I am pleased to share with readers our March 10, 2022 post to GlobalSource Partners subscribers ( Christine Tang and I are their Philippine Advisor.

The updates below are intended to give readers a better sense of how Russia’s invasion of Ukraine is affecting the local economy.

• Gas stations carried out this week their heftiest price increase so far this year, bringing gasoline prices about 20% above December 2021 levels. The upward adjustments will continue if world crude oil prices stay elevated or continue to rise. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno told reporters that a worst-case scenario where oil prices are sustained at $120-140/barrel (bbl) would push up the annual average inflation to 4.4% to 4.7%, above the monetary authority’s inflation target. As of yesterday, Dubai crude oil, the BSP’s benchmark, was already above $122/bbl.

However, the worst-case scenario for inflation will not be limited to oil prices. We earlier wrote about other transmission channels, including food and feeds, other fuel inputs for electricity, a weaker currency and other second round impacts. Additionally, experts warn that high fertilizer prices that may cause farmers to reduce application could lead to lower crop production, including rice, which will add to price pressures.

• Clamors for transport fare adjustments and suspension of oil taxes are rising. Economic managers appear resolute in granting neither. Instead, Finance Secretary Carlos Dominguez has agreed to double the budget for targeted subsides to key sectors, i.e., public utility vehicles and agriculture, which is deemed a more equitable solution. The overall package is estimated to cost government P6.1 billion, a small sum compared with lawmakers’ proposal to suspend oil excises which over a six-month period would cost about P40 billion (0.2% of GDP).

Public finances, already strained by pandemic assistance and stimulus programs, are coming under increasing pressure, both on the revenue and expenditure sides. In addition to fuel subsidies, economic managers are also proposing to temporarily reduce tariffs and remove other trade barriers on imports of basic food and fuel items. Among the target commodities are rice, corn, pork, fish, chicken, sugar, wheat, and coal. These surgical measures, which are expected to be done through Executive Orders, will nonetheless translate into foregone revenues.

Further, the Treasury has been rejecting this month market bids for its primary auction of Treasury bills and bonds due to higher-than-expected bid rates. Although it could afford to do this after raising P458 billion of retail treasury bonds last month, Secretary Dominguez has acknowledged that the conflict in Ukraine will likely raise borrowing costs even more, apart from US monetary policy tightening.

The peso has shed close to P1 against the US dollar this month, closing at P52.24/$1 yesterday, with the BSP intervening to temper losses. This is reflective of market expectations of a worsening current account as the terms of trade deteriorate with rising world commodity prices. Last quarter, the BSP forecasted a current account deficit of 2.3% of GDP this year. At the time, Dubai crude oil still averaged below $80/bbl. As we noted in our last Forecast report, although the country has ample foreign reserves, markets under risk-off conditions may choose to focus on the direction of change, and any demand response to the higher prices notwithstanding, a widening current account deficit will increase exchange rate volatility.

The best-case scenario for the Philippines is one where the crisis will not, in the words of the finance secretary, “last very long.” Although the President seems quite supportive of his economic managers at this time, the team is expected to be replaced by mid-year (not including BSP Governor Diokno who has a fixed term till June 2023.) and it is very difficult to predict what a new administration confronted with rising inflation will do to preserve its popularity.


Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos Administrations. He is a trustee/director of the Foundation for Economic Freedom, Management Association of the Philippines, and FINEX Foundation.