Apart from elevated inflation, the country is grappling with slow growth, a weak peso, and rising borrowing costs. We get the economic outlook from former finance secretary and Bangko Sentral Monetary Board member Benjamin Diokno. Good morning, sir.
Governor, secretary, Monetary Board member. Good morning, sir. Thank you so much for joining us this morning. So, good news: the inflation rate has been slowly going down—6.4% in June, 6.2% last month, and now 6.1% for August. So do you see it continuously sliding down?
It has gone down from I think 7.2% in April. So it's four months. In fact, it's consistent with our forecast for the entire year, which is 6.1%. And then we forecast that by next year, inflation rate will be around 5.4% and then down to 3.3%, which is within our target range. And so that's good news. That's good news.
On the other hand, the foreign exchange rates have been going up. It's now 62.5, major senior citizen levels. What are the factors that have been contributing to this? And some have been saying that it might even go up to 65 peso, 65 to a dollar or even 70. Do you also see it going in that direction?
Yeah, the peso depreciation has an impact on inflation in terms of our food requirements, right? We import fertilizer, we import our oil, of course. So that has an impact on inflation. But the BSP doesn't target a particular rate. Okay, we will let the market determine. We are just concerned with the volatility. We try to reduce the volatility, and until recently the peso was one of the most steady currencies. Now, unfortunately, in the last few weeks it has become volatile. So that's where we are concerned.
The peso has been described as one of the weakest in the region now, and some have been asking: is the BSP inclined to intervene at this point?
We have been intervening just as I said, to reduce the volatility of the peso because it affects the inflation target. But unfortunately, there are many factors that are affecting the peso rate right now, including our weak exports, for example, and of course the increase in oil prices also, right, and other imported products.
It's ironic that it's the exports that have been causing this when in fact, out of the various sectors, exports actually has been performing well. I mean, if you compare it to the other agencies' performance, they've done the 23 new free trade agreements and the numbers of our exports, and yet...
So the economy is like consumption plus investment plus exports minus imports, right? Export—
Plus I, plus G, plus X minus M.
Plus I, plus G, X minus M. So the exports, as you said, is doing well, but it's a very small component of the economy. And the kind of goods that we are exporting are not really high-value crops, right? We're into agricultural exports. We don't export—
Yeah, mangoes, ube, etc. It doesn't make a lot of difference with respect to the overall size of the economy. So we have to look at consumption, and consumer confidence is very important there, right? Government also. And as you know, government spending has been kind of sluggish at the moment.
So, sir, they have been saying that one of the biggest causes for our inflation are global headwinds—the Iran war, climate change, things that we cannot really control. But your opinion or your analysis, sir, is that in fact it's government spending and consumer confidence that's been causing all of these in our economy.
I think it's wrong to blame external factors for all our problems at the moment, because most of our problems are domestic-driven: low consumption, low investment, and these are based on their perception of what the government is doing. So it's confidence in government.
This goes to the good governance part of what people have been saying is the reason why our foreign direct investments have been going down. But in fact, DEPDev Secretary Arsenio Balisacan also said in the fourth quarter of 2023 it was really confidence—the corruption scandal, the flood control scandal—that brought our GDP rates down. But the government has been trying to, as Governor Remolona says, strenuously address this. Do you think that for the second half of the year we can transform and for the economy to actually pick up?
Actually, if you look at government investment, it has suffered since the third quarter of last year, fourth quarter of last year, first and second quarter of this year; it has really gone down. Okay. And so that speaks of investor confidence. And foreign direct investment actually has also gone down, and especially what we call the hot money, it has gone out of the country. What is the statistic there? Portfolio investments have declined by 90-plus percent. So that reflects on the poor performance of our stock market, okay.
Oh my, okay. And we have another challenge, which is our debt. We hit 15.39 trillion as of end of July, and with forex at this amount now at 62, what's the strategy that we should have for our debt service?
Yeah, it's really nice to look back where we were before, right? Can you see this under—
So we see a comparison of debt-to-GDP.
Among FVR, Estrada, GMA, Aquino, then Duterte.
We're back where we were before. Peak 1993, the debt-to-GDP ratio was around 66%. And then on the first year of GMA, also 66%. Now, it went down to the lowest—that was the year before the pandemic—39.6%. That is national debt compared to our economy, and now it's back to 66%. So that's what happened to the country.
Are we still going to be able to balance this? I remember that there was an argument saying that it's okay to borrow money as long as it goes to social services, as long as to lifting up the country, creating an environment that is conducive to investors. But it seems we are not addressing that.
Not necessarily to social services; maybe the national budget can take care of that. But when you borrow money, you have to take into account what will be the use of this money, right? So as long as the projects that we borrow for are worthwhile—like, say, it will give you an internal rate of return of 20%, cost of borrowing is only 3%—it makes sense. Go borrow, right? So now we just have to be more careful in borrowing foreign funds because we have actually already exceeded what is the norm, which is 60%. But we can still borrow; we just have to be very careful and make sure that we implement those projects. Okay.
Our debt servicing now, sir, is 15% of the net.
That's only the interest payments. If you look at the interest plus amortization, it could be more than half of the budget.
Education, the education sector, is at 18%.
Correct. If debt servicing including amortization will breach and be more than education, which is at 18%—
