The Philippines is on the right path, if the government can continue to balance between strong growth amid international uncertainty, while pushing reforms that raise living standards. Inflation and foreign investment tell the story.
According to the just-released report by the International Monetary Fund (IMF), Philippine real GDP grew by 6.7% in 2017 and by 6.3% in the first half of 2018 on a year-to-year basis, led by strong public investment.
The current challenge is inflation, which rose to 6.4% in August 2018. That’s an average of 4.8% percent year to date, which is above the inflation target band of 2−4%.
The medium-term challenge is the infrastructure program, particularly foreign investment which supports investment growth – and which has taken off dramatically in the Duterte era.
The forces behind inflation
Self-induced policy mistakes play a role in higher-than-expected inflation. The IMF attributes more than half of Philippine inflation to price increases in food, beverages and tobacco, particularly rice.
The National Food Authority administrator resigned a month ago after failures to purchase enough rice grains from local farms to stave off the need to import. The IMF supports the Philippine policymakers’ plan to replace the rice import quota system with one based on tariffs, while stressing the need to support small farmers affected by the reform.
As monetary policy has been accommodative, inflation has been driven by adjustments in excise taxes, rising oil prices, the weaker peso, and above-trend growth. That’s why Bangko Sentral raised its benchmark interest by half a percentage point last week. Inflation remains the top concern of Filipinos, as evidenced by the recent Pulse Asia survey.
The effort to curb inflation must remain elevated, however, because inflation may remain a challenge in the foreseeable future. First, while real GDP growth is projected at almost 7% over the medium term, inflation has also been projected at above the 4% upper target bound in 2018 and around 3−4% during 2019–20. Recent monthly figures exceeded the target bound by margin that’s too wide. Second, in normal times, mild discrepancies could be tolerated. But these are no normal times, as evidenced by the Fed’s rate hikes, strengthening dollar and escalating trade wars.
That’s also why Philippines is not alone in this battle. In my last column, I showed how the U.S. rate hikes and the dollar have penalized emerging Asian currencies causing significant damage in Asia’s most rapidly-growing economies, including India, Indonesia and the Philippines.
That’s why Indonesia’s central bank raised its policy rate to 5.75% last Thursday. The Bangko Sentral has raised rates by 150 basis points since May, which is its most aggressive tightening since 2000. Indonesia’s rate hikes this year also amount to 1.50 percentage points. India’s central bank has already raised its rate to 6.5% and is expected to hike ratesates for the third time in October.
About the Author
Dr. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/