Positive market sentiments to continue this year – BSP
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said the market is under a risk-on financial cycle since late last year and there is evidence and momentum that the market optimism will continue in 2024.
The risk-on risk-off sentiment is a measure of the trading activity and sentiments of market participants. A risk-on financial cycle means there is more market appetite and optimism to take on higher risks. In contrast, a risk-off environment is when there are significant uncertainties, such as sharp interest rate hikes.
“There is momentum, and that is something that should be nurtured and its opportunities maximized,” Remolona said during the release of the 2023 Financial Stability Report (FSR) on Tuesday, Feb. 13. The BSP leads the interagency Financial Stability Coordination Council (FSCC) that handles and prepares the FSR.
Remolona said regulators such as the BSP should “strike a careful balance between fueling the momentum further and taking a cautious stance against the build up of excesses.”
The FSR stressed the opportunities in a risk-on situation but also emphasized that regulators should put additional safetynets to manage liquidity.
“The risk-on situation provides a window to put in place added guardrails that may be useful for future use. (Since) fluidity defines financial markets … no market is entirely reflecting positive signs, just as there is no market that is absolutely without positives. The task, however, is to guard against those risks that can disrupt the system and to better position the system against likely risks,” said Remolona.
Based on the report, the market finished 2023 under a risk-on territory and the switch started from riskoff to risk-on in November last year following the US Federal Reserve’s announcement that it will pause its tightening bias.
The FSR said this optimism will continue this year as companies “act and sustain this positive perception” which will lead to demand for both liquidity and term funding to increase.
“The banking industry has enough space for this increased leverage, subject to regulatory limits. But the capital market could take an increasing role,” said the report.
With the expectation that the BSP will reduce its current 6.5 percent benchmark rate this year, firms’ defensive strategy is to go for shorter maturities.
“Any expectation of an early rate cut is optimistic. It is more likely that the Fed will keep its policy rates elevated over a longer period than expected by the market. Progress has been made, and by extension, the spillover pressures are not as pronounced. But the task of calibrating the economy with policy rates is also not yet complete. This is why most central banks do not take off the table the possibility of yet another rate hike,” said the FSR.
The report also noted that right now, the macroprudential policy issue is determining the extent to which liquidity
fuels more risk-taking and how to sustain the momentum “without endangering longerterm inflationary and growth prospects.”
“Given the risk-on stance and the positive atmosphere, now is a good time to consider added guard rails that are preventive but not obstructive,” it added, citing policy tools such as bank capital instruments, borrower-based measures, and liquidity-related tools.
The BSP already has, in various stages of implementation and review, the debt-to-earnings-of-borrower’s test (DEBT) which is described as a variant of a debt-to-income measure, and the countercyclical buffer (CCYB) which is similar to the DEBT.
The report placed emphasis on the real estate sector when applying safety nets. It noted that the sector “will always be closely monitored given its stylized role in the boomand-bust cycle” and it requires more granular data.
“At present, there seems to be some surprising trends in the residential sector, with prices rising in tandem with vacancies. With the loan portfolio of banks significantly invested in real estate activities, prudence requires a second look,” said the report.