Corporate decisions guided more by perception, confidence — BSP

Despite its efforts to keep macro-econo-mic fundamentals under control, the Bangko Sentral ng Pilipinas (BSP) said monetary policies have had minimal effect on investments as confidence and perception still played a major factor in corporate decision-making.

Perfectly-timed monetary tools, when used appropriately, are critical in determining key macro-economic considerations to investments decisions but the BSP’s actions, though much lauded by the international community, hardly played a role in attracting investors to the country.

Diwa Guinigundo, the managing director of the BSP’s economic research department, said investor confidence was a prime factor in corporate decisions especially this year when the country was constantly barraged by political and security concerns.

But Guinigundo explained that the BSP’s inflation-targeting approach had been effective in so far as determining monetary policies that affect interest rates, foreign exchange rates and monetary aggregates.

He said the Monetary Board (MB) has already started looking at the core factors of inflation when making its decision instead of just looking at the headline inflation, which incorporates the effects of such volatile items in the consumer price index such as rice and gas.

"These factors are very volatile and very susceptible to temporary shocks like weather and the fluctuating temperament of oil prices, for example," Guinigundo explained.

Guinigundo said that although the MB still looks at the headline inflation, it also looks at the core factors of inflation that were more reflective of actual demand and supply forces in the economy.

"Monetary policy should respond to core factors of inflation, it should not be subject to arbitrary factors like the weather," he explained. "If we did it that way, we would be missing the fundamental factors determined by supply and demand."

Guinigundo said the MB’s decisions have been based on its assessments of what inflation would be fifteen months hence which means that the prevailing inflation rate was influenced by monetary decisions fifteen months ago.

"There is also a question of whether the BSP had been unduly tight," he admitted. "But to determine that, you have to see if there had been an output cost such that people are actually discouraged from investing because of these monetary policies."

With interest rates at record lows, the cost of money has also been declining and should have encouraged investments. The fact that investments were not coming in, Guinigundo said, was due to factors that determine the confidence level of investors.

"Our interest rates have been low for a long time," he pointed out. "Inflation is low, reforms are under way and the economy is not contracting. The issue is confidence and perception."

These factors are most evident in the electronics sector where the industry itself had anticipated some $1 billion worth of investments to come in this year, ahead of the rise in the demand for electronic products in the global market.

However, the Semi conductor and Electronics Industries in the Philippines (SEIPI) reported earlier that semi conductor companies are already moving out of the Philippines and relocating to China where labor is cheaper.

The unique position of China in global politics also assured it of market share in the fast-dwindling export markets in Japan and the US.

SEIPI had originally projected additional investments of about $1 billion for the industry this year but as of the first four monthly, only about $53 million actually came in.