‘I watched with horror…’

President Ferdinand Marcos, Jr. could not have chosen more telling words.

Speaking in Tokyo on May 29, he said: “I watched with horror that the Senate has become this.” He was referring to what should have been one of the country’s most important democratic institutions descending into a spectacle of personal loyalties, factional maneuvering, and institutional paralysis.

What has unfolded in the Senate over the past several weeks is no longer merely a political drama. It is becoming a test of whether Philippine democratic institutions can still function credibly amid intense political conflict.

The sequence of events is now familiar: the controversial reorganization of Senate leadership; the dramatic reappearance of a senator who had been absent for months; allegations of attacks on the Senate itself; the arrest of Senator Jinggoy Estrada on plunder charges; the continuing uncertainty surrounding Senator Ronald dela Rosa; and finally, the decision of the former majority bloc to boycott Senate proceedings.

Until Wednesday evening, the majority senators, with the exception of former Senate President Francis “Chiz” Escudero, refused to attend session. Invoking both the Constitution and Senate rules, the remaining senators, 11 from the minority together with Escudero, constituted a quorum, arguing that the arrest of Estrada and the impending arrest of Dela Rosa reduced the Senate’s effective membership to 22, making 12 senators sufficient to conduct business.

The legal debate is important. But the larger issue is institutional.

The message being sent to the public is that the Senate, constitutionally entrusted with legislation, oversight, investigations, and the confirmation of key appointments, is increasingly unable to perform its basic functions because political factions are placing partisan considerations above institutional responsibility.

That perception matters.

Because while financial markets often appear indifferent to political controversies, they are never indifferent to institutional deterioration.

FROM POLITICAL NOISE TO INSTITUTIONAL RISK
Markets do not react primarily to personalities. They react to institutions.

A corruption scandal involving a single senator may not move exchange rates or bond yields. A leadership dispute inside the Senate may not trigger capital flight. Even impeachment battles and political feuds can be absorbed as routine democratic turbulence.

What markets fear is something deeper: evidence that institutions are becoming dysfunctional, unpredictable, or incapable of governing effectively.

The Senate impasse risks crossing precisely that threshold.

If the deadlock persists, legislative priorities are delayed, oversight functions are weakened, committee investigations are interrupted, appointments remain unconfirmed, and policy uncertainty rises. Investors begin asking questions that are far more consequential than who occupies the Senate presidency.

• Can laws still be passed?

• Can reforms still be implemented?

• Can the budget process proceed smoothly?

• Can public officials still be held accountable?

• Can democratic institutions still resolve conflict within constitutional boundaries?

These questions eventually become economic questions.

WHY THE TIMING COULD NOT BE WORSE
The political turmoil is unfolding at a particularly vulnerable moment for the Philippine economy.

The assumption that political instability can be separated from economic performance becomes increasingly difficult to sustain when growth is already slowing and inflation is accelerating.

Real GDP expanded by only 2.8% in the first quarter, dramatically below the government’s 5-6% target and extending last year’s weak 4.4% growth performance.

Inflation pressures have re-emerged, driven by elevated energy prices, geopolitical tensions in the Middle East, and persistent supply-side pressures. Household purchasing power is again under strain. With high inflation, consumption, which remains the principal engine of Philippine growth, is becoming increasingly vulnerable.

Not surprisingly, virtually every major international financial institution has downgraded its outlook for the Philippines.

The IMF reduced its growth forecast to only 4.1%, citing global uncertainty and governance concerns.

The World Bank is even more pessimistic at 3.7%, citing energy shocks, external risks, and domestic constraints.

The Asian Development Bank lowered its forecast to 4.4%.

AMRO reduced its projection to 4.1% from 5.3% previously, explicitly highlighting inflation’s impact on domestic demand.

Most strikingly, the OECD now projects growth of only 3.2%, potentially making the Philippines one of the slowest-growing economies in Southeast Asia.

