Report on Economy: Growth and Rising Inflation

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GROWTH AND RISING INFLATION

RICE FARMERS ASK FOR SUPPORT

By Yanna Agarin

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HE government has unveiled a strategy on rice importation to tame consumer prices, after inflation rate hit a five-year high of 5.7 percent in July. Filipino farmers, however, feel left out.

The Philippine Statistics Authority linked the high inflation to the increase in prices of food and non-alcoholic beverages. Data showed that rice, the biggest contributor to the price index, climbed 5 percent year-on-year in July.

Consumer and farmer groups complained about the high prices of rice in the domestic market despite the government’s apparent efforts to reduce retail prices.

Data from the PSA showed that despite the arrival of rice imports, prices remained high, with the average farmgate price of palay (unmilled rice) reaching P21.60 per kilogram, up by 11.17 percent from a year ago.

“Prices at the wholesale and retail trades of well milled rice are also still on the uptrend,” the PSA said.

The wholesale price of well milled rice was P42.09 per kg, higher by 7.81

percent than P39.04 per kg recorded last year. At the retail level, the average price was reported at P44.81 per kg, also up 7.05 percent from the same period last year. For regular milled rice, the price hikes were observed in the wholesale and retail trades.

The average wholesale price of regular milled rice increased 9.85 percent to P38.80 kg from a year ago’s P35.32 per kg, while the average retail price rose 8.91 percent to P41.21 per kg.

Amid the surge in prices of rice, President Rodrigo Duterte said he would abolish the quota on rice importation by private traders in a bid to make sure the National Food Authority would have enough stock to provide affordable rice to consumers.

The pronouncement was opposed by farmer groups, who insisted that Turn to E3

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GROWTH AND RISING INFLATION

Weak peso both boon and bane

HE Philippine peso dived to a 12-year low of 53.50 against the US dollar in July 2018. While it pushed consumer prices upward, the peso depreciation supported the competitiveness of the business process outsourcing sector and increased the spending prowess of overseas Filipino workers and their families.

The local currency has been battered by the surging US dollar over the past few months, as financial markets anticipated the US Federal Reserve to further hike interest rates.

Private economists see the peso depreciating to 53.03 in August, as the country’s trade deficit continues to widen. Latest data from the Philippine Statistics Authority showed the trade-in-goods deficit in June 2018 increased to $3.35 billion from a $1.59-billion deficit a year ago, as imports continued to exports.

Merchandise exports declined 0.1 percent from $5.704 billion in June 2017 to $5.700 billion in June 2018. Imports rose 24.2 percent to a record $9.05 billion in June from $7.29 billion a year earlier.

The data brought the trade deficit in the first half of 2018 to $19.10 billion, higher than the $11.75-billion trade gap a year ago.

Economists from First Metro Investment Corp. and University of Asia & the Pacific said the solid upswing in the US economy (with the US recording its lowest unemployment rate in 18 years, adding a monthly average of 200,000 jobs in 2018) provided further strength to the US dollar, while widening Philippine trade deficits added pressure to the peso.

The peso will continue to feel the heat as the US economy [and dollar] roars ahead and as long as the domestic economy manages to whittle down significantly its trade deficit, while inflation concerns should ease, they said.

First Metro said while the peso depreciation might seem negative, its impact in both the short and medium terms was positive.

“First, the US dollar has been strengthening

since end of the first quarter of 2018 due to several reasons: The IMF projects the US economic growth to accelerate to 2.9 percent this year compared to 2.3 percent in 2017,” they said.

Apart from the growth momentum, they said the effects of President Donald Trump’s tax cuts would be felt by individuals and corporations starting the second quarter of 2018.

The same tax reform tries to attract back to the US some $2 trillion of cash held by US multinationals abroad. Even if only half of that returns to the US, that would add significant demand for the greenback, they said.

The economists said foreign stock and bond investors were selling off their pesodenominated financial assets as they stand to lose with the peso depreciation. Foreigners have been net sellers in the local stock market by a total of P52 billion from February to May this year.

The economists said the peso actually appreciated 4.6 percent from 2004 to June 13, 2018, while Indonesia and Vietnam had large cumulative depreciations in excess of 40 percent during the same period. Malaysia also showed a net depreciation during the period.

The peso depreciation also has positive effects for the country. The most obvious effect is discouraging imports and producing more exports, thus, reducing the trade deficits over the medium term. And because of the increase in production locally, it will boost employment generation, they said.

The second positive effect is that it will give

a boost to the peso income of OFW families, exporters and those that supply raw materials to exporters, they said.

