We are proud to see the Bangko Sentral ng Pilipinas (BSP) showing its ability to defy pandemic-induced impediments to the actual conduct of consumer and business expectations surveys “to measure investors’ risk attitude and quantify its impact to stock market in a more direct and timely manner.”
Conduct of BSP’s own expectations surveys was hindered during the second quarter of 2020 because of the lockdown. Thankfully, imaginative use of the Google search engine enables one to capture investor sentiment and check the pandemic’s impact on financial markets. This can help policy-makers predict potential market stress and design government response.
This is the thrust of the September working paper prepared by Jean Christine A. Armas and Pamela Kaye A. Tuazon of the Department of Economic Statistics of the Monetary Policy Sub-Sector, Monetary and Economics Sector of the BSP. The researchers are young bank officers with a great future in central banking. Two and a half years ago, they initiated their foray into data analytics with their paper, “Central Banking and Data Analytics.”
In their review of relevant literature, a number of key events driven by adverse risk attitude of investors were cited. These include the Asian Financial Crisis (1997), Russian debt default (1998), and the dot-com bubble (2000).
Ms. Armas and Ms. Tuazon succeeded in constructing a COVID-19 Risk Attitude (CRA) metric for the Philippines and for some select Asian countries consisting of Indonesia, India, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand. They searched the internet using the following: COVID-19, coronavirus, 2019-n-CoV, and nCov covering the period end-December 2019 to 3 July 2020.
CRA was estimated as the sum of daily search volume terms for each of the nine countries normalized to 100 for comparability. The assumption was that the frequency of searches for these terms proxies for the public’s level of concern on the pandemic and its economic implications.
Public attention to the pandemic was highest in April for most Asian countries. The exception is Singapore, where it was highest earlier in February, right after the World Health Organization declared COVID-19 a global pandemic on Jan. 30. The frequency started to die down in the following months.
The study also followed the suggested calculation of the Government Response Stringency Index (GRSI) in the literature. The GRSI reflects nine governments’ anti-COVID-19 measures. It consists of mean scores of four components: 1.) government response; 2.) containment and health; 3.) stringency of the measures; and, 4.) economic support. As an index, the GRSI ranges from 0 to 100 with the stringency of responses clarified not to be a necessary measure of their effectiveness or relevance.
Data shows that these Asian countries sustained their anti-pandemic responses throughout the period, with most peaking in April alongside the generally highest percentage changes in accumulation of COVID-19 cases.
Another interesting observation is that the Philippines’ stringency index stabilized longest at highest levels among the nine countries in the sample. Peak-wise, India was comparable with the Philippines, but pulled back for most of the second quarter. Vietnam nearly maximized at some point but it was even quicker to do a substantial easing.
In simplified terms, the baseline model of the BSP posits that stock prices are driven by market fundamentals such as crude oil prices and trade-weighted US dollar index and stock price volatility. To test for the impact of the pandemic on the market, COVID-19 cumulative cases and the CRA were considered.
The countries were clustered: higher-income countries of Japan, Korea and Singapore; upper-middle-income countries of Indonesia, Malaysia and Thailand; and lower-middle-income countries of India, Philippines and Vietnam.
Panel regression was employed using the random effects model given the presence of country-specific differences that could affect stock prices in Asia.
Ms. Armas and Ms. Tuazon found that aside from market fundamentals, the CRA index is a good predictor of stock price movements. Having been hit by the coronavirus earlier, mitigating measures were established promptly in Asia compared with those in the US and Europe. Testing and tracing leveraged on technology. And finally, Asia’s previous experience with SARS in 2002-2004 served it in good stead.
The reason why COVID-19 cases did not seem to matter in equities is that their negative impact could have been folded-in with the CRA index.
Another highlight of the BSP research is the impact of income classes. For both high- and upper-middle income countries, the impact of CRA index to stock prices was both positive and statistically significant. This means higher market confidence in these economies because they were considered first to “press digital infrastructures into use…to stem the virus outbreak.”
For lower-middle-income countries including the Philippines, CRA index impacts stock prices negatively but not significantly statistically. The BSP officers correctly cautioned against making conclusive inference. What we can reasonably suggest is that these countries’ relatively underdeveloped financial systems deprive them of resilience by way of higher market confidence against the pandemic and its economic implications.
The GRSI was introduced in the basic model as a control variable. Its inclusion could check the consistency of the effect of investors’ sentiment on stock prices. The BSP officers also limited the time period to just the outbreak and the fever phase. They excluded the disease incubation period. These two modifications ensure that empirical results are not tentative by virtue of data selection, sample coverage, and time period. Robustness of results is important.
The inclusion of GRSI confirmed the consistency of relationships among variables. In particular, governments’ actions to step up anti-COVID-19 mitigation measures yielded higher market confidence in most of Asia.
Varying the time period also confirmed the impact of investors’ sentiment on stock prices.
The BSP findings should convince our authorities that firm and smart government action is what investors and the citizenry are looking for. They clamor for clarity of direction and transparency of messaging. The market’s risk attitude, driven by the daily search volume could be managed — and managed well — by the government’s quick and effective response based on sound science, not guess work; evidence, not speculation; with funding, not with lip service.
The chart that correlates COVID-19 cumulative incidence and government response is worth a hundred narratives.
Even as the daily percentage change in the number of COVID-19 cumulative cases seemed to have stabilized in the second quarter for the Philippines, the absolute number is now the highest in Asia minus India. This is the reason for our long, strict lockdown. This is the reason for our deepest economic recession with the exception of Malaysia which brought down its guard only in June.
Our authorities remain caught in a bind. We continue to record 2,000-3,000 daily incidence of COVID-19 while hospitals are still in full capacity. Vaccines will not be available soon. In the latest Social Weather Station survey conducted between Sept. 17-20, 85% of those polled are still worried that anyone in their immediate family might catch the virus. To top it all, the UN chief has declared, “there is still no end in sight to the spread of COVID-19.” He cited that more than one million lives have been lost worldwide. Health protocols should be non-negotiable.
But the government cannot ignore that because many quarters remain locked down, or partially at least, many small businesses cannot thrive. Jobs continue to be lost. No wonder, the World Bank recently announced that the Philippines faces “a deeper slump, slower recovery.”
We are losing some fiscal space as foreign borrowings for COVID-19 responses are approaching $10 billion or P500 billion, more than 11% of the proposed 2021 budget. In the past, we made the point that the budget for 2021 should be realigned to be consistent with the demand of the times — managing the pandemic and promoting economic revival — but it looks like legislative research and intelligence funds will be the run-away winners of pork.
These bits and pieces of news are the building blocks of both the risk attitude and the stringency of government response.
No, we wouldn’t want to bother John Lennon. But it was he who said that “Everything will be ok in the end. If it’s not ok, it’s not the end.”
Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.