OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
Tharman Shanmugaratnam, senior minister and chairman of the Monetary Authority of Singapore (MAS), is not one who would simply brush off important events strategic to the global economy and Singapore. Referring to the recent confluence of the Ukraine invasion, macroeconomic risks, climate change, pandemic insecurity, and disconnect in growth and wellbeing, he could not have been more correct in his analysis that the global economy is facing a “perfect long storm.”
He is not hopelessly pessimistic. He maintains the future remains viable when we invest in innovation and structural transformation. It’s just that the risks are new, and they are multi-dimensional. To be able to see the big picture and the risks it entails adds value to global understanding of what challenges us today.
But there is less value from those assessments that since Ukraine is some 8,980 kilometers away from us, and that we have limited economic link with that country and Russia, the spillovers could be minimal.
Perhaps this is another case of disaster myopia.
The Department of Energy had already expressed concern about the scale of the pump price adjustments last Tuesday. With global oil prices holding on to over $110 per barrel, oil companies were summoned to ensure no earth-shaking hikes were implemented.
The Department of Finance is eyeing a ₱20 billion fuel subsidy to public transport as well as farmers and fishermen to minimize the impact on transport cost and food prices. Excess collections from VAT and excise taxes on oil can be funneled to fund the subsidy which to us is a superior solution than scrapping the excise tax on oil. Everybody shoulders the additional burden, but those who are vulnerable receive a subsidy.
Labor groups have also started to demand Congress to legislate a wage hike. Partido Manggagawa (PM) is calling for a ₱100 increase in the daily minimum wage nationwide. Recognizing that this proposed adjustment is barely enough to cover actual subsistence, the PM recommends a holistic approach to include possible cash aid, price discounts and emergency job creation. Linking the inflationary situation to hunger and malnutrition, the Trade Union Congress of the Philippines is demanding an impossible ₱470 daily wage hike.
With dimmer growth prospects among Asian economies, one immediate impact is the plunge of the equities markets across the region. In the Philippines, this represents a six-month low last Monday, with losers dominating the market 190 to 34 gainers. This is a mirror image of what is happening in the US stocks that have been showing losses for five straight weeks.
The BSP has actually begun to effectively tighten monetary conditions by selling $2.5 billion in the spot market in January and February 2022 to ease FX pressure, and mopping up its peso proceeds. So far, the peso has dropped to a 30-month low and broke through the ₱52 to a dollar level. This could be inflationary.
Definitely these external shocks could end up inflating the power rates charged by Meralco. It is not far fetched for consumer prices to further trend up.
But are we seeing just flash in the pan?
To Tharman, the storm could also be long. “These are structural shifts. They’re not cyclical or random shocks,” The operative word is long; the storm could be persistent.
From a national standpoint, what is concerning is the second risk of macroeconomic imbalance. It is possible to have low growth and high inflation.
Such a result requires more than the central bank’s monetary adjustments. It would require a whole of government response with whole of society support because the driver of higher and more durable inflation is oil plus food, industrial metals, fertilizers, and other commodities.
In turn, high inflation reduces real income and domestic consumption, and in the process, undermines growth. In the Philippines, private consumption accounts for more than 70 percent of real output. A prolonged war in Eastern Europe could de-anchor inflation expectations and magnify its impact on growth and inflation.
For instance, Capital Economics tapered its 2022 GDP forecast for the Philippines from 8 percent to only 7.2 percent, together with eight other Asian economies, except for Indonesia, Malaysia and Singapore. This forecast is based on the stability of consumption due to public subsidies on public transport, or outright income transfer. But the enormous oil price adjustments could certainly make some consumers more level headed before embarking on consumption activities.
On the other hand, ING Bank N.V. is more pessimistic with its growth forecast of within the five percent range due to the war damage on recovery prospects. While denying the possibility of stagflation, the bank maintained the seven percent to nine percent target is at best aspirational.
Ironically, the usually conservative credit rating agencies are now projecting output performance ranging from 6.9 percent for Fitch Ratings to 7.4 percent for S&P, yet no one is prepared to upgrade the country’s investment rating to a higher level.
By all means, we may deny the perfect long storm is coming but we should be prepared to deploy enough buffers to manage it once it finally comes around.