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High inflation seen hounding Philippines’ recovery

/ 04:09 AM September 29, 2021

High inflation could linger in the Philippines and possibly slow economic recovery, think tanks said.

“The risks seem to be tilted toward higher inflation over the medium term in at least several major emerging economies. This includes Brazil, South Africa, Indonesia, the Philippines, Colombia and, to a lesser extent, Mexico and India. Together, these economies account for about a quarter of emerging markets’ GDP (gross domestic product),” London-based Capital Economics said in a Sept. 27 report titled “Have emerging markets vanquished inflation?”

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In a separate report on Tuesday, Moody’s Analytics said that “inflation is problematic in the Philippines” despite the Bangko Sentral ng Pilipinas (BSP) insisting that elevated prices were only “transitory.”

Headline inflation averaged 4.4 percent as of end-August, above the 2-4 percent target range, mainly due to expensive food.

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“The BSP maintains that the rise in inflation is temporary, but the risk of elevated price growth becoming more entrenched has increased. This is despite the government hoping that supply-side reforms will help stabilize food prices from 2022,” Moody’s Analytics said.

“Output remains approximately 9-percent below pre-pandemic levels and is not forecast to surpass pre-pandemic levels until late 2022, ranking the Philippines the last country in the Asia-Pacific region to recover lost ground. Ideally, monetary policy would remain on hold and firmly accommodative until late next year to support the recovery, but the BSP may be forced to act earlier if inflation does not cool,” it added.

Last week, the BSP kept key interest rates steady, but Moody’s Analytics expects a rate hike by the second half of next year.

“There is precedent for the BSP tightening interest rates when inflation accelerates beyond comfort levels. The latest example was in late 2018, when inflation edged towards 7 percent year-on-year and the BSP hiked rates for several consecutive months to help calm price growth,” Moody’s Analytics noted.

Moody’s Analytics said the BSP would also be “kept on its toes” by the impact of COVID-19 infections on the economy amid the shift to granular lockdowns in a bid to encourage more consumer spending.

“But the near-term longevity of the recovery is questionable given the combination of low vaccine coverage and already-elevated daily infections. Only 23 percent of the adult population is fully vaccinated. The risk of a more aggressive resurgence is high because of the potential strain on the already-stretched healthcare system,” Moody’s Analytics said.

In a report last Monday, Pantheon Macroeconomics senior Asia economist Miguel Chanco said that “the acceleration in food inflation still has plenty of room to run, as the country continues to import the rapid gains globally in the first half of this year, while the pass-through of the recovery in oil prices to utility costs is far from over.”

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But Chanco said interest rates would likely remain unchanged in the near term, no thanks to the slow economic rebound, and despite headline inflation likely settling above the BSP’s target band by yearend up to next year.

The UK-based Pantheon Macroeconomics projected the rate of increase in prices of basic commodities to average 5 percent this year and 4.5 percent in 2022.

Ben O. de Vera
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