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Financial Cycles and Credit Regimes in Five ASEAN Economies


Estimates of the duration of financial cycles can be a monitoring tool for policymakers so that they can have a better appreciation of when risks to financial stability increase, remain stable, or decrease. We use three indicators to estimate the financial cycle for the Philippines—the growth in Credit-to-GDP ratio, the growth in the level of Credit to the Private Sector, and the Debt Service Ratio. We extend this analysis to four (4) other ASEAN economies, namely Indonesia, Malaysia, Thailand, and Singapore and examine the period 1985 up to 2020, thus covering the COVID-19 pandemic. We posit that during the pandemic period, there was a downward trend in both the business cycle and the financial cycle in the region. Estimates using the Corbae-Oulliaris filter and the Credit-to-GDP indicator for the ASEAN-5 economies show that for three countries: the Philippines, Malaysia, and Indonesia, there is indeed a convergence in the downtrend for both the business and financial cycles. Meanwhile, using both Threshold structural vector autoregression (SVAR) and Markov-Type regime-switching techniques, we also establish that there are two distinct regimes in the region: a high-credit regime and a low- or normal- credit regime. Nonetheless, extending the estimation to Q4 2020 did not indicate a new switch for 2020 as yet, despite pandemic conditions. Finally, Threshold SVAR estimation as in Balke (2000) indicated that indeed, shocks to monetary policy and inflation would have a different impact on output depending on what credit regime the economy is in. During high credit regimes, monetary policy changes have a perverse impact on real output growth, and shocks to credit have a larger countercyclical impact on output. This could mean that monetary policy changes alone are not enough in containing overheating credit conditions, implying the need for macroprudential and other central bank policies.


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