IMF warns government support may fuel asset bubbles

THE International Monetary Fund (IMF) warned against “elevated” asset values which may have been propped up by investor expectations of government support as economies rebound from the pandemic, saying that a prolonged recovery could result in the erosion of such support and a “sharp adjustment” in markets.

“As long as investors believe that markets will continue to benefit from policy support, asset valuations may stay elevated for some time,” it said in a blog post.

“Nonetheless, and especially if the economic recovery is delayed, there is a risk of a sharp adjustment in asset prices or periodic bouts of volatility,” it added.

The Bangko Sentral ng Pilipinas (BSP) has said that systemic risk may emerge due to the global recession and has promised to ensure financial stability.

“Unlike in previous crises, emerging markets this time were also able to respond by cutting policy rates, injecting liquidity and, for the first time, employing asset purchase programs,” the BSP said.

In the case of the Philippines, the stock market is “still considered healthy” so far, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

The Philippine Stock Exchange Index (PSEi) on Friday dropped 39.86 points or 0.67% to 5,898.47 while the broader all-shares index slipped 3.71 points or 0.1% to 3,581.91.

The PSEi plunged by as much as 10.33% or 616.99 points to 5,736.27 — its biggest single-day decline since the global financial crisis — on March 12, following the World Health Organization’s declaration of the coronavirus disease 2019 (COVID-19) as a pandemic.

The BSP has slashed interest rates by 175 basis points so far this year and its policy measures have resulted in the injection of P1.9 trillion in liquidity support into the financial system.

“If sell-offs are large due to external risk factors/shocks, there were monetary policy interventions to help cushion the adverse impact on the local financial markets,” Mr. Ricafort said in a text message.

BSP Governor Benjamin E. Diokno has said monetary authorities have yet to see any indications that the financial markets have been impaired as a result of the pandemic.

According to the IMF, the banking sector entered the COVID-19 crisis much stronger in terms of capital and liquidity buffers compared to its condition at the onset of the global financial crisis.

“The success of reforms undertaken over the past decade has allowed them to be part of the solution rather than part of the problem so far, as banks continued providing credit to businesses and households during the pandemic,” the IMF said.

However, it said that some banking systems could be hit by “significant capital shortfalls” in a scenario where a large number of firms and households default on their loans. — Luz Wendy T. Noble