The direction is unmistakable. The downgrades are no longer isolated adjustments. They represent a broad reassessment of Philippine economic prospects.

And governance concerns are increasingly becoming part of that assessment.

MARKETS ARE CALM FOR NOW
Until today, financial markets have remained remarkably composed.

The peso continues to weaken, but primarily because of interest-rate differentials, external balances, and global risk sentiment.

Government bond markets remain relatively stable. Sovereign spreads remain contained. Equity investors appear more focused on monetary policy and global financial conditions than domestic politics.

The underlying market assumption is straightforward:

• The Philippine government will continue to honor its obligations.

• The Bangko Sentral ng Pilipinas (BSP) will remain independent.

• Public institutions will continue to function.

In short, markets are still extending the Philippines the benefit of the doubt.

But that confidence is not unconditional.

Markets are forward-looking mechanisms. They can ignore political controversies for extended periods until they conclude that those controversies are impairing governance itself.

Once that threshold is crossed, repricing can be abrupt.

THE REAL ECONOMIC COST OF LEGISLATIVE PARALYSIS
The immediate casualties of the Senate boycott are obvious.

• Pending measures such as the Magna Carta of Barangay Health Workers and the Anti-Hospital Detention Bill face delays.

• Energy-related legislation has become increasingly urgent given the risks associated with a prolonged Iran conflict and elevated fuel prices.

• Committee investigations, including the Senate Blue Ribbon Committee’s inquiry into alleged anomalies in flood control projects, face uncertainty.

• Confirmation of key appointments may likewise be postponed.

Yet the greater danger lies elsewhere.

Legislative dysfunction threatens to delay economic reforms, frustrate infrastructure initiatives, weaken fiscal management, postpone critical oversight functions, and undermine confidence in the government’s ability to respond to emerging risks.

In economic terms, the issue is not a single bill.

The issue is state capacity.

A government that cannot legislate efficiently becomes less capable of managing shocks, responding to crises, and sustaining investor confidence.

WARNING SIGNS ARE ALREADY EMERGING
The BSP’s Business Expectations Survey provides a glimpse of this vulnerability.

Business sentiment deteriorated sharply from -24.3 in March to -35.8 in April, already reflecting concerns over inflation, the Middle East conflict, and weakening consumer demand.

Importantly, those survey results were collected before the Senate crisis intensified.

They therefore do not yet capture the impact of legislative paralysis, institutional uncertainty, or the subsequent downgrades in growth forecasts.

If those factors persist, business confidence may weaken further. That matters because investment decisions are ultimately confidence decisions. Firms postpone expansion when uncertainty rises. Investors delay commitments when governance becomes questionable. Consumers reduce spending when inflation erodes purchasing power.

Indeed, economic slowdown becomes self-reinforcing.

THE QUESTION MARKETS ARE BEGINNING TO ASK
The central question is no longer whether individual senators survive politically.

It is whether Philippine democratic institutions can still demonstrate enough maturity, restraint, and credibility to preserve public trust.

So far, markets have treated the Senate leadership struggle, impeachment controversy, strategic absences, and corruption allegations as political noise rather than systemic risk.

But look, markets are beginning to broaden their focus.

They are no longer assessing merely politicians. They are assessing institutions namely, the Senate, the Executive, and the Supreme Court.

Markets are focusing on the entire constitutional architecture.

If investors eventually conclude that these institutions are no longer functioning predictably, credibly, and effectively, the consequences could extend far beyond politics.

• Capital outflows could accelerate.

• Risk premiums could rise.

• Borrowing costs could increase.

• The peso could weaken substantially.

• Growth could slow even further.

That is why the President’s remark deserves serious reflection.

Watching with horror may be understandable. But restoring confidence in the country’s democratic institutions requires far more than observation.

It requires leadership, accountability, and a renewed commitment to ensuring that public institutions serve the nation rather than themselves.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.