Inflation, GDP and Duterte

Last week, the October inflation and 3^rd quarter GDP growth data were released by the Philippine Statistics Authority (PSA) and the numbers confirm the fear of many observers of deteriorating macroeconomic fundamentals of the Duterte administration.
The big jump in inflation rate was triggered by the TRAIN law. Only 2.9% in December 2017, went up to 3.4% in January 2018 (first month of TRAIN law), 3.8% in February, 5.7% in July, 6.4% in August, 6.7% in August and same 6.7% in September. The year to date (ytd, January to October) inflation rate then is 5.1% or nearly double 2017’s 2.9%.
The good news is that this may be the peak inflation for the year. Any upward pressure in prices because of the provisional fare hikes and wage hikes implemented this November will be compensated by low world oil prices. WTI oil peaked at $76.4 a barrel last Oct. 03, down to $60.6 a barrel on Nov. 11.

The bad news is that compared to many neighbors in Asia, the Philippines has the biggest jump in inflation this year compared to last year. Some countries even experienced decline in inflation despite the high world oil prices (see Table 1).
The high inflation rate coupled with rising interest rates as the BSP tries to temper price uptick via monetary policy has resulted in low consumer confidence.
Recall the basic macroeconomic equation, GDP = C + I + G + (X-M), where C is household consumption, I is investment, G is government consumption, and (X-M) is net exports less imports. C is huge, 61% of GDP and the three others constitute only 39%. C growth has been declining, 6.2% in Q4 2017, went down to 5.7% in Q1 2018 (with TRAIN law), 5.6% in Q2 then 5.2% in Q3. This is bad.
As a result, overall GDP growth of the Philippines has been pulled down, from a high 6.9% in 2016, 6.7% in 2017, and only 6.3% in 2018 Q1-Q3. By way of recommendations, the following may be considered by the Duterte government.

One, suspend part two of TRAIN excise tax hikes for oil and coal, full year 2019 and not reinstate them after the May 2019 elections.
Two, freeze or suspend raising the Motor Vehicle User’s Charge (MVUC) or road user’s tax, (RA 8794). Like oil tax hike, this has inflationary pressure, a good observation and proposal from the Senate President Pro Tempore Ralph Recto.
Three, continue the agricultural trade liberalization, replace the quantitative restrictions (QR) with low tariff and remove NFA importation monopoly.
Four, cut VAT rate from 12% to around 8% and reduce the exempted sectors. Malaysia is the best example for this, it has a gross sales tax (GST) of 6% until May 2018 then abolished it in June, a campaign promise of PM Mahathir. Its average inflation rate four months before (February 1.4%, March 1.3%, April 1.4%, May 1.8%) was 1.5%, became 0.3% four months after (June 0.8%, July 0.9%, August 0.2%, September 0.3%).
 
Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers.
minimalgovernment@gmail.com