Challenged

What a challenged year 2018 has been.

Through most of the year, oil prices escalated sharply after oil producers curtailed supply. Toward the end of the year, oil prices dropped as sharply due to the abundance of supply.

It is not a matter of the absolute quantities of oil actually produced. The oversupply is attributed to declining global economic activity. That decline is mostly attributed to the fallout from the tariff war that the Trump government initiated. But it is also a consequence of higher oil costs.

Another factor influencing the decline in global economic activity are higher interest rates imposed by most of the world’s central banks. The increased interest rates mark the transition from the cheap money regime imposed after the 2008 financial crisis to help push up economic activity.

Over close to a decade, the low interest regime kept recession at bay and allowed many economies (including ours) to expand rapidly. They came with other expansionary policies including government purchases of bonds to infuse more money into the economy.

Over the last few months, governments have been unwinding their positions, selling bonds back to the market. This soaks up the money and slows economic activity. Now, analysts are predicting some of the major industrial economies will slide into recession.

With liquidity being mopped up, stock prices will likely tumble. We saw this in the behavior of the New York Stock Exchange in the form of drastic declines in stock values in the days leading up to Christmas followed by last Wednesday’s magnificent stock rally.

The prudent monetary policies adopted by the US Fed enraged Donald Trump, who threatened to fire the freshly appointed Fed chairman. The American president expects the stock market to rally strongly as a reflection of historically low unemployment rates. But that is not how market reality works.

Our own economic performance reflected the strong headwinds the global economy generates. We failed to meet the high growth targets set when oil was cheap and interest rates were low.

In part because of rising fuel costs and, to a major extent, supply issues afflicting our domestic economy, our growth rate fell below target. We are still among the fastest growing economies in the region, but there is no way we break through the seven percent growth barrier in the foreseeable future.

An infrastructure boom cannot single-handedly push the economy beyond the seven percent barrier. We need to improve on the other sectors just as quickly: our thinning power supply, our poor domestic logistics systems and, most importantly, our stagnating agriculture.

In the transition to a fully investments-driven, strongly exporting economy, we will have to rely on expanding those sectors where the capital required to create a job is comparatively lower. These are the business process outsourcing and the tourism sectors. Over the next two decades, we will have to continue relying on exporting a large section of our labor force to bring in valuable remittances and prevent high domestic unemployment.

Through the first three quarters of this year, inflation rose dramatically. Only during the last two months did oil prices finally soften, reacting to dropping demand.

If we must blame TRAIN for the recent bout with elevated inflation, it will be less about the new excise taxes imposed. Those who blame the excise taxes want to politicize inflation and force government to yield political points.

TRAIN, with its dramatically lower personal income tax rates, boosted the disposable incomes of wage earners. It also improved the fiscal capacity of government to spend on necessary economic investments. These resulted in dramatically rising domestic demand that highlighted the supply weaknesses of our economy.

We have a serious balance of payments problem. While our exports remain stagnant, the private sector began importing capital goods in anticipation of the infrastructure program. This put pressure on the peso’s exchange rate and will likely continue doing so in the coming months.

Our consumers have greater disposable income not only because of the reduction in the personal income tax rates and but also because of the free tuition our politicians, against better public finance wisdom, decided to give out by law. That freed the education budget of parents, allowing them to buy more of other things.  This adds to the demand shock that hit our weak supply systems.

Because of an elevated inflation rate, however, our consumers could not fully appreciate the higher disposable income brought about by tax reform. But we should not be expecting to grow our economy by over six percent and expect the inflation rate to remain low.

If we want to fully cure inflation, we should stop our economy from growing. But stagnation will harm the poor more.

If we want to sustain a rapid expansion rate for the domestic economy, we need to improve government revenues. Tax reform intends to grow the tax base and ensure stable revenue flows. This will allow government to plan on a long horizon and invest in the infra we so direly need.

There are hard choices to be made and our economic managers have made the right choices courageously. Next month, the excise tax on fuel will be imposed according to the original schedule.

Politicians looking for votes will likely make the appropriate populist noises for self-serving purposes. But the only thing they will accomplish is to confuse our people even more about the crosscurrents we need to manage well to bring our economy to a competitive state.

The next year will be as challenged as this one was. But strong political will should carry us through.