity,” Unctad said.
“The concomitant growth of often complex and opaque financial and debt instruments, along with substantial changes in the structure and composition of developing country external debt, have rendered their debt highly vulnerable to the vagaries of private financial markets, in particular, and in the present global economy, more generally,” it added.
Unctad data showed that in the debt crisis of the 1980s and the Asian Financial Crisis of 1997-1998, the Philippines had high levels of external debt.
The Philippines entered a currency crisis and a banking crisis in 1983, as well as a sovereign debt crisis in the same year. The country’s gross external public debt as a share of GDP was at 34.2 percent.
During the Asian Financial Crisis, the Philippines entered a banking crisis in 1997 and a currency crisis in the following year. The country’s external debt at that time was 42.5 percent and total gross public debt as a share of GDP was at 10.4 percent.
While the level of indebtedness of the country was still lower than other countries affected by the crisis, the Philippine economy still suffered from these external shocks.
“Therefore, the persistent vulnerabilities and challenges posed by international financial markets make it all the more important to ensure that the debate about enhanced debt restructuring mechanisms is taken seriously,” Unctad said.