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I want to pay more for a Spotify subscription

By Leonid Bershidsky, Bloomberg Opinion
SPOTIFY executives like to say they manage for growth rather than profitability. It was the growth, however, that disappointed investors in the latest earnings, released Thursday. As a user, I also worry that the music-streaming service’s ideas about growth are wrong.
Spotify was down more than 6% in early afternoon trading Thursday after the announcement that the company’s fourth-quarter revenue forecast missed analysts’ expectations: At the lower end, €1.35 billion ($1.54 billion), the guidance was even lower than the third-quarter number, €1.352 billion. That could be because when Spotify executives say “growth,” they mean the total user base first and revenue second. With the latest forecast, the average quarterly growth rate of the user base, including both subscribers and free, ad-supported users, is 28.6% year-on-year in 2018. The growth rate for revenue is just 25.3%.
At Goldman Sachs’s Communacopia conference in September, Spotify Chief Financial Officer Barry McCarthy, formerly of Netflix, was asked if it wasn’t time for Spotify to raise its subscription fee beyond the seemingly magic price point of 10 units of the local currency in its major markets, the US, the euro area and the UK. “I think it’s one of the really dumb questions I get,” McCarthy replied. He then launched into an explanation why, although music copyright owners want Spotify to raise prices, the company itself doesn’t, and investors shouldn’t, either:
“I think what you want is revenue to grow and you should want our market share to grow and in particular, our relative market share, okay? So, I know from Netflix that music like video, very price elastic. So, if you want to tip the marketplace, if you want to tip broadcast radio, make it a better service. Stop trying to make it worse, so that you can get people to convert to pay. Stop trying to raise the price. Think about what we did at Netflix. Held the price constant, then we added a little streaming, then we added more streaming, then we added a ton of streaming, we never changed the price. So, effectively, we lowered the price of the service by increasing the features and functionality and use occasions, amount of content and we invested a hell lot of money to do it. We took down gross margin in the process and grew revenue dramatically.”
Spotify isn’t Netflix, though. It doesn’t produce its own content; it provides access to 40 million songs compared with fewer than 6,000 titles on Netflix. People use it in different situations and for different reasons than Netflix. So it’s not necessarily the best idea to ape the streaming video provider’s strategy. And maybe a price hike wouldn’t be so dumb, both for investors and for Spotify as a two-sided marketplace, as the management describes it.
The service is going for market share because its current installed base amounts to just 13% of the 1.3 billion smartphones in use today. The thinking is that outcompeting the other streaming services is more important than anything else while there’s so much room for growth. But if the market is really two-sided, perhaps it makes more sense to outperform competitors by paying more to artists, and then users will go where they can find more of the music they want. In the process, Spotify investors might see profit.
Chief Executive Officer Daniel Ek always stresses that, as a software engineer, he’s more interested in improving the product than anything else. The current buzzword at Spotify is “discovery”: If the service helps users discover more music, the thinking goes, it’ll get a competitive edge. I can see Spotify is working hard to help me find new songs and new artists. I regret to say, however, that the algorithmic recommendations have been completely useless so far. I just don’t like what Spotify suggests on the basis of my listening habits; I find new music in other ways — by reading reviews, talking to friends, using Shazam on songs I hear on the radio or in bars, going to festivals.
As a Spotify user, I want as much diverse music as possible to be available so I can check live music listings and hear new artists mentioned in reviews. I also want all the latest albums to be accessible so a concert, which may cost hundreds of dollars to attend, doesn’t disappoint.
This means that instead of spending lots of money on largely useless “discovery” mechanisms — last year, Spotify’s research and development expenses reached €396 million, almost 10% of revenue — I want the company to give more money to copyright owners. And I’m willing to pay twice what I’m paying today to a streaming service that does its best to get every artist’s latest album immediately after its release. Unfortunately, Spotify is far from that ideal, and so are its competitors, which also seem to believe that maximizing catalog size and getting music faster aren’t the best ways to get more users.
I’m fine with Spotify keeping a little of that extra money to improve its profit margins, too. The lack of profit means I can lose my favorite streaming service at some point, or see its catalog dwindle. I don’t want that.
There’s room for price increases in major markets. In July, Glenn Peoples noted on the Music Business Worldwide blog that Spotify’s subscription prices largely align with the relative wealth of countries in which the company operates. But there are anomalies that are easy to see when one compares Spotify’s fees with the average wage.
There’s no real reason why US users should pay a smaller share of their income than Swedes or Mexicans, except for the pricing policies of Spotify’s competitors. But if the service becomes markedly better at providing access to new music and a deeper catalog, that reference point won’t matter as much.
There’s an easy way to experiment with this: Introduce a new pricing tier for users like me. It should offer instant access to all the new albums that would normally appear on Spotify weeks or months later, as well as the ability to request titles I cannot find but would like to get. It wouldn’t cost much, but it could open up new possibilities for both users and artists. Perhaps it would also open up a path to broader price increases, which would no longer seem “dumb” if there’s interest in a better-quality, more expensive service.

