The next Philippine president will have to focus on the country’s rising inflation and the central bank’s responses to control high prices of goods, which is to increase interest rates for the first time since November 2020, according to a Moody’s Analytics commentary.
“The incoming president will need to treat inflation as a top economic priority (since) inflation management has become a key policy point. Since early 2022, household discretionary income has come under threat from higher prices for staples,” said Moody’s on Monday, May 9, which is national election day for the Philippines. The commentary was dated May 6 and released on Monday.
Following Bangko Sentral ng Pilipinas’ (BSP) pronouncements of a possible June 24 Monetary Board adjustment of the policy rate, Moody’s said if the government reports an above six percent gross domestic product (GDP) growth for the first quarter, then the “odds of a rate hike in June will rise to 60 percent.”
Moody’s added that the BSP may have to again perform some “heavy lifting” to be able to “soothe inflation.”
For most local analysts such as Security Bank Corp.’s Robert Dan Roces, the GDP growth prospects for the first quarter is healthy due to the easing of mobility measures. Roces expects the government to report a GDP growth of seven percent on Thursday, May 12. He noted though that the downside risks in the quarters ahead “remain to be the pandemic as well as elevated inflation (but) we do not anticipate a regression towards a negative path for growth, but rather slower than the potential on the back of inflation's effect to domestic consumption.”
For the month of April, the Philippines’ inflation rate has surged to 4.9 percent from four percent in March, and three percent in February and January. The 4.9 percent April rate was the highest reading since January 2019, on account of the impact of the Russia-Ukraine war on the prices of oil and non-oil commodities. The BSP expects inflation to exceed the two percent to four percent target this year. The latest forecast is an average 4.3 percent for 2022.
Moody’s said that whoever wins between the top two presidential candidates, former senator Ferdinand “Bongbong” Marcos Jr. and incumbent Vice President Leni Robredo, he or she will have a lot to deal with, especially in managing inflation.
“The incoming president will need to treat inflation as a top economic priority. Both Marcos and Robredo have floated fiscal support, with Marcos flagging the idea of a fuel subsidy and Robredo suggesting targeted social aid for the poor,” noted Moody’s.
Moody’s also commented on the impact of the prolonged pandemic on the country’s income disparity and unemployment situation which has increased.
“The jobless rate was sitting around five percent prior to the pandemic. Over the course of the pandemic, it climbed to around 7- 8 percent. According to government statistics released in late 2021, around 26 million Filipinos—close to 24 percent of the population—cannot meet their basic food and nonfood needs. In an effort to address poverty, Robredo has also promoted a job scheme and housing program. Marcos has suggested the government step up investment in agriculture as a way to create jobs,” said Moody’s.
However, the debt watcher said the Philippines “might not have the financial capacity to provide such fiscal cushioning.”
“Heavy borrowing to fund pandemic stimulus packages took the country’s debt-to-GDP ratio beyond 60 percent in 2021, up from 54.6 percent in 2020. The limited fiscal room has the new administration's hands tied when it comes to navigating price hikes,” it said.
After the government announced a 4.9 percent inflation rate for April, BSP Governor Benjamin E. Diokno said that while there are signs that inflation expectation is higher for 2022, it remains broadly anchored to the target in 2023.
Diokno said inflation is still consistent with its assessment that it will remain elevated over the near term because of volatility in global oil and non-oil prices as an impact of the Russia-Ukraine war which started on Feb. 24 and is still ongoing.
As of March 24, during the Monetary Board’s last policy meeting, the BSP has a 2022 average inflation forecast of 4.3 percent, up from its Feb. 17 forecast of 3.7 percen. For 2023, the BSP also forecasts a higher inflation rate of 3.6 percent from its previous projection of 3.3 percent. A key factor for the higher forecasts is BSP’s revised assumptions of Dubai crude prices. From a previous assumption of $83.33 per barrel average last Feb. 17, they now see $102.23 per barrel. They also raised the 2023 crude price assumption to $88.21 per barrel from the previous $75.59.