BSP prepares enhanced critical EWS system

The Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. has announced that they are currently refining and enhancing an early warning signal (EWS) system that can predict a future financial crisis that may impact the Philippines. One of the ongoing projects to develop an EWS is the economic volatility index (EVI), which the BSP has been perfecting for the past year.

Governor Remolona stated, “We’re working on these indices. We want an early warning signal for stress. We want an index that’s calibrated so that it actually predicts (a crisis).”

The BSP’s Department of Economic Research is also transitioning to the Policy Analysis Model for the Philippines (PAMPh) in collaboration with the International Monetary Fund’s (IMF) Institute for Capacity Development (IMF-ICD) and the Japan International Cooperation Agency. Remolona added that they are updating and making the PAMPh more critical while also developing indices such as the EVI.

Currently, the BSP forecasts inflation using the Multi-Equation Model (MEM), but an enhanced PAMPh will complement MEM.

Remolona emphasized the importance of accurate and timely statistics, stating, “We underscore the importance of accurate, timely, and relevant statistics. These are essential in fostering our economy’s growth and our resilience against shocks.”

In addition to developing more effective indices and forecasting methods, the BSP is strengthening its stress testing exercises by implementing reverse stress tests to evaluate the ability of banks to withstand credit shocks.

The BSP’s efforts to improve its forecasting performance include acquiring real-time information and developing new tools, such as machine learning methods, to analyze non-traditional data sources like internet searches, newspaper articles, and social media posts.

The article also highlighted the BSP’s credibility and accuracy in forecasting methods, as well as its commitment to continuously improving its surveillance mechanisms and forward-looking indicators for scrutinizing a bank’s asset health.

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