ELECTIONS 2022: Diwa Guinigundo on Philippine' debt and inflation

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Former Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo sat down with Yahoo Philippines to explain the Philippines’ debt, both external and internal, the rising inflation, and what the next government could do to reverse the negative effects brought by these crises.

During the first presidential debate hosted by CNN Philippines, presidential candidates were asked about the ballooning debt of the Philippines, and how their administration will resolve it.

Vice President Leni Robredo said that while there’s nothing inherently wrong with the government taking loans especially when there’s a dire need for public resources, she promised that her administration will make sure the debts incurred will be paid off.

Former Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo. (Photo: Yahoo Philippines)
Former Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo. (Photo: Yahoo Philippines)

Senator Ping Lacson wanted more balance in budgeting, removing non-essential items in the budget. Senator Manny Pacquiao meanwhile lamented the mismanagement of government funds, saying that these loans must be used to fund investments, not yearly expenses.

Manila Mayor Isko Moreno wanted to offset the country’s debt servicing in order to free the state from liabilities to address its problems, while Dr. Jose Montemayor declared that all debts are bad, and that his government will create a “safety net” to ensure that loans will not be misused by politicians.

Former Presidential Spokesperson Ernesto Abella said that the government must invest in productive industries and must have an entrepreneurial approach to unload the burden on poor Filipinos. Labor Leader Ka Leody De Guzman, meanwhile, wanted to revamp the Philippine economy.

But what exactly does the national debt mean to an ordinary citizen, and how does rising inflation affect the day-to-day lives of the Filipino people?

The interview has been edited for length and clarity.

What is the current debt that the Philippines owes, both internal and external?

The current level of external debt of the Philippines is $105.9 billion. There was a huge increase from the level of 2019, which was before the pandemic, and 2020, precisely because of the huge demand for public money to help mitigate the pandemic.

$105.9 billion is equivalent to about 27 percent of the Gross Domestic Product (GDP). If we compute both the interest and principal payments at this point, that would be about eight percent relative to exports of goods and services.

If we look at the National Government’s debt, both external and domestic, it currently stands at P11.7 trillion, which is about 60.5 percent of our GDP. Is this sustainable? At this point, even if it has breached the normal metrics of a 60 percent ratio between the total National Government debt and GDP, I think it’s still sustainable. There was only a small breach.

It is sustainable because, for 2021, we have already started to grow. The government also believes that it will be able to manage a 7-9 percent growth in 2022, and between 6-7 percent in 2023. So, on the basis of the assumption that there will be no further accumulation of demand on public resources, I think we can grow out of that debt and start reducing it to pre-pandemic levels of about 40 percent.

How can the new government address this ballooning debt?

First, do an inventory of all these debts, to make sure that everything is accounted for, and everything will be considered in the servicing of those debts.

Second, to come up with a debt strategy on both the domestic and external obligations of the government. A strategy will allow the new government to pursue, on a more intentional basis, the servicing of these debts and ensuring debt and fiscal sustainability. If you have a good plan, the market will be more confident in coming in.

And thirdly, to make sure that all levels of government promote and adhere to good governance, to make sure that we avoid in the future any allegation or any action that would remind us of corruption in high places.

What are the forces behind the rising inflation in the country?

The inflation that we saw in 2021 was supply-driven. We had problems with the supply of pork because of the African Swine Flu. We had problems with fish as there was very little to fish, especially in the West Philippine Sea. Vegetables were in short supply because of typhoon Odette. Therefore, monetary policy will always tend to look through the supply-driven kind of inflation.

That’s why you can expect the monetary authorities to simply keep the policy rates steady. And that’s what they did for most of 2021. Moving forward, there are certain possible shocks, one of which is oil prices. Second is the possibility that you have another upsurge of the virus, which will trigger a lockdown on business activities, personal movement, which will then affect inflation because if you’re not producing anything, supply will be short and there will be an impact on prices.

With respect to policy, it’s important for the Central Bank to remain agile and cautious on any possible shocks that may be brewing in the external markets and here, especially with respect to supply. Supply-driven inflation cannot necessarily and forever be ignored by the monetary authorities because if you have problems with supply and it gets entrenched, that can have second-round effects, and second-round effects will affect inflation expectations. Once inflation expectations are affected and get to the psyche of individuals, then their demand behavior will also be affected.

What are the key decisions that the government made to resolve this?

The government’s response to various non-monetary measures will be key to ensuring that inflation remains manageable.

Because of the short supply of pork, fish, and vegetables, the government has liberalized importation. It was a timely decision on the part of the government. We are now importing more than 1.6 to 1.7 million metric tons of rice, for example. Meanwhile, in the case of pork, we are also importing so much. And fish, that’s about 60,000 metric tons. Vegetables as well. So the government policy was to liberalize imports so that whatever short supply we have in the domestic market will be complemented by imports.

The so-called MAV or minimum access volume was also increased to allow us to import more and mitigate the short supply in the local markets. A certificate of necessity to import was also issued by the government to make sure that we can import those commodities that may be in short supply so that we can mitigate inflationary pressures building up.

Has the government’s policies and decisions regarding the West Philippine Sea affected inflation?

The government’s decision to remain indifferent to the incursion of foreign powers in the West Philippine Sea, based on reports, has affected the access of our local fishermen to the very rich aquatic resources we have in the West Philippine Sea. Based on the reports, we are seeing this translated into a short supply of fish. The West Philippine Sea is one of the major sources of fish supply in the markets.

How should the incoming government deal with inflation?

The new administration can help tackle the issue of inflation if its commitment to strengthening our ability to produce is implemented. It is important that our manufacturing and agriculture are robust and resilient to produce the basic commodities that we need, that we will not be in short supply.

Second, support should also be given to small businesses because micro, small and medium enterprises actually account for more than 97-98 percent of the total number of firms in the Philippines. The more people producing, the more supplies in the market, and we should see prices leveling down.

Thirdly, we should have contestable markets. It means that the economy is competitive, that entry and exit of industries will always be available and therefore, in this kind of competitive environment, you only see the best. You see the best in industry, you see the best in people producing more and producing efficiently. That will have a very positive impact on inflation.

Marvin Joseph Ang is a news and creative writer who follows developments in politics, democracy, and popular culture. He advocates for a free press and national democracy. The views expressed are his own.

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