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2018’s main stumbling block behind us?

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By Melissa Luz T. Lopez
Senior Reporter

MANY FILIPINOS welcomed 2018 with marked optimism, with the promise of deeper pockets adding to the usual post-holiday cheer.

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But it wasn’t too long before they felt the opposite — they had no choice but to tighten their belts as prices of basic goods began to shoot up faster than expected.

Victor A. Abola, economist at the University of Asia & the Pacific, said inflation was the biggest problem which the Philippines faced in 2018.

Higher prices hurt overall economic growth, dampening domestic consumption and manufacturing as it drove households to rebalance budgets and drop some leisure expenses to make ends meet.




The worst part: poor families carried the heaviest burden, as higher costs of living meant a persistent pang of hunger as food prices surged from a year ago.

“Inflation is a major concern both on the producer and consumer side, more so because those who have fixed income, when prices go up, it will leave them with very little choices,” Emmanuel A. Leyco, economics professor at the Asian Institute of Management (AIM), said during a Nov. 28 interview.

“For the poor, forgoing spending means‚“they have less money to spend for food,” he added, noting that this often meant skipping meals.

GETTING THERE
Commodity prices started picking up in January, which started out at 3.4% to hover close to breaching the 2-4% target band set by the Bangko Sentral ng Pilipinas (BSP).

The metric used for tracking inflation was even adjusted in the middle of the year — which authorities said was standard practice as it used 2012 prices as the new base — but this did not prevent prices from overshooting the four percent ceiling. By March, prices increased by 4.3% year on year, and it went on to climb faster to reach a nine-year peak of 6.7% in September and October.

Inflation has been food-driven, worsened by thin rice supply which has bumped up prices of the Pinoy staple for every meal. Typhoons and heavy rains also tore through crop-rich provinces which also depleted the production of vegetables, fish and meat, among others.

Mr. Leyco, who formerly led the Department of Social Welfare and Development, said inflation likely drove more families below the poverty line while poor provinces turned even poorer.

Some 52% or 12.2 million Filipino families considered themselves poor, according to the latest poll done by the Social Weather Stations (SWS) in September. This is higher than the 48% (11.1 million) families tallied in June, marking a second straight increase in self-rated poverty in 2018.

Of these, eight percent did not consider themselves poor during the past four years.

Around 13.3% or 3.1 million families also said they went hungry in the third quarter, the SWS reported, up by a tenth from the estimated 2.2 million reported in June. More Filipinos also said they experienced severe hunger, with the number climbing to 2.8% in September from 1.3% the previous quarter.

This seems to run counter to the administration’ goal of sustaining a decline in poverty incidence, with the 2015 tally of 21.5% eyed slashed to 14% by 2022.

Mr. Leyco even went as far as saying that surging prices could erode President Rodrigo R. Duterte’ popularity, with net satisfaction ratings posting declines during the first half of 2018 before a recovery in September, according to SWS poll results.

WHO’s TO BLAME?
The central bank had already conceded overshooting the inflation target as early as May, with recent interventions more geared towards reining the rate back to below four percent by this year.

But this wasn’t the view they had at the start of 2018. Authorities were bullish about economic prospects going into 2018 amid expectations of more upbeat activity in both government and private sector. The state’ aggressive infrastructure spending plans was expected to boost overall growth together with a surge in consumer spending.

The optimism came from the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) law, as lower personal income tax rates which took effect Jan. 1, 2018 were expected to arm the lower and middle-income classes with more money to spend.

A few weeks into 2018, TRAIN morphed from hero to villain in the eyes of lawmakers and critics, blaming the measure as the culprit behind faster inflation as additional duties jacked up price tags on cigarettes, alcohol, sugary drinks, and, especially, fuel.

BSP Governor Nestor A. Espenilla, Jr. previously admitted that policy makers saw no need to touch key rates early in 2018, noting that expected price increases will be caused by supply concerns which are not necessarily covered by monetary adjustments.

“However, supply shocks such as the rising price of crude oil in the international market as well as the effects of recent tax reform measures began to push up inflation expectations in Q2 2018. In addition, early signs of second-round effects underscored the risk posed by sustained price pressures on future wage and price outcomes,” the BSP said when asked for an explanation.

The Department of Finance (DoF) has been dismissing talks that TRAIN wrecked the fairy tale: they maintain that new taxes only added as much as 0.7 percentage points to the headline inflation.

The central bank caught on and kicked off what would be its most aggressive tightening cycle in over a decade. A 25-basis-point (bp) rate hike was unleashed May 10, meant to temper expectations that prices will go even higher. This was followed by a similar increase in June, and aggressive back-to-back 50-bp adjustments in August and September.

Attention then shifted to food, no thanks to strong typhoons and floods which damaged rice-producing and crop-rich provinces back in September. Thinning rice stocks drove Filipinos lining up in the wee hours of the morning in local markets just to buy rationed packs of cheap rice distributed by the National Food Authority (NFA) — a nightmare not seen in a decade.

