Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the Russian-Ukraine war could lower gross domestic product (GDP) growth by 0.1 percentage point (ppt) and raise the inflation rate to as much as 4.7 percent this year, breaking the two-four percent target.
The war between the two biggest Eastern European countries will have an indirect impact on the Philippines through higher oil, energy and food prices.
Citing Oxford Economics, Diokno said the war “would reduce domestic GDP growth by 0.1 ppt each in 2022 and 2023 from the baseline projections - meaning 6.5 percent instead of 6.6 percent in 2022 and 6.4 percent instead of 6.5 percent in 2023.”
The 6.6 percent and 6.5 percent GDP numbers are the assumed BSP growth predictions in forecasting the inflation path, currently pegged at 3.7 percent for this year and 3.3 percent in 2023.
Diokno said the Russia-Ukraine war would affect the Philippines through higher oil prices with global crude already exceeding the BSP’s threshold assumption of $95 per barrel.
“Based on the BSP's oil price simulation, inflation could settle above the target range of two-four percent only if crude oil prices average higher than $95 per barrel in 2022 and 2023. Below $95 per barrel, inflation would settle within the target range. But the oil price scenarios considered only the direct effects and do not incorporate any potential second-round effects on transport fares, food prices, and wages among others,” he said in a Viber message to reporters.
The highest Dubai crude oil on record was $141.33 per barrel on July 15, 2008. “Should the worst-case scenario of oil prices reaching $120-140 per barrel occur this year, inflation would be 0.7 -1.0 percentage point above baseline in 2022. In brief, inflation would average between 4.4 - 4.7 percent under the worst-case scenario,” said Diokno.
As for the war’s impact on the foreign exchange rate, the BSP chief said this will be muted, as well as its impact on trade and investments since both Russia and Ukraine are not major global traders. Russia's export and import trade only accounted for 1.9 percent and 1.5 percent in 2020, while Ukraine's share was 0.3 percent for both export and import in the same year.
“The BSP is seeing muted impact of the Russia-Ukraine war on the domestic currency. In the peso-dollar exchange rate, the peso continued to trade sideways, with slight depreciation pressure,” said Diokno. “The BSP views such development as a result of the impact of the geopolitical tensions on oil prices, which likewise affected the peso. But this is in line with the behavior of other currencies in the region which also depreciated against the US dollar,” he added.
Diokno also stressed that the Philippines has more than adequate level of foreign exchange reserves “to temper any volatility in the exchange rate market.” The gross reserves stood at $108 billion.
The Russian-Ukraine war, which began on Feb. 24, has taken heavy toll in terms of lives lost, human suffering, as well as huge damage to Ukraine's physical infrastructure, said Diokno.
“The situation remains quite fluid and no one can predict with certainty what the final outcome will be. (And) yet, policymakers have to predict, no matter how clouded with extraordinary uncertainty, how the war in Ukraine would affect their respective jurisdiction. For the Philippines, the impact will be indirectly through the war's impact on the global economy and on prices of commodities, such as oil and energy and food,” he said.
Capital Economics has estimated a worst-case scenario of oil prices rising to $120-$140 per barrel while Oxford Economics said a “full invasion scenario” would reduce global growth by 0.2 ppt this year and by 0.1 ppt in 2023.
Last March 4, Diokno said they are closely monitoring emerging second-round effects from supply- side pressures or any shifts in inflationary expectations.
The Monetary Board, BSP’s policy-making body, has kept a low benchmark rate at two percent since November 2020. The market consensus is that BSP may raise the policy rate by at least 25 basis points (bps) this year and a bigger 50 bps rate hike in 2023. The next monetary policy meeting in on March 24.
Diokno has said that inflation will again break the two-four percent target if global crude prices which has risen past $100 per barrel, will stay above $95 per barrel on a sustained basis. As of February, the country’s inflation is at three percent.
Based on the BSP’s February Monetary Policy Report, which replaced the quarterly inflation report, impact scenarios showed that if Dubai crude oil price hit $110 per barrel in a sustained manner beginning in the first quarter this year, inflation will climb to 4.2 percent and up to 4.5 percent in 2023, breaching the two-four percent target in the next two years. This has since been updated to a much higher possible increase of 4.7 percent if the Russia-Ukraine war will be prolonged.