It’s all about commitments
BIZLINKS - Rey Gamboa (The Philippine Star) - December 6, 2018 - 12:00am

At the close of the G20 meeting held in Argentina last week, leaders of 19 countries and the International Monetary Fund (which accounts for the 20th in G20) issued a joint communiqué, putting at ease speculations that this would be the third multilateral meeting this year that would fail to come up with a common declaration.

While a number of global issues seem to have progressed to some form of resolution, a great many remain in discussion, with some critical ones showing no immediate chances of finding common ground.

Over the two decades that the G20 has been operational, its biggest feat to date has been the response to the 2008 global financial crisis. On the other hand, the issue of climate change continues to be a concern to countries that use fossil fuels and those affected by weather disasters.

As a meeting of powerful countries that represent 85 percent of world economic activity, 75 percent of global trade, and two-thirds of the world’s population, much is expected from this yearly meeting where an assessment of the state of the world is followed by a list of commitments.

We live in a dynamic world, where old beliefs can change overnight by a change of leadership in the most powerful country in the globe. Yes, Donald Trump not only turned his back on several declarations with regards climate change, he also single-handedly triggered the US’s current trade war with China.

Trade war truce

The G20, however, was spared of Trump’s theatrics. For one, he tweeted that China and the US were close to resolving the trade war escalation before his meeting with China’s President Xi Jinping during the two-day summit.

Indeed, a pause for 90 days was agreed upon by both parties to work out differences in the tit-for-tat exchange of sanctions on exports between the two countries, already reaching billions of dollars, and which was putting the whole world on edge with the uncertainties.

While the truce is temporary and has not yielded any concrete positive action, markets were up across the globe. With the actual discussions expected to start only in January next year, the ceasefire in the trade war during the Christmas month was welcome news.

Analysts talk about commitments that both countries supposedly gave during the meeting, although warn that these should not be taken at face value given the deep conflicting ideologies of both countries and both leaders.

What is sure, though, is that there is a commitment to suspend the US’s threat to impose a 25 percent tariff on $200 billion worth of Chinese goods, higher than the previous 10 percent rate until end March of 2019.

Finding a balance

Everybody should have noticed the significant drop in crude prices in November — which, unfortunately, jerked up only once again after the G20 meeting.

In November, crude prices suffered a 22 percent decline, the biggest in a month since October 2008. Trump loved this, and added that he wanted to see prices reduced even further. Oil producing countries were not happy at all.

Trump has committed to support moves to bring crude oil prices even lower, saying this is good for the American economy. On the other hand, Saudi Arabia, which is the world’s biggest oil producer, called for production cuts, something that not all other oil producers agree to.

OPEC meets this week to come up with a consensus that would at best stem a further drop in prices. Given the politics involving the rest of the oil cartel nations, bringing crude price levels to somewhere nearer the high point this year would be wishful thinking.

US shale oil has successfully curbed the concerted effort by non-US oil producers to bring prices closer to $100 per barrel, and this spoiled attempt has cause some finger-pointing among OPEC members, and vague commitments to a production cut.

As long as American shale can play a dominant role in the global mix of fossil fuel use, the average price of crude oil from 2015 to 2017 of about $47.58 per barrel should be a good starting point for planning purposes.

Inflation uncertainties

Our economic planners have been emboldened by oil geopolitics to call off a planned suspension of the fuel tax, the second installment starting Jan. 1, 2019 that comes with the passage of the Tax Reform Acceleration and Inclusive (TRAIN) Act.

TRAIN, after all, is integral to the commitment of Build Build Build.

The memory of rising inflation through most part of the year has prodded senators to urge the President to continue with an earlier call for a suspension of taxes on fuel products, but, as reflected by the President’s latest decision, the economic team together with the Cabinet has prevailed.

We now face a period of renewed anxiety after having been assured last month that the end to inflation is in sight. While the economic team has consistently stated that TRAIN has very little impact on inflation, we know how vulnerable our economy is to crude prices.

Being almost totally dependent on imported oil for most of its power needs, the Philippines knows too well how rumblings of war in the Middle East can bring about a tightening in crude oil supplies, and correspondingly, abnormal spikes in prices. 

For now, all we can do is sit tight and enjoy the coming holidays, pushing away any worries of how OPEC’s upcoming meeting will play out. Let’s hope that our government has learned a valuable lesson about inflation, and that this will be put to use if ever things go awry next year.

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