Japanese firm defers P40-B expansion project — PEZA

THE Philippine Economic Zone Authority (PEZA) said one of its Japan-based locators recently deferred an expansion project worth about P40 billion due to the uncertainties over the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill.
PEZA Director-General Charito B. Plaza said Philippine Manufacturing Company of Murata, Inc. had allocated P40 billion to add two new manufacturing facilities to its existing two buildings at the First Philippine Industrial Park in Tanauan, Batangas. The expansion project was expected to add 3,000 to 6,000 jobs.
“They’re holding it until they’ll know fate of TRAIN 2,” Ms. Plaza said in a text message on Monday.
“They’ll expand… once incentives remain the same or an attractive TRAIN 2 incentives will be passed,” she added.
The TRABAHO bill mainly seeks to reduce the corporate income tax rate gradually from the current rate of 30% to 20% by 2029, while repealing redundant incentives and limiting their enjoyment to a maximum of five years to industries identified in the Strategic Investments Priority Plan.
The House of Representatives approved the TRABAHO bill, or House Bill No. 8083 on final reading in September, while the Senate has suspended its deliberations pending clear data on the bill’s impact on jobs.
Murata is a global firm engaged in the design, manufacture and supply of advanced electronic materials, leading edge electronic components, and multi-functional, high-density modules.
Murata’s largest production site in Asia is in the Philippines, where it makes multilayer ceramic capacitors, among other electronic components.
The company has so far invested P7.7 billion in its facility in Tanauan City since it started manufacturing operations in 2012. It earns P5.65 billion in sales per year, according to the PEZA chief.
As of September 2018, the company employs 2,948 people. — Janina C. Lim