There are about 10 million OFWs and with an average family size of 4.6, the peso slide benefits some 46 million Filipinos. Add to that the number of families dependent on exports, which account for 30 percent of GDP, plus those that supply raw materials to exporters, we can easily conclude that a vast majority of Filipino families benefit from the higher peso-dollar exchange rate, according to First Metro and UA&P. The peso posted its weakest level this year at 53.53 per greenback on July 19, 2018, a 12-year low since it settled to 53.55 a dollar on June 29, 2006. The peso hit an all-time low of 57 a dollar in August 2004.

Philip Wee, foreign exchange strategist of DBS Group Research, said in a report Asian currencies were facing depreciation pressures because of monetary policy divergences that supported the US dollar globally.

The US Federal Reserve increased

interest rates just recently and signaled that more increases were on the way this year, as officials expressed confidence that the world’s largest economy was strong enough for borrowing costs to rise without hindering economic growth.

DBS Bank of Singapore predicted the peso might depreciate further to 54 a dollar by the end of the year given the ballooning trade deficit.

Australia and New Zealand Banking Group Ltd. said the peso might close the year at 53.50 because of the widening current account deficit.

The Bangko Sentral expects the current account deficit this year to hit $700 million. The current account is one of the main components of the balance of payments.

In 2017, the country’s balance of trade in goods deficit widened to $29.786 billion from a $26.702-billion gap in 2016.

The BSP also signaled it was ready to prevent the further slide of the peso, after it increased the benchmark borrowing rate by 50 basis points on Aug. 9.

Julito G. Rada

Surging inflation dampens Filipino consumers’ sentiment

By Othel V. Campos FILIPINO consumers have been coping with the rising costs of goods and services over the past seven months. The impact was most felt by the poor.

The 11.1 million self-rated poor Filipinos saw their daily living expenses increase this year, as prices of basic goods and commodities swelled amid the implementation of package 1 of the Tax Reform for Acceleration and Inclusion law.

Consumer advocacy group Laban Konsyumer Inc. said the Train law had an all-encompassing effect on prices of goods.

“There’s no other economic policy implemented in the wake of 2018 but the Train Law. The law has direct and indirect impact on the price of goods with price hikes particularly felt by the poor,” said Laban Konsyumer president and former Trade undersecretary Victorio Dimagiba.

Dimagiba said this was exacerbated by surging prices of world crude.

He said when Congress enacted the Expanded or Reformed Value Added Tax to 12 percent under Republic Act No. 9337, the law added mitigating measures “to lessen or minimize its impact on consumers.”

It reduced to zero the excise taxes on kerosene, diesel, LPG and bunker fuel, or the so-called “socially sensitive products.”

“The Train law removed those zero excise taxes and on top of the 12-percent VAT. The Train law is, thus, called by many as anti poor. The point is that they took the gamble that the excise tax in petroleum will not impact on cost of goods and services. But as figures show, it did. It also impacted on consumption. Now, where and how do we pick up the slack?” he asked.

Dimagiba said while world crude prices started their descent, it never affected the behavior of the Philippine inflation rate.

July inflation climbed to a five-year high of 5.7 percent in July from 5.2 percent in June, data from the Philippine Statistics Authority showed.

“When they made assumptions for 2018 to 2022 , they assumed that Train 1 will pass the bicameral deliberations. For me, they assumed a very, very optimistic inflation rate. They had been overconfident that inflation will stay at the vicinity of 2 to 4 percent in the entire 2018. That’s the same optimistic forecast they had in 2017. They were so positive that Train 1 will not impact on inflation, but that did not happen,” he said.

The consumer confidence index was also on a downhill as it declined 1.7 percent in the first quarter of 2018 from (0.5 percent in the last quarter of 2017).

Consumers said in a report that most of their take-home pay was spent more on electricity, food, nonalcoholic and alcoholic beverages, fuel, water and transportation.

“What is even worse, after Train 1 is not just Train 2, but the shifting of characters of the sectors affected by these measures. Hoarding is a problem that has been at play even before these measures came about.

Smuggling could come into play also, but like hoarding, it has been there ever since. This time around, I see more hoarders and smugglers who will take their chances for better market prices,” Dimagiba said.

GROWTH AND RISING INFLATION RICE... From E1 for a rice-consuming country with an increasing population like the Philippines, rice self-sufficiency remained the only viable option.

“Any discussion on the prospect of the rice industry should look into the relatively thin world rice market and, recently the impact of extreme weather situation as major considerations,” the Samahang Industriya ng Agrikultura said.

Sinag executive director Jayson Cainglet expressed concern over the government’s plan to rely on imported rice. “The tradeable rice in the global market is thin.

