Stability largely depends on emerging macroeconomic dynamics: SBP

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KARACHI: The State Bank of Pakistan (SBP) said on Tuesday that financial stability largely depends on emerging macroeconomic dynamics against the backdrop of the trajectory of global commodity prices, particularly oil prices, tensions geopolitics in Eastern Europe, the evolution of the domestic political scenario and monetary policy. political position in advanced economies.

The State Bank has released its annual flagship publication, the Financial Stability Review (FSR) for CY21. The review presents the performance and risk assessment of various segments of the financial sector, including banks, non-bank financial institutions, financial markets, financial market infrastructures and non-financial corporations.

According to the FSR, the commodity price index posted a staggering rise, which was also identified by market participants in the latest Systemic Risk Survey among the top risks facing the financial system.

The review mentioned that a further increase in oil prices could exacerbate the current account deficit, which could have negative repercussions on financial markets and the real economy. On the other hand, continued tightening by the Federal Reserve, for example, could push up the cost of external financing and add to pressures on the exchange rate, impacting foreign trade and portfolio investment.

On the domestic front, the preservation of external sector stability, the implementation of the reforms agreed under the IMF program, including fiscal discipline and political stability, will play a central role in maintaining confidence in the markets. financial services, maintaining the stability of the financial system and addressing emerging risks to the macroeconomy.

The FSR pointed out that the recent tightening of monetary policy could have different implications for the banking sector. Usually, such a rise impacts the debt repayment capacity of heavily indebted borrowers. However, delinquency rates in banks’ loan portfolio are expected to remain under control thanks to improved debt servicing capacity of the corporate sector, decent recoveries on rescheduled/restructured loans under the program debt relief and continued demand for bank credit due to rising input prices. , he added.

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In addition, banks’ consumer portfolios could also come under pressure from both rising rates and general levels of inflation. However, at the same time, the recent rise in interest rates will improve banks’ margins on growing productive assets. While mobilizing deposits and generating adequate liquidity will likely remain a major challenge for banks to finance the increased demand for bank credit from the public and private sectors.

The report states that in the past, the SBP has effectively applied its monitoring and crisis management framework and relevant tools in the face of various complex and dynamic stress scenarios to ensure the continued financial stability of the system. Accordingly, with these capabilities, experience, and enhanced toolkit, SBP is poised to address the short-term challenges of financial system resilience and facilitate economic activity.

The FSR mentioned that the SBP has instituted a comprehensive micro and macroprudential policy framework to proactively monitor and address emerging risks to financial stability. This framework is continually reviewed and updated to align with emerging international best practices and domestic market dynamics. In this regard, a number of measures were also taken during the year under review, including the establishment of an emergency liquidity support framework, the implementation of a monitoring framework on risks, amendments to the SBP law aimed at explicitly formalizing the financial stability mandate of the SBP and its roles in terms of banking resolution and crisis management.

Governor Syed Murtaza Syed SBP (Acting) also said in his note that the risks to financial stability going forward depend on the strength of external buffers, policy continuity and overall macroeconomic conditions in the context. developments on the geopolitical front in Europe, global commodity prices and global financial conditions.

“In the dynamic and challenging environment both domestically and globally, SBP, for its part, will continue to take initiatives to keep pace with the changing financial landscape and remain vigilant to emerging risks, while keeping ready to take the necessary measures to pursue its statutory objectives of price stability, financial stability and economic growth,” he added.

Copyright Business Recorder, 2022

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