Gov’t raises P15 billion via T-bills

By Melissa Luz T. Lopez, Senior Reporter
THE GOVERNMENT raised P15 billion in fresh funds from Treasury bills (T-bill) yesterday after receiving substantial offers, which came with a modest pickup in yields.
The Bureau of the Treasury (BTr) made another full award at Monday’s T-bills auction as offers received reached P22.946 billion, well above the amount it wanted to raise, although lower than the P26.985 billion in tenders received a week ago.
Yields rose by less than 10 basis points (bp) on average across all tenors.
The government borrowed P4 billion worth of 91-day debt papers as market players were willing to lend as much as P4.67 billion. The auction fetched an average interest rate of 5.077%, up by 9.8 bps from the 4.979% yield fetched last week.
A full award was also made for the 182-day tenor, with the government accepting P5 billion as planned from total tenders worth P9.032 billion. Its average yield also climbed to 6.233%, some 7.4 bps higher than the 6.159% logged the previous auction.
The 364-day T-bills followed this trend as investors put forward P9.244 billion bids, allowing the Treasury to raise the full P6-billion program with an average return of 6.506%. Yields went up by 9.6 bps compared to the 6.41% rate seen during the Oct. 29 exercise.
At the secondary market yesterday, the 91-day, 182-day and 364-day T-bills were quoted at 5.154%, 5.974% and 6.574%, respectively, based on the PHP Bloomberg Valuation Service Reference Rates.
National Treasurer Rosalia V. De Leon said the sustained rise in Treasury yields reflect market concerns ahead of the release of October inflation data, as well as an expected fresh round of tightening from the US Federal Reserve in December.
“The bids continue to increase but at least it’s already moderated,” Ms. De Leon told reporters after the auction. “I guess there is still cautiousness coming from the survey of inflation — the median continues to be…actually it plateaued, but on our end I think that inflation will trend a little bit lower than the September print.”
“There are those two events that market continues to watch out for. They are provisioning for some buffers to be able to in the bids that they submitted [yesterday], but definitely not as much as they have been doing in the past,” she added.
A BusinessWorld poll among 15 economists yielded a 6.7% median inflation forecast for October, which if realized would match the nine-year high logged in September. This compares to the 6.5% estimate given by the Finance department and falls within the 6.2-7% range given by the Bangko Sentral ng Pilipinas.
The government will release official inflation data today. Inflation averaged 5% as of September versus a 2-4% target band.
Sought for comment, a bond trader also noted that T-bill yields also mirrored rising rates for US Treasuries. The trader pointed out that appetite is stronger for the one-year papers as players seek higher profits.
Meanwhile, Ms. De Leon said the BTr “continues to be watchful” about the developments in the global market as they time their issuance of a fresh batch of dollar bonds. She noted that they are looking to issue papers due anywhere between 10 to 25 years, to be used for general funding for 2018 and possibly to pre-fund requirements for next year.

Grab launches premium tricycle service

GRAB Philippines (MyTaxi.PH, Inc) partnered with distributor AutoItalia Philippines Enterprises, Inc. to offer the GrabTrike Premium service using the three-wheeled Piaggio Ape.
At the launch event on Monday, Brian P. Cu, Grab Philippines country manager, said they will work with local government units (LGUs) to adopt the use of GrabTrike Premium either by increasing supply of tricycle franchises or replacing older tricycles with the Piaggio Ape units. Tricycle franchises are issued by LGUs.
Two thousand Piaggio Ape City F1 units will be offered to LGUs for the GrabTrike Premium service.
The municipality of Binalonan, Pangasinan was the first LGU to adopt the GrabTrike Premium service, with the deployment of 24 Piaggio Ape vehicles last month.
The Piaggio Ape is Euro IV compliant, and offers safe short-distance commute for passengers. The Piaggio Ape also has a maximum load capacity of 300 kilograms, and is powered by either gas or diesel engine. A liter of gas can go up to 38 kilometers.
“The tricycles will fit in the short distance commute, where you would be commuting from the small alleyways or villages that are hard get to with the four-wheel vehicles. The three-wheeler will be able to service those areas in a much more efficient and budget-friendly manner,” Mr. Cu said.
On the fare scheme of GrabTrike, Mr. Cu said that they will follow the LGU regulations, but noted there will be a P10 booking fee which goes to the driver. — V.M.P.Galang

Fan meet set

MANILA FANS will get the chance to meet actor and model Lee Jong Suk during the “2018 Lee Jong Suk Fanmeeting Tour Crank Up in Manila,” presented by PULP Live World, on Nov. 18 at the Araneta Coliseum in Cubao, Q.C. In 2005, Jong Suk became the youngest male model ever at the age of 15 for the Seoul Collection program at the Seoul Fashion Week and he went on to have a modeling career. Jong Suk officially debuted as an actor in the 2010 South Korean TV series Prosecutor Princess and appeared in the horror movie Ghost. He went on to have stints at the hit South Korean TV series Secret Garden and School 2013, which earned him his first acting award. This was followed by an award in the 2013 Korea Drama Awards for his role in the series I Can Hear Your Voice. He has since appeared in TV series and movies including No Breathing, Doctor Stranger, Hot Young Blood, Pinocchio, W, and While You Were Sleeping. The fan meeting will start at 6 p.m. Tickets are available at TicketNet (www.ticketworld.com.ph) with prices ranging from P2,500 to P10,000.