Less than 10 percent is available, 30 percent of which are already reserved for China,” he said.

Caingletsaidglobalriceproduction was pegged at 622.8 million metric tons annually. Of these, only 45.8 million MT were tradeable, with China securing 30 million MT. “This means that less than 8 percent of the rice produced globally is available in the world market. This relatively thin market means that rice supply [and rice prices] has tended to be more unstable in recent years,” he said.

Cainglet reminded the government of the 2008 rice price crisis when global prices of rice soared to as much as $800 to $948 per metric ton, from $400 per metric ton in the previous years. This, he said, was due to the imposition of temporary export bans/restrictions of rice exporting countries and the ensuing panic

buying of rice importing countries like the Philippines.

“The 2008 rice price crisis should already be a wake-up to us all on the vulnerability of the global rice market. It is ridiculous, if not outright despicable, that a country with the capacity and history of producing its own staple to rely instead on a very volatile and unstable international market. Reliance on imports with thin supply will only increase prices in the long run, not lower it,” said Cainglet.

Cainglet said his group was deeply concerned on the attempt to rely on rice imports in the era of tarrification.

The proposed Rice Tariffication bill is one of the government’s initiative to stabilize rice prices and address the supposedly “artificial shortage” created by rice hoarders and cartels.

House Bill 7735, also known as the “Revised Agricultural Tarrification Act,” aims to protect local farmers and consumers by imposing tariffs in lieu of the quantitative restrictions on imports.

Under the proposed bill, the Philippines’minimum access volume will go back to 350,000 metric tons from the current 850,000 metric tons. The bill also proposes a tariff rate of 35 percent for imported rice coming from the Association of Southeast Asian Nations.

The bill also seeks to impose a 40 percent most-favored nation tariff rate for in-quota rice coming from non-Asean countries and a 180-percent percent tariff rate for shipments outside the MAV.

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High inflation reflects strong local demand

By Othel V. Campos

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FASTER inflation rate partly reflects the strong domestic demand and the country’s capacity to sustain its economic growth in the coming years, according to a Cabinet official.

“This might sound insensitive to many of us, to see inflation as a way to prepare for the future, but to us and the builders of the nation, a certain level of inflation will help the economy to expand and grow resilient,” said Trade Secretary Ramon Lopez.

“A n d w h a t s h o u l d b e highlighted, of all things, is that growth is here and is coming into play,” said Lopez.

What is even better, according to Lopez, is that inflation is being used to drive the importation of goods for the ‘Build, Build, Build’ infrastructure program and the public-private partnership projects.

He said capital and intermediate goods were now in great demand, with the ongoing big-ticket infrastructure projects.

The appetite to bring in capital and intermediate goods was fueled by the increasing foreign direct investments in the country, he said. Capital and intermediate

goods are the raw materials for production.

“Every Cabinet members understand these are all capital expenditures for future expansion, so higher inflation is okay. For instance you can expect that in any manufacturing project, one needs to invest for capital equipment heavily. We want to build our manufacturing. This is the right time,” the trade chief said.

What is important at this juncture, he said, is that growth borne out of inflation was going to a productive activity, instead of driving consumption.

The government sees more capital expenditures to boost economic activities. This will also help prop up exports, he said.

“We need continuous growth for manufacturing as contributor to the gross national product.

Admittedly, we were not able to invest in manufacturing. More investments in capital equipment will help boost and build and export economy,” said Lopez.

As inflation rate hit a five-year high of 5.7 percent in July, the government expects a gradual deceleration in the coming months.

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GROWTH AND RISING INFLATION

BSP delivers strong monetary response

By Julito G. Rada

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HE Bangko Sentral ng Pilipinas delivered its strongest monetary response in 10 years to combat the rising inflation rate and the peso depreciation.

The Monetary Board, the policy-making body of the BSP, raised by a rare 50 basis points the overnight borrowing rate to 4 percent on Aug. 9, after inflation rate accelerated to a fiveyear high of 5.7 percent in July.

The interest rates on the overnight lending and deposit facilities were also raised accordingly.

The Monetary Board said it deemed stronger monetary action was necessary to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects, even as the previous monetary policy responses continue to work their way through the economy.

The Monetary Board’s 50-bps hike was the third adjustment this year, following the 25bps increase in May and another 25-bps hike in June. Overall, the board increased by 100 basis points the policy interest rates this year. “The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation, including those emanating from the ongoing normalization of monetary policy in advanced economies and its impact on the foreign exchange market, and bring inflation toward a target-consistent path over the medium term. Favorable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings,� the BSP said in a statement.

