BIS Warns of Rising Global Risks for Philippines: High Inflation, AI Bubble, Fiscal Woes

The Bank for International Settlements (BIS) has warned that global pressures from rising public debt, financial fragilities, and the sustainability of the artificial intelligence (AI) boom are increasing risks, underscoring the need for disciplined policymaking. These global developments could have indirect implications for the Philippine economy. The central bank umbrella group's Annual Economic Report published on Sunday warned of a complex mix of vulnerabilities. It highlighted four key pressure points: a pickup in inflation, with the BIS cautioning that more frequent supply disruptions could cause higher inflation expectations to become entrenched among households and businesses. Policymakers must act decisively to preserve stability, the BIS said. "Policy actions must reinforce each other to avoid a pull and push on the global economy. Ultimately, success depends on sound fiscal and financial foundations," BIS General Manager Pablo Hernandez de Cos told reporters. He added that the readiness to act if central banks observe the anchoring of inflation expectations is the main message they want to set. The BIS also flagged uncertainty over the durability of the current surge in investment tied to artificial intelligence. While AI has boosted confidence and supported growth through expectations of productivity gains, the bank warned it was raising fears about jobs and that supply bottlenecks and intense competition could lead to the kind of overinvestment seen in previous boom-and-bust cycles. For central banks, it was posing fundamental questions about how the economy is likely to function. Financial vulnerabilities remain another area of concern. Elevated asset valuations and signs of investor complacency have left core bond markets more fragile. The financing of the AI boom also looks increasingly reliant on debt and complex funding structures across the supply chain. At the same time, record-high public debt and sovereign debt markets increasingly dominated by large, highly leveraged hedge funds had created "a new sovereign-financial stability nexus," which poses growing risks. "The new fiscal-financial stability nexus may mean more frequent and sharper drops in sovereign bond values," said Frank Smets, acting head of the BIS monetary and economic department, adding such swings could rapidly tighten financial conditions. De Cos said the BIS' message was one of "urgency" in terms of the need to bring down debt levels in key economies, "because the fact is that today debt is high, and this is financed through non-bank financial intermediaries." The BIS urged policymakers to prioritize price stability, ensure fiscal sustainability, coordinate and strengthen oversight beyond the banking sector, and pursue structural reforms. "Policymakers must act now. Delay will only make the necessary adjustments more costly," de Cos said. The Philippine economy could be indirectly affected by these global risk factors. For instance, rising global inflationary pressures could impact domestic prices through higher import costs, potentially influencing the Bangko Sentral ng Pilipinas' (BSP) monetary policy decisions. Furthermore, advancements in AI technology might lead to structural shifts in the Philippine service sector, including the BPO industry. Overseas investment trends are also susceptible to global financial market stability, warranting close monitoring. Source: GMA Money Philippines