Filipino hotel chain expands

THE ORIENTAL Hotels and Resorts is expanding in several key tourist destinations in the Philippines, by acquiring old buildings and transforming them into hotels. In a statement, Rebecca Marie Abigail Lee, president and chief executive officer of the Oriental group, said that the company is expanding in top destinations such as Baguio City, Alaminos City, Banaue, and Sorsogon. “The thrust of Oriental Hotels and Resorts is to preserve heritage, evident in the type of buildings we have been acquiring for renovation,” Ms. Lee said. She said the company is also looking to restore Diplomat Hotel in Baguio City, and is set to lease the Banaue Hotel, which is owned by the Tourism Infrastructure and Enterprise Zone Authority. This year, the Oriental group is set to open The Oriental Albay in Legazpi City. Next year, the company will open the Alaminos City hotel near Hundred Islands National Park, Pangasinan. It is also planning to establish a low-density luxury resort in Tikling Island in Matnog, Sorsogon. The Oriental group, which is part of Sorsogon-based LKY Group of Companies, opened its first project in Legazpi City, Albay in 2011. Its other properties include Oriental Leyte in Palo, Oriental Luxury Suites in Tagaytay City, Oriental Hotel Bataan in Mariveles, and Swagman Hotel in Ermita, Manila. — V.M.P. Galang

NTC asks court to junk Now Telecom’s petition

THE National Telecommunications Commission (NTC) has asked the Manila Regional Trial Court (RTC) Branch 42 to deny Now Telecom Company, Inc.’s petition for preliminary injunction on some provisions of the terms of reference (ToR) for the selection of the third major player in the telecommunications industry.
In a 32-page memorandum submitted on Oct. 31, the NTC, through the Office of the Solicitor General, said Now Telecom was guilty of forum shopping as it had also asked the NTC’s Selection Committee to clarify provisions of Memorandum Circular (MC) No. 09-09-2018 related to its complaint.
MC No. 09-09-2018 sets rules and regulations in awarding the third major telecommunications service provider.
The NTC said Now Telecom’s complaint is “fatally defective” because it had failed to avail of all administrative processes available.
It also noted Now Telecom’s petition for preliminary injunction should “mooted” because it wants the third telco selection process to proceed according to the schedule.
“Moreover, as correctly observed by the Honorable Court, the intended consignation is incongruous to plaintiff Now Telecom’s manifestation that it wants the bidding process to proceed. In fact, the Honorable Court even retorted that the application for the issuance of a writ of preliminary injunction has been mooted by such express representations,” the NTC said.
The Commission also noted the issuance of writ of preliminary injunction to halt the selection process for the new telco will violate Republic Act No. 8975, where Section 3 stated that only the Supreme Court can issue any temporary restraining order or preliminary injunction over bidding or awarding of government’s infrastructure project.
The NTC said Now Telecom “miserably failed” to prove any of the requisites for a writ of preliminary injunction which are: the existence of a clear right to be protected; the right is threatened by the act assailed; the invasion of the right is material and substantial; and there is urgency for the issuance of the writ.
Furthermore, the NTC claimed that the petition was filed by telecommunications company after it said that it is not qualified to participate in the bidding process.
The NTC noted Now Corp.’s complaint is meant to “derail” the selection process for the new major player because the issues in the complaint were not raised with the NTC despite opportunities to do so during the rulemaking process.
Now Telecom filed the complaint on Oct. 9 to block some of the selection terms. It challenged the terms of reference for selection requiring a P700 million “participation security,” a P14 to P24 billion performance security, and a P10 million non-refundable appeal fee.
Now Telecom’s earlier petition for temporary restraining order (TRO) was denied by Makati RTC Branch 42 for failure to meet the standards for the issuance of TRO.
The deadline for submission of bids for the third telco player selection is on Nov. 7. — V.M.Villegas

Security Bank net profit climbs 5% in 3rd quarter

SECURITY BANK Corp. booked a higher net income in the third quarter.

