More sleepless nights in the Palace

THIS piece is based on what we wrote yesterday on the Philippines’ headline inflation for September in our capacity as the new GlobalSource Partner for the Philippines. Our friend and colleague at the Foundation for Economic Reforms, Romy Bernardo, asked us to assume this role as he swore in as a member of the Bangko Sentral ng Pilipinas (BSP) Monetary Board. For whatever we could contribute to a greater understanding of the Philippine economy and politics, outside our two weekly columns, Romy got it for a bottle of mineral water. We hope we can convince our potential foreign investors that our public policy and political leadership are stable, and that economic management in this country is much more profound and informed than what they see. Needless to say, it is not our commentaries, or those of others, that would bring in new foreign money, but it is the actual demonstration of good and competent governance by those in authority.

An excellent case in point is inflation management.

Yesterday, the Philippine Statistics Authority (PSA) announced a most disconcerting statistic, and that is that the Philippine headline inflation for September was 6.1%. What this number is telling us is that, one, it is several basis points higher than the August inflation of 5.3%; two, it kept the year-to-date average inflation at 6.6% which is way above the 2-4% inflation target of the National Government (NG) and the latest BSP forecast of 5.8%; and, three, if this trend is sustained, the slowdown in real GDP to 4.3% that we witnessed in the 2nd quarter is likely to continue because inflation depresses domestic consumption and discourages investment.

Such momentum seems to not be letting up. The month-on-month inflation based on the PSA report is 1.1% which, when translated to annual growth, represents 13% inflation. To be sure, the breakdown of the inflation dynamics is a mirror image of the failure of governance as far as controlling inflation is concerned.

The main driver of September inflation’s further advance was, of course, the heavily weighted category of food and non-alcoholic beverages which moved by near double digits at 9.7%. This group accounts for 38.34% of the consumer basket. Of the 6.1% annual increase in domestic inflation in September, it accounted for 61% or 3.7 percentage points (ppts), together with restaurants and accommodation services with 11.4% share or 0.7 ppt, and, finally, housing, water, electricity, gas and other fuels, with an 8.6% share or 0.5 ppt.

Of the food items, the major driver was rice inflation, rising by 17.9% in September against August’s only 8.7%, reflecting the serious supply problem and the failure to import a sufficient volume of rice before the harvest season. More fundamentally, the government has also failed to address the root problem of land use and agricultural productivity. Running after hoarding and profiteering involving this staple commodity would have limited impact; the rice crisis is not an issue of law enforcement. It’s a question of sound judgment and administration. Price control and the rejection of the proposal to temporarily reduce the rice tariff did not help any. Rice became inaccessible to many ordinary Filipinos who must be feeling left behind by this time.

The problem with the other inflation drivers can also be traced to weak public policy. Housing prices have increased because supply could not cope with the rising demand of a rising population. Water remains a paradox in the Philippines: we don’t have water when we need it, but there is too much of it when we don’t need it. Good public policy could have caused the construction of more dams and water impounding facilities, and irrigation. We wasted the Malampaya gas field and all the cash resources associated with it.

How is the Filipino civil society taking it?

The Pulse Asia Survey results of Sept. 10-14 said it all.

President Ferdinand Marcos, Jr. suffered a major decline in his approval rating as consumer prices in the Philippines weakened his base support. Some 65% of the 1,200 respondents approved of his performance, but this was down 15 ppts from 80% in an earlier poll in June. After all, didn’t he promise to reduce the price of rice to P20 per kilo?

The Filipino people are simply demanding a receipt.

And when they rate, they rate wholesale. The decline in popular support was not limited to the President. The Vice-President also suffered an erosion of public trust. Likewise, all the heads of key government agencies did not see the people trusting them more.

And this trend may not reverse very soon. Inflation may be here to stay, at least until the end of the year through early next year. Upside risks are just too great, and their likelihood of happening may not exactly be trivial.

With this latest inflation outturn, and the BSP’s elevated inflation forecasts for this year and the next, we don’t see monetary policy shifting out of a pause. The BSP itself admitted during the last press conference on monetary policy in September that upside risks continue to be dominant. These risks include higher prices of fuel and, consequently, transport and food prices. The prolonged dry spell of El Niño could exacerbate the unfavorable price condition. We have also seen that many regional productivity and wage boards have already approved the additional wage increase petitions. The secondary effects are nearly in full swing.

We believe that if all those risks materialize, it is possible even the 2024 within-target forecast of 3.5% could breach the 2-4% inflation target. What we see happening is that in the next meeting, if the October inflation sustains this uptrend, the BSP must then be more than prepped up to adjust by another 25 to 50 basis points, especially if core inflation blips up again.

Clearly, the Pulse Asia Survey and the latest inflation footprint make a strong case against the poor management of inflation in the Philippines.

On inflation expectations, analysts and forecasters appear broadly consistent with the BSP’s own forecasts for this year, but the two-month inflation trend might help de-anchor them. Most of them were quite on the low side of the BSP’s forecast range. While monetary policy could inspire better prospects, the non-monetary interventions are failing miserably.

Yes, headline inflation remains supply driven — even as core inflation sustains its elevated readings — but policy makers should try to avoid repeating the mistake of last year. Supply shocks should not be immediately dismissed as transitory. As it turned out, they could be more persistent with large, second-round effects.

After all, we believe that even with the economic scarring during the pandemic, the Philippine economy has somewhat recovered quite reasonably quick. The output gap must be generally neutral with the phase down of economic momentum. This was never lost on both private sector analysts and international financial institutions that all downgraded the growth prospects for this year and the next.

The point is that the economy continues to grow, and in that respect, monetary policy continues to enjoy some space to sustain its battle against inflation and the National Government to do its share on the supply side.

We recall that last year, the President expressed his concern over rising prices, that they were giving him sleepless nights. Since then, prices have remained elevated. But lest anyone forget, higher inflation does not only produce sleepless nights in the Palace, but could also reduce economic growth. And erode public trust and confidence.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.