Stability largely depends on emerging macroeconomic dynamics: SBP

KARACHI: The State Bank of Pakistan (SBP) Tuesday said that the financial stability largely depends on emerging macroeconomic dynamics in the context of trajectory of global commodity prices particularly the oil prices, geo political tension in Eastern Europe, evolving domestic political scenario, and monetary policy stance in advanced economies.

The State Bank issued 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 corporate.

According to the FSR the commodity prices index has been showing a staggering rise, which has also been 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 may exacerbate the current account deficit that may have adverse implications for financial markets and the real economy. On the other hand, continued tightening by Federal Reserve, for instance, may push up the external funding cost and add to pressures on the exchange rate, impacting foreign trade and portfolio investments.

On the domestic front, preserving external sector stability, implementation of agreed reforms under IMF program including fiscal discipline and political stability will play a pivotal role in keeping the confidence in financial markets, maintaining financial system stability and addressing the emerging risks to macro economy.

The FSR pointed out that the recent tightening of monetary policy may have differential implications for the banking sector. Usually such a rise impacts the debt repayment capacity of highly leveraged borrowers. However, the delinquency rates in banks’ lending portfolio are expected to remain in check owing to improved debt servicing capacity of the corporate sector, decent recoveries on rescheduled /restructured loans under the debt relief scheme and continuing demand for bank credit due to higher input prices, it added.

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In addition, the consumer portfolio of banks may also face some strain due to both rate rise and general inflation levels. However, at the same the recent increase in interest rates will improve the banks’ margins on growing earning assets. While, the mobilization of deposits and generation of adequate liquidity is likely to remain a key challenge for banks to finance the increased demand for bank credit from public and private sector.

The report said that in the past, the SBP has effectively applied its supervisory and crisis management framework and its relevant tools in the face of various complex and dynamic stressed scenarios to ensure continued financial stability in the system. Accordingly, with these capabilities, experience and enhanced toolkit, SBP stands prepared to address near-term challenges to the resilience of the financial system and facilitate economic activity.

The FSR mentioned that the SBP has instituted a comprehensive micro and macro prudential policy framework to proactively monitor and address the emerging risks to financial stability. This framework is continuously being reviewed and updated to align with emerging international best practices and domestic market dynamics. In this connection, a number of measures were also taken during the reviewed year, including institution of emergency liquidity assistance framework, implementation of risk-based supervision framework, amendments in the SBP Act to explicitly formalize SBP’s financial-stability mandate and roles in respect of bank resolution and crisis management.

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

“Amid the dynamic and challenging environment both at domestic and global fronts, SBP, on its part, will continue to undertake initiatives to keep pace with the evolving financial landscape and remains vigilant to the emerging risks, while standing ready to take necessary measures in pursuit of its statutory objectives of price stability, financial stability and economic growth,” he added.

Copyright Business Recorder, 2022