SECURITY BANK Corp.’s net income grew in the third quarter, reversing the decline it saw in the previous three months, on the back of a surge in consumer loans and deposits.
Security Bank booked a P2.25-billion net income in the July-September period, up 5% from the same quarter last year and 15% higher than its second-quarter profit, it said in a regulatory filing on Monday.
“A key driver for the earnings growth was the continued expansion of the bank’s consumer loans and low-cost deposits. Consumer loans grew 48% year-on-year while low-cost deposits increased 18%,” the statement read.
The bank’s total loans reached P401 billion in the third quarter, 8% higher than the P370 billion recorded in the same period in 2017. It was however slower than the 38% year-on-year loan growth logged in 2017.
The lender said the growth of its wholesale loans slowed to 2% in the third quarter from 36% last year, but would have been 9% if its short-term corporate bridge loan from July to September last year was excluded — which, in turn, could have boosted the bank’s total loan growth to 15%.
Consumer loans accounted for 19% of total loans in the quarter, larger than the 14% share in the same period last year.
Total deposits, on the other hand, stood at P468 billion, up 9% from P431 billion in the third quarter last year. High-cost deposits also grew 3%.
Net interest income from customer loans and deposits for the quarter also grew 23% year-on-year.
Its net interest spread reached 4.43% in the third quarter, 11 basis points (bp) greater than last year, and 16 bps higher than the previous quarter.
The bank’s service charges, fees and commissions went up 38% due to bancassurance, credit card, deposit charges, and loan fees.
Security Bank’s operating expenses for the third quarter excluding provisions for credit and impairment losses grew 13% from last year.
Provisions for income tax, meanwhile, surged 118% “due to growth in income from regular banking unit,” the lender said.
Its net interest margin stood at 3.3% in the third quarter, up seven basis points from a year ago and 11 bps higher from the previous quarter.
In the first nine months of the year, Security Bank recorded a P6.5-billion net income, 11% lower than the year-ago period “primarily due to the decrease in trading gains by 57% or P627 million and the increase in provision for income tax by 73% or P769 million.”
Total net interest income for the January-September period however grew by 7% year-on-year to P15.3 billion.
The bank’s net interest income from loans and deposits also rose 30% to P11.3 billion. Interest income from financial investments, on the other hand, slid 13% “due to a lower level of securities portfolio which decreased by 18% year-on-year.”
Operating expenses in the nine-month period, excluding provisions for credit and impairment losses, likewise grew 13% from last year, putting its cost-to-income ratio at 54%.
The listed lender said its asset quality remained “healthy” as it logged a gross non-performing loan (NPL) ratio of 0.7%, a tad higher than the 0.6% booked as of June. Provisions for credit losses stood at P227 million for the January-September period while its NPL reserve cover was at 120%.
Security Bank’s capital adequacy ratio stood at 18.6% at end-September, steady from last year’s 18.5%, while its common equity Tier 1 ratio in the period was at 16.3%, steady from 16.2% last year.
Return on shareholders’ equity was 8.1%, with the shareholders’ capital growing 6% year-on-year to P109 billion.
The bank’s total assets stood at P733 billion as of end-September.
Security Bank shares closed at P146.10 apiece on Monday, climbing P1.70 or 1.18% from its previous finish. — Elijah Joseph C. Tubayan

How PSEi member stocks performed — November 5, 2018

Here’s a quick glance at how PSEi stocks fared on Monday, November 5, 2018.

