IN an interview this week, former Bangko Sentral ng Pilipinas (BSP) deputy governor and now economist with GlobalSource Partners Diwa Guinigundo suggested that further policy easing by the BSP may pass the point of diminishing returns in terms of spurring faster economic growth, unless the government implements structural and other reforms. This observation, coming as it does from one of the BSP’s most outstanding former officials, serves as a strong validation of the views of policymakers and business leaders shared at The Manila Times Economic Forum last week, and should be a further wake-up call to the government that more imaginative action needs to be taken.
Guinigundo’s comments were in reaction to the latest benchmark interest rate cut by the BSP, a reduction of 25 basis points to 4.25 percent. The Monetary Board cited slowing economic growth and inflation hovering at the lower end of the 2- to 4-percent target range as justification for the reduction.
Guinigundo, who once headed up monetary policy for the BSP, suggested that holding off on another rate cut “could have been more circumspect,” as inflation forecasts are somewhat unclear, and the series of cuts so far have not resulted in faster economic momentum. Consumption spending is still subdued, he noted, while business sentiment is weak and investment activity uneven.
The most telling sign that interest rate cuts are having no real impact on economic growth is that banks have tightened credit as the benchmark interest rate has come down. Guinigundo took note of this, and it has also been observed by businessmen and consumers that we’ve talked to. The tighter lending policy of banks signifies much higher risk aversion and uncertainty about near-term economic prospects, as it is exactly the opposite of what is intended, and what almost always happens when the benchmark interest rate is lowered.
“This dynamic underscores a central reality,” Guinigundo said. Monetary policy cannot compel risk-taking or override structural constraints, such as logistics inefficiencies, regulatory uncertainty and external vulnerabilities.
In fairness to the BSP, Governor Eli Remolona Jr. has acknowledged this on several occasions, urging the fiscal agencies and other departments to do more to facilitate faster economic growth. The central bank has limitations — as it should — on how much it can intervene in the broader economy. It can try to encourage banks to lend more, and indirectly encourage consumers and businesses to spend more through its application of policy tools such as interest rates, banks’ reserve requirements and participating in the currency market, but all of those things simply relate to the supply of money. If there are other factors that discourage banks from lending or consumers and businesses from spending, those are beyond the BSP’s control.
The significance, or more accurately, the diminished importance of interest rates and other monetary policy actions was also evident from the almost complete absence of the topic from the discussions at our economic forum last week. The concerns expressed were far more fundamental, and sadly familiar: Persistent red tape, particular at local government levels and regulatory inefficiency; the need to speed up infrastructure development, most especially in the area of digital infrastructure; the persistent high cost of energy and gaps in its reliability; and the need to expand regional trade, take advantage of diversified trade relationships, and facilitate trade access to the country’s micro, small and medium enterprise sector. Monetary policy can help to enhance all of those things, but it cannot on its own create them.
The government is not exactly sitting on its hands, but it needs to be pushing reforms much faster. There are some hopeful signs. President Ferdinand Marcos Jr. has exhorted the Department of Public Works and Highways to fast-track the completion of several key infrastructure projects. The Anti-Red Tape Authority has begun to aggressively call uncooperative local government units to account, filing administrative suits against 117 of them just this week for violations in connection with the mandated electronic Business One-Stop Shop system. New policies being rolled out by the Department of Energy will, hopefully, increase competition and improve both power supply and costs in the coming years. And, using its chairmanship of the Association of Southeast Asian Nations (Asean) this year, the Philippines is pushing discussions on maximizing the Asean Free Trade Agreement and other opportunities such as the Regional Comprehensive Economic Partnership.
However, more needs to be done to improve consumer and business confidence, and encourage investment. There are no band-aid solutions, and the work never ends; the government would do well to take that to heart.
