The recent freefall in oil prices arising from the Saudi Arabia-Russia oil price war and the China-epicentered coronavirus pandemic will bring down pump prices and overall inflation in oil-importing Philippines but it may not bode well for the more than two million overseas Filipino workers (OFWs) in the Middle East, economists said.
In an interview, economist and former Bangko Sentral ng Pilipinas (BSP) deputy governor Diwa Guinigundo said he was concerned about the impact of the slump in oil prices, noting that the fallout could not be addressed by aggressive monetary policy easing.
“First approximation of the so-called market analysts is that it will help keep prices stable so BSP can have more monetary space and bring down policy rates and reserve requirement ratio. That oil price reduction actually results from a price war and the realization that this specific coronavirus issue could compress global demand. While oil prices could indeed help lower prices and inflation, the counterweight could be more serious and this is the tightening of global supply as global supply chains are upset,” Guinigundo said.
“The other collateral impact of course is the adverse impact on the Middle East. Jobs may be cut back and OFW remittances could thin out. We cannot overemphasize its impact on domestic consumption and finally on economic growth,” he added.
Rather than easing monetary policy, Guinigundo said keeping a steady monetary policy could buy the inflation-targeting BSP time and conserve ammunition should conditions further worsen.
“There is virtue in waiting, there is virtue in patience especially when information is very little and there’s a lot of uncertainty in the market,” he said.
The BSP raised its overnight policy rates by a total of 175 basis points in 2018 to combat rising inflation. It has since cut rates by 100 basis points, the last of which was the 25-basis point reduction last February. The next monetary setting is scheduled this Thursday (March 19), during which many analysts expect the BSP to deliver another rate cut.
For his part, Bank of the Philippine Islands economist Emilio Neri Jr. said the slump in oil prices might benefit the Philippines by pulling down inflation. “However, low oil prices may also hurt our remittances in the long run as this could lead to the displacement of OFWs in the Middle East,” he said.
Neri said he expected the coronavirus pandemic, which had infected more than 120,000 people and killed 4,300 globally, to curb remittances and foreign direct investments (FDI) this year given the possibility of lower growth in major economies.
He said the pandemic could severely hurt the global economy. “Even those countries with strong fundamentals are not safe from the fallout brought by the disease,” he added.
Global oil prices crashed by more than 30 percent last week to about $27 a barrel, the lowest since 1991, after Saudi Arabia
aggressively slashed its official selling prices, sparking a price war with Russia.
In a March 13 research note, Franklin Templeton Emerging Markets Equity’s managing
director Bassel Khatoun projected that extended demand weakness and continued oversupply would keep global oil prices at around $30 a barrel in the second and third quarters of this year, but move back to the $40-$50 range by yearend, thereafter normalizing in the $50-$60 range.
Overall, Khatoun expects the vast majority of emerging markets – whether measured by population, gross domestic product or market capitalization – to benefit from the oil price collapse despite the near-term negative market reaction.
“In an environment of slowing economic growth due to the coronavirus, lower oil prices represent a substantial additional stimulus to the broader asset class, particularly within Asia. Our portfolios are predominantly positioned in domestic-oriented consumer and technology businesses, plus world-leading semiconductor manufacturers—all of which stand to see benefits from lower energy costs,” he said. INQ