More people were hungry and were definitely feeling the bite from higher prices.

BEYOND ECONOMISTS
Prices have risen faster both in Metro Manila and in the provinces. AIM’ Mr. Leyco has even pointed out that it’ a double whammy for some of the poorest provinces in the country, as their regions also reeled from the highest inflation rates when computed by area.

Malacañang was forced to step in and try to do its part to rein in food prices, which was done via four administrative orders directing the NFA, the Sugar Regulatory Administration, and the Department of Agriculture to lift non-tariff barriers and streamline import processes for rice, sugar, meat and fish, as proposed by Mr. Duterte’ economic managers.

Lawmakers were also hard-pressed to pass a law removing import limits on rice to be replaced by 35% tariffs, letting go of trade quotas which they have protected for so long just to provide some relief on rice prices and growling stomachs.

Come October, surging world crude prices fuelled inflation as they rose to three-year highs. Prices hovered around $80 per barrel, spurring moves to postpone the second tranche of additional fuel taxes under TRAIN due last Jan. 1, with some solons even calling to repeal the provision of the law altogether. This became moot as oil rates recovered by November.

But this was not before the government approved fare hikes for public jeepneys and buses, only to recall the former after just a few weeks.

Costs of consumer goods finally simmered down as inflation eased to six percent in November, but not before the BSP launched a “proactive” 25-bp hike to douse fears of rising prices altogether. It finally paused from hiking rates at its December meeting. Now, benchmark rates range from 4.25-5.25%, with the key rate of 4.75% the highest since 2009.

The central bank delivered successive rate hikes to fulfill its mandate of price stability, but these responses aren’t as potent when used as a cure for supply constraints which are beyond their reach.

In June, monetary officials soon realized that they can’t be the only soldiers on this war on skyrocketing costs and called for backup by way of “coordinated” efforts from other state agencies.

“In short, monetary policy is not the only solution; non-monetary intervention can go a long way towards addressing inflation pressures especially in the face of strong supply shocks,” the BSP told BusinessWorld.

Just last month, however, the DoF went on to pin some blame on bank economists for “off-the-mark” forecasts by saying that they contributed to rising inflation expectations, much to the bewilderment of these analysts who were simply talking numbers.

Most market watchers now stand convinced that inflation will continue tapering off, with more growing confident that the rate will be back to below four percent in 2019. The BSP even slashed its 2019 inflation forecast to 3.2% in December, saying they are much more “comfortable” that price increases will ease to their desired pace.

And indeed, interventions seem to be working as inflation has tapered, as predicted. Headline inflation eased significantly to 5.1% in December, putting 2018 headline inflation at an average of 5.2% — matching the full-year estimate of the central bank, but still higher than the 2.9% rate logged in 2017 and the 2-4% target.

How soon this decline will benefit the poor and the hungry is another matter.

Come October, surging world crude prices fuelled inflation as they rose to three-year highs. Prices hovered around $80 per barrel, spurring moves to postpone the second tranche of additional fuel taxes under TRAIN due last Jan. 1, with some solons even calling to repeal the provision of the law altogether. This became moot as oil rates recovered by November.

But this was not before the government approved fare hikes for public jeepneys and buses, only to recall the former after just a few weeks.

Costs of consumer goods finally simmered down as inflation eased to six percent in November, but not before the BSP launched a “proactive” 25-bp hike to douse fears of rising prices altogether. It finally paused from hiking rates at its December meeting. Now, benchmark rates range from 4.25-5.25%, with the key rate of 4.75% the highest since 2009.

The central bank delivered successive rate hikes to fulfill its mandate of price stability, but these responses aren’t as potent when used as a cure for supply constraints which are beyond their reach.

In June, monetary officials soon realized that they can’t be the only soldiers on this war on skyrocketing costs and called for backup by way of “coordinated” efforts from other state agencies.

“In short, monetary policy is not the only solution; non-monetary intervention can go a long way towards addressing inflation pressures especially in the face of strong supply shocks,” the BSP told BusinessWorld.

Just last month, however, the DoF went on to pin some blame on bank economists for “off-the-mark” forecasts by saying that they contributed to rising inflation expectations, much to the bewilderment of these analysts who were simply talking numbers.

Most market watchers now stand convinced that inflation will continue tapering off, with more growing confident that the rate will be back to below four percent in 2019. The BSP even slashed its 2019 inflation forecast to 3.2% in December, saying they are much more “comfortable” that price increases will ease to their desired pace.

And indeed, interventions seem to be working as inflation has tapered, as predicted. Headline inflation eased significantly to 5.1% in December, putting 2018 headline inflation at an average of 5.2% — matching the full-year estimate of the central bank, but still higher than the 2.9% rate logged in 2017 and the 2-4% target.

How soon this decline will benefit the poor and the hungry is another matter.

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