Years ago, I wrote about the dangers of the extreme measures employed by governments worldwide to stave off the impact of the global financial crisis and a global recession. In so doing, governments and central banks had to tread a dangerous path between quantitative easing and monetary tightening, and it seemed only a matter of time before a recession, inflation, or even deflation resulted from such policies.
Now it appears that these dangers are being realized left and right. The global economy is now experiencing a slowdown, exacerbated by geopolitical tensions, a looming trade war between the US and China, and by oil and grain supply shocks brought about by the Russian invasion of Ukraine. While the West is experiencing slower growth and a heavier fiscal debt burden, Russia is experiencing serious inflation and its currency’s value is plunging. Even China has recently fallen into deflation, in a manner eerily similar to Japan’s own encounter with falling prices, ending its post-war economic boom when its asset price bubble burst in the 1990s.
The Philippines, once a bright spot in the region, has not been spared — with inflation and sporadic supply shocks and shortages, particularly in essential consumer goods and food. In fact, the Philippines is now experiencing the highest inflation since the global financial crisis of 2008, and if this remains elevated, further erosion of household purchasing power is inevitable.
What has the government done about this? The Bangko Sentral ng Pilipinas (BSP) has repeatedly announced its readiness to act as necessary to address any inflation risk. However, much in the same manner as central banks in advanced economies, the BSP also decided to increase interest rates, based on the same inflation-targeting model that guides the economic policy model of many central banks.
This response would be proper in case inflation were actually caused by excessive demand, as increased interest rates would suppress consumption and investment through monetary tightening. One may even argue that the current inflation is the tail end of various stimulus programs and cash aid given by the government during the pandemic, which would have added to existing demand stimulus.
On the other hand, with interest rates at near 16-year highs, households may also be facing higher debt servicing costs, since many households took out loans as a result of the COVID-19 pandemic, prodded in no small measure by relatively low interest at that time. Now, the cost of servicing such debt will be higher, resulting in further reduction of disposable household income, thereby lowering demand, especially for non-essentials.
Worse, increases in interest rates will sooner or later end up affecting investment and slowing down the economy. This is because higher interest rates increase the costs of borrowing, and when this is passed on to the consumers, prices correspondingly increase, compounding the problem. In fact, the possibility of higher prices (inflation) existing simultaneously with recession or stagnation, a phenomenon called stagflation, is looming larger as well.
In view of these, monetary tightening can only be considered as a stop-gap measure to address excessive inflationary pressures, that may have been brought about by abnormally high demand or even an excess of money circulating in the economy due to large loans taken and then spent by the government in recent years. If employed too long, the risk of harming the economy through forceful suppression of demand and investment is increased.
Nonetheless, there is some hope in sight. Unlike China, which was prone to deflationary pressures due to an aging and stagnating population, as well as an export-dependent economy that naturally weakens in the event of a trade war or global recession, the Philippines has a young and booming population, as well as an increasingly younger workforce. This, among others, blessed the Philippines with a domestic consumption and demand-driven economy, which actually makes it resilient in the face of a worldwide recession as long as purchasing power is maintained and the workforce is adequately employed.
Thus, the Philippines could greatly benefit from increasing productivity while maintaining high employment. Stimulating the economy and reining in unemployment may seem counter-intuitive, if not difficult, in the face of existing inflationary pressures and a looming global recession — but often the long-term solution is obscured by present or existing crises. However, such a solution may only be achieved by a government that is responsible and focused, a productive and cooperative private sector, and a compliant taxpayer base.
Needless to say, the government must be able to collect the proper amount of taxes to fund the necessary programs and expenditures. Even if taking out loans is necessary, it must make sure that any or all funds obtained are fully put to productive use, and not wasted on non-essentials or useless programs or worse, lost to graft and corruption. Reckless spending through debt financing must also be avoided at all costs since the country’s debt burden — which now stands at P14.2 trillion — is colossal. Adding any more will only result in higher debt service payments, which will further decrease available funds in the future.
Given the enormity of these challenges, everyone must work hand in hand. Better transparency on the part of the government in its spending will also improve prudence and accountability on its part, and this in turn should encourage support and compliance from the private sector and taxpayers alike. Otherwise — like Odysseus trying to navigate the treacherous waters between Scylla and Charybdis of old — the ship we may call the BRP Philippines may risk falling into inflation, stagnation, or worse, both, with disastrous consequences for us all.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Jaffy Azarraga is a director at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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