Policy missteps by next president may cause stagflation

The Philippines appears resilient against stagflation—the dreaded confluence of high inflation, slow growth and pervasive joblessness—for now, but several factors, including the economic governance quality of the next administration, may quickly turn the tide against the country.

This is according to New York-based think tank Global Source, which assessed the International Monetary Fund’s (IMF) warning of stagflation risk for Asia alongside a relatively rosier outlook for the Philippines.

In a research note dated April 28 written by economist Romeo Bernardo, Global Source noted that the IMF’s upgrade of its 2022 Philippine gross domestic product (GDP) growth outlook to 6.5 percent from 6.3 percent suggested that the expected expansion in domestic demand would weather fallout from the war in Ukraine, the uptrend in US interest rates and the slowdown in China’s economic growth.

The Ukraine war has led to higher fuel and food costs and is expected to curb European growth, while US monetary tightening is seen to add to tighter global financial conditions. Further deceleration in China’s economic growth due to its zero-COVID-19 policy, meanwhile, is seen to disrupt global trade and supply chains.

IMF’s inflation forecasts of 4.3 percent this year and 3.7 percent for the Philippines next year are likewise seen to be “relatively benign” given the country’s reliance on imported fuel.

Global Source said the country’s 2022 GDP growth may settle at a lower number while inflation at a higher number compared with IMF’s forecasts, but added that stagflation risks were “manageable at this time” especially as the inflation-targeting local central bank had signaled an earlier-than-expected increase in interest rates.

“However, there are several known unknowns in the near-term that could change this assessment quickly,” Global Source said.

Economic governance quality of the next administration was flagged as a key issue.

“For example, it is unclear at this time whether the next administration will be able and willing to stay the course in liberalizing food imports and using targeted measures to cushion inflation’s impact on consumers,” the research note said.

“The alternative of resorting to blunt instruments, e.g., suspending oil taxes, returning to government monopoly of rice imports, would have deleterious impact on government’s fiscal position and further constrain fiscal resources needed to support longer term economic growth,” it added.

The Philippines is set to elect its next president on May 9. The survey frontrunner is Ferdinand “Bong Bong” Marcos Jr., son and namesake of the late dictator who was ousted from Malacañang during the 1986 EDSA Revolution.

On the activity side, Global Source cited the risk of a resurgence in local COVID-19 cases following the detection of a new variant in the country.

Although economic activity has increasingly become less sensitive to COVID-19 numbers, the think tank said stricter mobility restrictions would still affect incomes and output.

Global Source added that local macroeconomic policy space was also narrowing, with the central bank needing to be alert to more aggressive US interest rate increases and global risk-off conditions. At the same side, it said fiscal authorities would need to craft a credible fiscal consolidation plan to reassure risk-averse investors and keep borrowing costs reasonable.

An escalation of the conflict in Ukraine and Western sanctions on Russia that could send fuel prices soaring anew and over time send food prices even higher than currently expected was also flagged as a key risk.

Structural problems in the electric power sector that continue to limit reserve power may also aggravate the impact of higher fuel costs on consumers’ electric bills, Global Source said.

“Perfect storms involving a combination of any or all of the above could lead to a dreaded stagflation scenario,” the think tank warned.