It was the first time in 10 years that the BSP increased the policy rate by 50 basis points, since it delivered a 50-bps hike on July 17, 2008 after inflation reached 12.2 percent during the

global financial crisis.

The Monetary Board decided that the 50-bps hike in policy rate was the most appropriate measure in its tool kit to temper the accelerating inflation.

Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said the board was keeping the reserve requirement ratio for banks at 18 percent for the rest of the year after two cuts early this year.

However, he said the reserve requirement cut may resume next year, in line with his goal of reducing it to a single digit within his term as BSP governor.

In deciding on the latest interest rate adjustment, Espenilla said the Monetary Board noted that latest baseline forecasts shifted higher over the policy horizon, indicating some risk of inflation exceeding the target in 2019.

He said upside risks also continued to dominate the inflation outlook as the sustained increase in core inflation suggested broadening price pressures amid resilient aggregate demand conditions.

The Monetary Board also reaffirmed its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to further mitigate the impact of supply-side factors on inflation.

The BSP adjusted upwards the inflation forecasts for 2018 and 2019. The forecast for this year was increased to 4.9 percent from the estimate of 4.5 percent made during the June 20 meeting. The forecast for 2019 was likewise raised to 3.7 percent from 3.3 percent previously. The board also announced the 2020 inflation forecast at 3.2 percent.

Bangko Sentral Deputy Governor Diwa Guinigundo said the board took into consideration four factors in adjusting the inflation forecast for 2018. These were the increase in jeepney fares (which was granted by the in the National Capital Region, Regions 3 and 4), water rate increases, increase in excise taxes for tobacco and higher oil prices.

Espenilla expressed optimism that the rate hike could prop up the peso.

He said it was premature to make further statement on the peso at the moment, saying any movement

by monetary authorities should be guided by pertinent economic data.

ING Bank Manila senior economist Joey Cuyegkeng said the BSP delivered an aggressive policy response to anchor inflation expectations as it signaled last month. He said the move also supported the peso, which had contributed to rising inflation.

The inter-agency Development Budget Coordination Committee earlier adjusted upward the inflation forecast in 2018 to a range of 4 percent to 4.5 percent from the previous estimate of 2 to 4 percent.

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GROWTH AND RISING INFLATION

Toll roads, airports, railways equal jobs

By Darwin G Amojelar

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OLL roads, railways and other infrastructure projects generate jobs and the Philippines will need more of them to lift majority of the Filipinos out of poverty.

The Department of Transportation clearly sees the connection, vowing to complete all infrastructure projects worth hundreds of billions of pesos by the end of President Duterte’s term.

“We are going to complete all the projects, (if not all, many). I will be happier if all the projects will push through, not for me, not for you, not for them but for everybody,”Transportation Secretary Arthur Tugade said.

“This administration, through the strong leadership of President Duterte, is on target. Investments in construction grew by 10.1 percent in the first quarter of 2018. Public construction expanded by 25.1 percent,” Tugade said.

He said the increase in infrastructure spending was expected to create around one million direct and indirect jobs annually.

The Department of Budget and Management said spending for infrastructure and other capital outlays rose 41.6 percent to P352.7 billion in the first half of the year from P249.1 billion year-on-year.

“Build Build Build is Jobs Jobs Jobs. This is providing life to our nation. Unemployment has already decreased to 5.5 percent from 5.7 percent, year-on-year. We expect this figure to shrink further,” Tugade added.

DOTr’s big-ticket infrastructure projects include the P227-billion Mega Manila Subway, P105.31-billion PNR North Phase 1, P150-billion PNR Phase 2, P130-billion PNR South Commuter Rail, P151-billion PNR South Longhaul and the P31.50-billion Mindanao Railway from Tagum and Davao City to Digos.

About 468,000 jobs were generated in the construction sector based on a Labor Force Survey conducted by the Philippine Statistics Authority in April 2018.

“We are elated with the strong performance of the construction sector.

Mactan-Cebu International Airport Terminal 2

In April 2018, total employment in the sector reached 4.012 million from 3.544 million during the same period in 2017. This is a 13.2-percent increase,” Labor Secretary Silvestre Bello III said.

Employment in the construction sector stood at 3.381 million at the start of the Duterte administration in 2016.

Largest contributor

“Construction is the largest contributor to employment among the industry sub-sectors during the period and we believe the Build Build Build infrastructure program is the main driver of

growth,” Bello added.

Department of Public Works and Highways Secretary Mark Villar said the “Build Build Build was gaining momentum at an unprecedented rate,” noting that more jobs were generated during the first two years of the Duterte administration compared to the previous five years.

