Think tanks: Speed bumps ahead of PH road to recovery

MANILA, Philippines—External risks from higher global production input costs, the US Federal Reserve’s interest rate hikes, and an investment slump are forming speed bumps to the Philippine economy’s road to recovery, think tanks said.

The Washington-based Institute of International Finance (IIF) in a Jan. 27 report said emerging markets like the Philippines, Colombia, Malaysia and South Africa were currently in a “disinvestment cycle” or a period of decline in fixed private capital formation, which “runs the risk of transforming the COVID-19 shock into a medium-term drag on growth.”

Among the 21 advanced economies and 23 emerging markets covered by the IIF report, the Philippines had the biggest drop—nearly 30 percent—in real gross fixed private capital formation between the pre-pandemic fourth-quarter of 2019 and the third quarter of 2021.

UK-based Oxford Economics said in a report on Friday (Jan. 28) that the passthrough in producer price index (PPI) — defined by the Philippine Statistics Authority (PSA) as the “measure of the average changes in average prices of a basket of goods as they leave the establishment of the producers” — to the consumer price index (CPI) in the Philippines, South Korea and Thailand was “notable” and tended to be the fastest in the region, usually taking place in three months.

The Philippines’ purchasing managers’ index (PMI) in recent months pointed to rising input costs which domestic manufacturers have been trying to avoid passing on to their customers amid still fragile economic recovery.

Oxford Economics head of India and Southeast Asia economics Priyanka Kishore and senior economist Sung Eun Jung said that across the Asia-Pacific region, “even prior to the pandemic, businesses were slow to pass along increased costs to consumers.”

“With economic outlook on the mend, we do not dispute that price pressures are likely to remain elevated in the near-term,” Oxford Economics said.

“But in our view, a much faster pace of recovery is needed for businesses to pass on a substantial portion of the strong price increases they have experienced to consumers,” it said.

But Oxford Economics added that the producer-to-consumer price passthrough in the Philippines “strengthened in recent years, most likely boosted by the tax reforms of 2018 that led to a jump in beverages and tobacco products in the PPI and CPI.”

“Both the Philippines and Thailand are also large energy importers with low fuel subsidies, which leads to a strong passthrough from PPI to CPI,” it added.

In a report on Friday, Singapore’s DBS Bank Ltd. said that with a hawkish US Fed — expected to hike rates by up to four times this year — “we see risks of a further softening for emerging market sovereign US-dollar credit.”

“Both Indonesia and Philippines have sizable amounts of US-dollar bonds outstanding, and they are also expected to report fiscal deficits exceeding 3 percent of GDP this year, given a continued need for fiscal support,” DBS said.

“If US rates are to rise more sharply on the back of Fed policy tightening, investor tolerance of a delay in fiscal consolidation may erode and trigger a new round of spread widening,” it said.

DBS nonetheless added that “economic fundamentals are better relative to the 2013 taper tantrum period, and this should help moderate any credit sell-off.”

“Current account balances for both Indonesia and Philippines are in better shape today compared to the sizable deficits seen pre-pandemic, while inflation is also not excessively high. All in, Asian credit tail risks should still be limited even as the Fed begins to hike at a potentially quicker pace this year,” DBS said.

In another report also on Friday, DBS said the Philippines’ rank in its annual emerging market risk heatmap slipped to eighth place in 2021 from second in 2020 due to the prolonged COVID-19 pandemic’s “harsh” impact on the economy.

The higher the rank in DBS’s risk heat map covering 25 emerging markets, the less vulnerable an economy was to risks like capital flow volatility, debt service difficulties, and disorderly currency depreciation — in general, broader economic and financial distress.

“Key indicators of analysis are foreign exchange reserves, fiscal balance, private and public sector debt, external (hard currency) debt, savings-investment balance, gross external funding requirement, and real exchange rate,” DBS said.

DBS said that last year, “Thailand and the Philippines have downshifted somewhat from strong external positions.”

The Philippines ranked fourth in 2016, first in 2017, sixth in 2018, and fourth in 2019 — pre-pandemic — in DBS’s emerging market risk heatmap.

TSB