Taal disaster to push inflation higher

As ashfall from Taal volcano puts livestock in the Calabarzon area at great risk, pressures on the supply of food products like chicken, hogs and fish may jack up consumer prices in the country early in the year, an economist from Philippine National Bank (PNB) warned.

From 2.5 percent year-on-year inflation rate in December, PNB economist Jun Trinidad said the Philippines might open the year with a year-on-year inflation rate of 3 percent or more in January.

While it’s still in the early days to estimate damage to businesses, private property and public infrastructure caused by the disaster, Trinidad said macroeconomic downside risk from this natural disaster would likely impact more on inflation rather than on domestic demand that could undermine gross domestic product prospects.“We worry that the Taal eruption may put pressure on food prices of livestock, particularly chicken and hogs [as well as fish supply] since Calabarzon—Taal’s location and region most affected, is a significant contributor to local production of livestock,” Trinidad said in a research note dated Jan. 14.

Calabarzon—the region com­prising the provinces of Cavite, Laguna, Batangas, Rizal and Quezon—is the area worst hit by the ongoing phreatic eruption of Taal Volcano.

Trinidad noted that Calabarzon, for instance, is the country’s biggest regional source of live chicken, having produced 87,000 metric tons liveweight out of a total of 428,000 thousand MT liveweight in the third quarter of 2019.

The region is also noted to be the second-largest source of hog supply at 17 percent of total third-quarter 2019 hog production of 551,600 MT liveweight. “While income and food price shocks arising from natural disaster events do not last given import channels and return to normal business/production in the affected regions, the recent effects bolster a 2020 inflation trajectory that’s likely to break out of the 2-2.5 percent range and perch at 3 percent year-on-year if not more, to kick-start 2020,” he said.

Such national disaster would render fiscal policy response as more urgent than monetary easing, the economist said, as this would require immediate relief for affected communities, reconstruction and rehabilitation of damaged public infrastructure and more regional infrastructure projects that heighten potential jobs and income creation to strengthen demand prospects.

Trinidad noted that the consumer price price index for fish hit 7.5 percent year-on-year in December as demand for pork substitutes persisted, likely prompted by consumer aversion to African swine fever.

“High livestock food and fish prices may be allayed by low rice prices. If supply shortfall persisted, government may ease import constraints on these commodities while imposing regulatory price restraint measures in the affected areas,” Trinidad said.

But he noted that the downside on the macroeconomy could be mitigated by the size and speed of the government’s relief and aid efforts, alongside the reconstruction and infrastructure rehabilitation of school buildings, airports, public markets/medical facilities, government offices and road networks. However, he said bureaucracy could delay, if not weaken, the government’s disaster response.

“Private-led, infrastructure service companies from toll road services to electricity providers respond as best they can in repairing these infrastructure assets damaged by [natural disaster], that more often fast-track normalization in the affected areas. Fiscal imperatives would also require jobs/income creation in the affected regions/provinces until business/production activities normalize,” he said.

Having the approved 2020 budget with a National Disaster Risk Reduction and Management Fund of P20 billion and with proceeds from the CAT (catastrophe-linked) bonds of $222 million, Trinidad said the government could provide initial funding to enable fiscal alleviation of recent losses.

In Batangas alone, preliminary assessment of economic impact amounted to P7.63 billion, according to Socioeconomic Planning Secretary Ernesto Pernia. The figures did not include public and private damage costs.

“Deploying significant pri­vate and public resources in disaster-affected areas to address the [natural disaster] damage can compensate for macro downside risks. Postdisaster, domestic demand prospects in the affected regions can easily recover with a strong fiscal response,” Trinidad stressed.