PH needs buffers from ‘tail risks’


The Philippines will continue to be an attractive destination for business and investment but it must ensure that it has enough buffers to cushion the economy from “tail risk events.”

This was the message of Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. during the Security Bank Economic Forum 2016 in Makati City on Wednesday.

“The country’s economic record continues to be underpinned by our ability to show that our macroeconomic institutions are working. We have institutions that have well-articulated policy frameworks, emphasize anti-corruption and uphold good governance. Such institutions improve the cost of doing business, help secure confidence, and provide a dependable safeguard against negative surprises,” he said.

“We have policy space on the monetary side as well as on the fiscal side to address downside risks to economic growth. Moreover, the new administration’s commitment to reform the tax system should further provide room to ramp up infrastructure spending that in turn would boost productivity and further lift medium-term growth,” he said.

However, the BSP governor noted it can be argued that 2016 was the year of “tail risk events.”

“In economics or statistics, there is the concept of a tail risk. In technical terms, tail risk is defined as the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price. In layman’s terms one can think of a tail risk as the risk of a ‘verrryy rare’ event occurring,” he said.

For instance, the Brexit, the United States elections, on-going rebalancing of the Chinese economy and weather disturbances can be considered as tail risk events.

“Let’s begin with Brexit, one of the tail events I cited at the top of my remarks. Data suggest that its direct impact on the domestic real economy would be limited. Trade with and FDI [foreign direct investments]from the UK represent less than 1 pct of total trade and FDI, respectively. That said it is the second round effect that we need to be concerned about. In other words, how Brexit would affect growth in the EU,” Tetangco noted.

On the forthcoming assumption to office of US President-elect Donald Trump, it is too early to tell how he would govern, he said.

However, Tetangco said what was heard during the campaign points to a need for vigilance over possible changes in tax laws, immigration policies and financial and business regulations.

“Off hand, we will keep an eye on the possible impact of shifts in immigration policies on remittances as well as the prospects of sustained investments from US business process outsourcing companies,” he said.

A third risk is the on-going rebalancing of the Chinese economy, he said.

“A protracted slowdown of the world’s second largest economy, as it transitions from being export-led to being services and domestic consumption-driven, could impact our external sector given the increasing bilateral relations between our two economies in recent years,” he noted.

On top of external risks, the central bank chief said the impact of severe weather disturbances and infrastructure gaps remain significant challenges on the domestic front.

“While we try to anticipate unlikely events, this cannot be the bulk of our work. We must focus on adjusting our settings to contravene global headwinds and buoy growth,” he said.

Tetangco noted the importance of scoping the downside impact of these events and building the appropriate buffers.

“Building buffers means we craft policies, create the institutions, and conduct appropriate operations to ensure the economy remains resilient. Based on latest indicators, I can say, so far, we have done well,” he said.


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