Is the crisis end in sight?

We’ve gone through worse times, and yet.

The Philippines has experienced higher inflation rates in the distant past, the last double-digit figure of 10.4 percent being in 1994. Filipinos may find this hard to remember, especially since the following years saw a tempering despite all the various regional and global crises.

Perhaps, the biggest factor that rankles most with the recently felt crisis is the continued instability of rice prices. History will bear out that inflation and rice prices almost always go together. When inflation rises, expect rice prices to spike, and vice versa.

Since February this year, Filipinos have been seeing the cost of a kilo of rice inch up. And because rice accounts for 30 percent of a household budget on average, having to spend more every week for about 10 kilos without a commensurate increase in income has raised big worries.

One of the more important grounded lessons in economics that I learned as an oilman was the sensitivity of two products: rice and LPG. Spikes on any or both cause public anxiety, both having to do with a Filipino’s eating concerns.

When LPG prices experience sharp fluctuations, housewives can get really noisy. But when rice prices go through successive rounds of increases, just like what is happening today, the nation gets really agitated.

Tempering inflation, strengthening the peso

The rice crisis, as many critics and allies of the current administration point out, is surmountable. The President has already ordered more imports of rice, and streamlining administrative procedures on the importation of agricultural products to address the supply-demand gap felt in the market.

The Bangko Sentral ng Pilipinas (BSP) is meeting today to decide on rates, which many analysts foresee will call for the fourth round of increase this year, at least another 25 basis points (bps) – on top of the 25 bps called last May, 25 bps in June and 50 bps in August.

This aggressive stance by the BSP is seen not just to temper inflation, which had risen to 6.4 percent in August, the highest reading since March 2009, but also to protect the peso at a time when the government is on a spending binge over its Build Build Build (BBB) infrastructure-boosting program.

The country needs to boost investor confidence, which now is rumored to be flagging, to ensure that there will be takers for future global or corporate bond offerings at lower yields and stronger exchange rates.

The BSP’s move to further raise rates and President Duterte’s order removing non-tariff barriers to agricultural importation are expected to ease rising inflation and restrain the peso’s slide – at least, for now.

Immediate threats

There are new concerns on the horizon, though, that may weigh in on inflation and the peso.

The latest reports indicate a full blown-up trade war between China and the United States, and the continuing rise in crude oil prices. This will add more pressure on the peso, which had fallen to 54.31 against the US dollar last Tuesday, its weakest level since 2005.

The trade war that has imposed higher tariffs on imports would result in higher products. On the other hand, with oil-producing countries agreeing to keep their supply taps at current levels, crude prices will most likely continue rising.

China and the US have restored tariffs on just about any products that cross their respective borders, and this expected to cause an increase in the price of many commodities that the Philippines imports from both countries.

On the other hand, oil-producing countries, after their meeting in 2016, have successfully managed to raise the average price to crude oil to $60 in 2017. The goal is to bring the price to $80 per barrel this year and in the near future, something that is already within reach.

Being a consumer-led economy and dependent on imported fossil fuels, the Philippines already has a huge import bill; and the worsening trade war and higher oil prices will continue to bloat this, adding more pressure to the peso and on inflation. 

If it is any consolation, the unwanted effect of both the trade war and crude prices will not be felt immediately for the next few months. This should give us some breathing space, so to speak, before getting hit by these external factors.

Strong fundamentals

Our government economic team is relying on the continued strong showing of the economy, which would still be in the range of six percent, although lower than the targeted seven to eight percent gross domestic product (GDP) growth performance.

In the remaining months of the year, inflation is expected to taper down, ending at about five percent on the average for the whole 2018. This month’s is seen to be lower than August’s. The government is looking at a return to the two to four percent range next year as the rise in food prices ease.

There have been delays in planned infrastructure projects this year under BBB, and while this is not good news for investors who have always criticized the government’s poor spending on infrastructure, this has helped temper the import bill from ballooning.

The closing months of the year should bring more dollar remittances from overseas Filipinos, which would help shore up our foreign reserves. We may wake up to 2019 with vestiges of the crisis still around us, but the good news would be about seeing an end to all this anxiety. That, certainly, is something to look forward to.

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