FIRST PERSON - Alex Magno (The Philippine Star) - November 24, 2018 - 12:00am

Over the next few days, we expect the oil companies to continue rolling back oil prices. This reflects the dramatic retreat of international crude prices. Over less than two months, crude prices dropped by nearly 30 percent.

For consumers, there is even better news. Analysts are now projecting a continuing decline in oil prices through 2019. That decline might not be as dramatic as the drops we saw in the past few weeks, but the projection is certainly welcome.

Just a few months ago, commodity traders were forecasting oil prices to increase, quoting a possible high of $100 per barrel. That forecast anticipated the effects of a looming embargo on Iran imposed by the US.

As it turned out, that embargo, meant to cripple Iran’s economy, kept the backdoor open. The US granted exemptions for China, India and several other importing countries. The two most populous nations by themselves could absorb all Iran will be able to export.

In a word, the US embargo proved toothless as far as Iranian oil exports were concerned. Despite Donald Trump’s bark, the US did not have the bite to force large countries such as India and China to play along with America’s designs.

Oil prices did rise while Donald Trump was barking. When the actual policy was revealed, oil speculators quickly sold down the product. This resulted in the dramatic price reductions we saw.

There was some uncertainty after that grisly murder of journalist Jamal Kashoggi at the Saudi consulate in Istanbul. Some feared this could produce turbulence in the region, threatening oil supplies.

All indications pin responsibility for the murder on Saudi Arabia’s impetuous Crown Prince Mohammad bin Salman. The CIA reached this conclusion after reviewing the case, although this did not persuade Trump to support sanctions on the kingdom.

Reeling from this fiasco, the Saudis succumbed to American pressure to increase its production. They were earlier contemplating leading oil exporters to cut supply in order to force up prices.

Increased Saudi oil exports were complemented by rising production of shale oil in the US and Canada. The US is now the largest oil producer in the world. American pump prices are likely the lowest anywhere.

The Trump administration supports drilling for oil in Alaska. While this dismays environmentalists, it also guarantees abundant oil supplies in the coming years. That outlook encourages cheaper prices for the product.

On our case, the dramatic drop in oil prices will likely relieve inflationary pressure. It will likely reflect in a dramatic drop in the inflation rate in the closing two months of this year. That will help us recover our growth momentum.


There is a worrying downside in the decline of oil prices, however.

The dramatic drop in oil prices is driven not only by a glut in supply. Declining global demand also contributes to that glut. Declining demand, in turn, is an indication of a slowdown in global growth.

Economists have warned that the global economy is due for a recession. We might be seeing the early signs of that. This week, the OECD’s projections for global growth for the remaining part of this year and the whole of next year have been adjusted downwards. The slowdown is attributed to the worsening trade conflict and to rising interest rates.

As a general rule, cheaper oil spurs economic activity and expensive oil courts recession. If oil prices continue dropping, this will help us avert a bout with recession.

Should recessionary clouds continue to gather, individual economies could best respond by deploying what economists call “counter-cyclical measures.” These include: lowering interest rates, increasing liquidity in the financial markets and raising public investments.

When the 2008 financial crisis struck, the Philippines was one of the few economies that managed to avoid the recessionary contagion. The government of then President Gloria Macapagal Arroyo took proactive steps to avert shrinkage. Counter-cyclical measures were quickly and adeptly deployed. Quarter-on-quarter growth was maintained.

Fortunately, we are well positioned to fight off a bout with recession should that happen. We are nearing 20 years of sustained quarter-on-quarter growth. That should provide us strong momentum.

The Duterte administration’s high growth strategy walks on two legs: the tax reform program that improves our fiscal capacity and the infrastructure modernization program that will prop up investments and demand in the domestic economy. This high-growth strategy makes our economy nearly recession-proof.

Improved revenue flows increase government’s ability to raise spending for investments and social services. A large part of this government’s investment activity is directed at the massive infrastructure modernization program called Build, Build, Build.

The infra modernization program opened a portal for increasing the flow of official development assistance from friendly countries as well as the multilateral financial institutions. More than that, it immediately creates new employment and puts in motion the beneficial multiplier effects of such state investments. It is a ready, and massive, counter-cyclical measure to fight off recession if that trend gains traction on a global scale.

All the soft loans we negotiated and the economic alliances we built over the past two years provide us the means to fight off a drop in demand. This is complemented by the more rapid regional integration within the framework of AFTA.

Imagine if we listened to the perpetual naysayers who want us to scrap the tax reform program, reject the soft loans we have negotiated and delayed the infra program. In we did all that, we would now be most vulnerable to a global bout with recession.

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