 
Philippine Stock Exchange’s most active stocks by value turnover — November 5, 2018

PHL to pursue amendments to open economy

THE GOVERNMENT will immediately pursue amendments to current laws to further open them up to foreign participation after “marginal improvements” were realized in the latest Foreign Investment Negative List (FINL).
Socioeconomic Planning Secretary Ernesto M. Pernia said that the 11th FINL — the Duterte administration’s first — contained only “marginal improvements” and “baby steps” in further increasing foreign ownership in Philippine industries.
“We want to be sufficiently competitive with our ASEAN (Association of Southeast Asian Nations) neighbors. For that to happen there have to be some legislation or changes in some laws, amendments to our laws so more areas and activities can be opened to foreign participation,” Mr. Pernia said in a briefing on Monday.
“I wanted to encourage our legislators. The President also wants to encourage our legislators to liberalize some more so we don’t have to wait for the next round of revisions to this 11th FINL. If there is political will to change our investment milieu to make it more attractive… The word is always as soon as possible,” he added.
Mr. Pernia said that the government will no longer wait for the required two-year period before the next FINL to ease more foreign ownership restrictions, and has put in motion moves to amend special laws.
He cited pending bills in Congress such as the House-approved Bill No. 5828, or amendments to the Public Service Act, seeking to redefine public utilities and take out telecommunications from the industries restricted to foreign ownership; and several bills in both chambers of Congress lowering the paid-up capital threshold for the retail trade to $200,000 from the current $2.5 million under Republic Act No. 8762, or the Retail Trade Liberalization Act of 2000.
“That is the desire of the economic managers and that is what’s needed,” according to Mr. Pernia, a Cabinet-level official who also heads the National Economic and Development Authority (NEDA).
President Rodrigo R. Duterte signed Executive Order No. 65 on Oct. 29 promulgating the 11th FINL, about three and a half years after the previous negative list — which was largely unchanged from the preceding one.
Mr. Duterte’s FINL now allows full foreign ownership in Internet businesses, a category that has been excluded from the category of mass media, which otherwise remains completely barred to foreign ownership and participation; teaching at the higher education levels in non-professional subjects; training centers engaged in short-term high-level skills development that do not form part of the formal education system; insurance adjustment companies, lending companies, financing companies and investment houses; and wellness centers.
It also increased the foreign ownership cap to 40% on contracts for construction and repair of locally funded public works (except those that are foreign funded or assisted and required to undergo international competitive auction), from 25% previously; and private radio communication networks, from 20% previously.
Foreign business chambers have welcomed the more liberal FINL, but said that more needs to be done.
Mr. Pernia said that the FINL’s effects on foreign direct investment may start to be felt next year.
“We expect the total for the year to be greater than that of last year and this is even without the liberalization yet. It will take time for the easing of restrictions to take hold and be absorbed by the foreign investor community,” he said.
“I think next year we should see some fruition (in terms of) foreign investor interest in coming here to invest,” added Mr. Pernia.
FDI hit an all-time high of $10 billion in 2017. In the seven months to July, FDI totaled $6.67 billion, up 52.1% from a year earlier. — Elijah Joseph C. Tubayan

