Institutional credibility now a bigger risk to PHL economy, ex-central banker says

THE GOVERNMENT could face a tougher task as growing political instability could translate to weaker confidence in the Philippine economy, which may compound external risks, a former central banker said.

GlobalSource Partners Principal Advisor Diwa C. Guinigundo said issues surrounding the country’s political institutions, particularly the Senate, may now pose a greater risk to the economy than external shocks such as the oil crisis and artificial intelligence.

“With respect to external shocks, we have very little control. But with respect to domestic issues, particularly political issues, I think we have better latitude in terms of control and management,” he told Money Talks with Cathy Yang on One News on Monday.

Asked what is the bigger economic threat between the two, Mr. Guinigundo said: “It’s (the) institutional issues and credibility of our political institutions.”

This came after the chaos that ensued in the Senate last month following a leadership shake-up allegedly orchestrated in time for Vice-President Sara Duterte-Carpio’s impeachment trial and Senator Ronald M. dela Rosa’s impending arrest linked to his alleged role in former President Rodrigo R. Duterte’s anti-drug campaign.

The former Bangko Sentral ng Pilipinas (BSP) deputy governor noted that governance issues arising from the recent controversies surrounding lawmakers create uncertainties about the country’s capacity to provide stability and long-term viability to investors.

This, he added, could eventually impact investor confidence and social cohesion.

“When the Senate is perceived to be inconsistent with certain principles of the Constitution, issues about credibility would actually crop up,” Mr. Guinigundo said. “So, credibility as well as loss of confidence may be an issue, and it is becoming an issue.”

“And that could also extend to the Philippine economy in terms of issues about governance,” he added.

Investor confidence, alongside consumer and business sentiment, has already taken a hit from last year’s corruption scandal.

In April, businesses’ confidence index worsened to -35.8% from -24.3% in March, a recent survey from the BSP showed.

While none of the reasons pointed to political instability, the survey indicated that local firms remain pessimistic due to the economic implications of the ongoing Middle East conflict.

Still, Mr. Guinigundo said investor confidence can still be saved if the government restores its credibility, but noted that the opportunity to do so is “fast closing in.”

Among the reforms the government can pursue include reaffirming its constitutional autonomy, ensuring transparent leadership, and refraining from taking any action that could provoke further instability.

Meanwhile, the former BSP official said the current systemic issues present a fresh challenge for the central bank, which is under mounting pressure to tackle inflation amid an energy crisis straining the economy.

Mr. Guinigundo noted that the central bank could have tightened policy rates as early as last year amid emerging external risks at the time.

“The work of the central bank is even harder today because while the BSP can provide very decisive forward guidance with respect to interest rate as well as the exchange rate, the other factors pulling it apart is the political noise that we hear from the Senate,” he said.

Although the Senate situation lies beyond the BSP’s direct authority, monetary authorities still have the tools to control its economic fallout, according to Mr. Guinigundo.

Fiscal policy should also go hand in hand with monetary policy, with the latter centered on keeping inflation expectations anchored to help strengthen public trust on government measures, he added.

“It (BSP) has little control over what the Philippine Senate is doing at this point,” he said. “But if the BSP will just continue anchoring expectations and trying to increase public confidence in public policy, particularly on monetary policy, I think it can do its share in helping stabilize the situation.”

For Mr. Guinigundo, this means the BSP should continue taking decisive action to bring inflation back to its 3% target.

The Monetary Board began tightening in April as it sought to temper the spillover effects of rising oil prices and keep inflation expectations anchored amid the Middle East war.

It raised the benchmark policy rate by 25 basis points to 4.5% for the first time since October 2023.

Since then, the central bank has been vocal about maximizing its monetary policy tools to steer inflation back to its 2%-4% tolerance range within a reasonable time. — Katherine K. Chan