“In the first quarter of 2018, the gross value added in donstruction is at 9.3 percent,” he said.

The DOTr also said it completed 129 commercial port projects under the Philippine Por ts Authority, and four social/tourism ports under its Maritime Sector, in

the last two years.

Tugade said better port facilities would strengthen tourism in the country and bolster the Philippines’ appeal as a cruise destination.

He said all these were done to fulfill the government’s promise of improving the lives of the public by providing them with facilities to enable them to have a comfortable and efficient travel and transportation.

Philippine Ports Authority general manager Jay Daniel Santiago said the government was pouring in billions in the next five years to improve and modernize ports in the country.

GROWTH AND RISING INFLATION

US-China trade war may deter PH growth

Dominguez

Espenilla

By Julito G. Rada

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XTERNAL developments always pose a threat to the Philippine economy and the current trade friction between the world’s two leading economic powerhouses— the United States and China—is no exception.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said the first-round impact of the trade war could be minimal, but its further escalation could be another story. “... Looking at the items that will be affected... based on the initial list... that means aluminum, iron, steel. Our exports and imports from the US and from China are very negligible. That’s the first-round effect... no significant impact on us,” Guinigundo said.

... From our perspective, we just have to be ready. I think preparation is very critical.

“But if it reaches the second and third rounds, when economic per formance of the countries involved like China, Japan and even the US is considered, then the impact could be more significant...,” Guinigundo said.

He said any “constriction” in trade could result in the country’s net exports to go down. He said negative net exports would eventually pull down economic growth.

He said the government’s move of diversifying the country’s export markets from its traditional trading partners was a good vital step to avoid the expected adverse impact of a full-blown trade war. “... From our perspective, we just have to be ready. I think preparation is very critical. And we have been doing it, we have been trying to diversify the source of our imports and the markets for our exports,” he said.

“Export market has been diversified actually with veering away from US and Japan in favor of intra-Asean trade. That has become very important... Diversification of market both exports and imports of course, greater competitiveness among our exporters and importers and the rest of the industr y,” Guinigundo said.

The US in July imposed a 25-percent border tax on $34 billion worth of Chinese goods shipped into the US. In response, China levied tariffs on $34 billion worth of imports from America.

Economists said the tariffs and counter-tariffs could have a major negative impact on consumers and global economies.

Bangko Sentral Governor Nestor Espenilla Jr. said any escalation in the ongoing trade friction between the US and China would do more harm than good because it would limit opportunities in the global trade environment.

Espenilla said if the situation worsened, the trade war could obviously affect the Philippines because the country had been trading with many other countries.

Finance Secretar y Carlos Dominguez III echoed Espenilla’s observation.

But Espenilla expressed optimism the Philippines would remain resilient going forward despite these global developments, citing the Philippines’ solid and strong macroeconomic fundamentals.

Dominguez also cited the economy’s strength, namely the just implemented tax reforms, increased foreign direct investments and a significant rise in public spending in the first two years of the Duterte administration.

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GROWTH AND RISING INFLATION

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Small businessmen shrug off rising inflation, remain upbeat

By Othel V. Campos

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URGING inflation has dampened the spirit of small businessmen but they remain optimistic the Philippines will weather the latest blip in the economy.

When the inflation rate in July rose to 5.7 percent, the country’s largest groups of businessmen and micro, small and medium enterprise despaired. They could not help it but raised their hopes that consumer prices would taper off.

Philippine Chamber of Commerce and Industry chairman emeritus Francis Chua believes the inflation rate will soon reach its peak and make a gradual descent.

The business sector, he said, though bracing for things to come, remained upbeat the Philippine inflation would abate to give industries a degree of stability to recoup production costs, profit a little and expand, if possible.

From 4.6 percent in May, the inflation rate in June rose 5.2 percent and reached a five-year high of 5.7 percent in July.

Many sectors quickly blamed the Tax Reform for Acceleration and Inclusion, or TRAIN, law but businessmen like Chua were positive that once fully rolled

out, the measure would stabilize the economy and prices.

Chua said the law had not even scratched the surface of all the reforms needed to stabilize the economy.

Chua downplayed the increase in demand for goods and services that normally occurs in the last quarter of the year, saying higher consumer spending would neutralize the expected rise in prices and demand.

He added the Bangko Sentral ng Pilipinas was taking monetary actions to help bring down inflation rate to tolerable levels.

The country’s exporters, meanwhile, said it was important to keep inflation down to help sectors vulnerable to the fluctuation of prices.

The private sector, especially the exporters’ group Philippine Export Confederation, says rising inflation rate must be checked to make local manufacturing and export activities more competitive.