DoF disputes slip in WB rankings by citing credit-driven growth

RISING CREDIT was behind a recent increase in investment, the Department of Finance (DoF) said, by way of disputing the Philippines’ decline in ranking on the World Bank’s ease of doing business list due to weak scores in access to credit.
“Investment growth was made possible by the rapid growth in credit provided by the financial sector,” the DoF said in an economic bulletin on Monday.
Domestic lending grew 15% year-on-year to P11.35 billion at the end of August, equivalent to 64.8% of gross domestic product GDP for the eight months to August.
The DoF noted that credit growth averaged 13.7% over the past six years, and accounted for 56.1% of the economy.
The Finance and Trade departments have challenged the results of the World Bank Doing Business 2019 report, saying it was “grossly inaccurate and understated” and claimed that access to credit as a driver of growth was not properly documented, leading to the decline in the Philippines’ overall ranking to 124th, 11 notches down from the 2018 report.
Officials said the World Bank did not access data from the Philippines’ largest credit information database, thereby hurting the country’s score.
“Despite the rapid growth of credit, the World Bank Ease of Doing Business Survey 2019 wrongly gave the Philippines lower ratings in its Getting Credit Indicator compared to its 2018 survey. The reason is the failure of the World Bank’s survey team to gather data from three credit rating bureaus which would have raised the population coverage of credit information of the country to a level above the 5% benchmark. This led to the Philippines dropping in the rankings,” according to the economic bulletin.
The World Bank has yet to respond to queries at deadline time.
“Compared with neighboring Asian countries, the Philippines has among the highest real growth in credit provided by the financial sector,” the DoF said.
It said the Philippines posted the second-highest rate of credit growth of 11.4% in 2017, behind the 12.6% of Singapore — which was ranked the world’s second most competitive economy.
Vietnam posted 8.1% credit growth, while China came in at 6.9%.
From 2012 to 2017, the Philippines’ average credit growth was the fourth-highest at 20.2%, compared with China at 30.7% Vietnam at 23.3% and Singapore at 22.5%.
“Credit growth is sustainable; it is supported by a similarly rapid growth in bank deposits,” the DoF said.
Bank deposits rose 13% to P12.45 billion in the eight months to August. It averaged 12.9% annually since 2011, and accounted for 75.3% of GDP as of August 2018, up from 55.4% in 2011.
Despite rapid credit growth, the loan-deposit ratio remained “manageable,” at 75.3% according to the DoF. — Elijah Joseph C. Tubayan

Gov’t may need to cut spending to tame inflation — ANZ

THE government should consider reducing its planned spending as another route to temper inflation, ANZ Research said, as softer domestic demand could ease price pressures.
In a special report published yesterday, ANZ Research said the government can pursue a different approach to reduce consumer price growth apart from addressing supply concerns for food and fuel.
“A tighter fiscal stance via reduced spending would go a long way in durably lowering inflation and resolving other imbalances, including a wider current account deficit and sustained high credit growth,” ANZ chief economist Sanjay Mathur said in the report.
Inflation has averaged 5% in the nine months to September, well above the original 2-4% target range. It touched a nine-year peak of 6.7% in September, which ANZ said was roughly 65% driven by food prices.
Mr. Mathur said the government’s decision to suspend the second tranche of fuel excise taxes for 2019 plus the proposed rice tariffication law – which will remove import quotas to bring in cheap rice from overseas – are expected to temper inflation in 2019.
“However, whether these developments will be sufficient to durably lower inflation is unclear at this juncture,” ANZ added.
“The role of domestic demand is evident from the broadening out of inflation from goods to services in recent months, presumably via higher wages.”
A “more neutral” fiscal stance should bode well for the country, with ANZ noting that a reduction in government expenditure worth 0.2% of GDP is “unlikely to have a significant impact” on overall growth prospects.
“In our view, the expansionary fiscal policy is diminishing the impact of monetary tightening, which in magnitude mirrors that in Indonesia,” ANZ said. “Therefore the risk is that sustained fiscal spending eventually over-burdens monetary policy, forcing a more aggressive response than needed.”
The International Monetary Fund concurs, saying in September that the Philippines should target a more modest budget deficit by shaving off allocations for “non-priority” spending and in the process reduce risks of overheating.
The IMF said the Philippines should keep the fiscal deficit at 2.4% of gross domestic product (GDP), unchanged from the 2017 level and lower than the government’s 3% ceiling for 2018. The budget deficit was 2.3% of GDP during the first half.
The government has been pushing for a wider budget deficit to accommodate increased spending on infrastructure, with big-ticket items under the “Build, Build, Build” program in mind.
Budget Secretary Benjamin E. Diokno said the programmed deficit ceiling remains “reasonable,” noting that cutting spending targets mid-year could even do more harm as agencies may become reluctant to disburse funds.
Apart from trimming state spending, ANZ also flagged the need to plug the current account deficit and temper credit growth, which comes at a time of heavy importations as well as rising interest rates. — Melissa Luz T. Lopez

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