OF SUBSTANCE AND SPIRIT

Last week, some think tanks observed that the monetary authorities are becoming less hawkish based on their policy statement, that references to keep monetary policy sufficiently tight “is completely gone” and that keeping it steady is emerging to be the norm. Economists of some multinational banks with local branches even went as far as saying the US Fed could start loosening as early as May with some 150 basis points. The BSP is believed to be calibrating its future move with the US Fed.

One of them chose to be overly aggressive as to suggest a specific timeline of June this year “even if inflation stays above four percent next quarter.” The BSP could move ahead and unhinge its policy rate from 6.5 percent provided the month-on-month inflation remains disinflationary and its path is expected to drop below four percent.

We believe that the BSP admits that the emerging inflation dynamics is showing some improvements and it continues to sound hawkish. It remains critical for the BSP to assure the market that its focus on price stability is unfazed. Inflation expectations, once unmoored, could make even supply shocks more entrenched.

No inflation targeting central bank would be so careless to start easing policy rate if inflation stays above its target for a quarter. It’s risky. Such a misbehaving quarter could outweigh the benign inflation readings for the rest of the year. Disinflation is hard to achieve if one quarter shows out-of-target reading. Some analysts must be banking on base effects.

But there are basic reasons to be risk-averse for the rest of the year.

For one, El Niño based on weather studies appears to be on the strong side through the second quarter of 2024. Some weather experts believe there could be a transition to more neutral conditions sometime in the middle of the second quarter but such transition is found to be quite abrupt. This means the initial report by the Agriculture Department on crop destruction could be understated. With diminished rainfall, delayed planting season, and crop failure, lower harvest is likely to affect at least 23 provinces in Luzon and one in the Visayas. With a stronger El Niño, some 65 provinces may be hit. The other side of El Niño is La Niña which could succeed it with strong flooding and tropical storms. This could probably happen starting the third quarter 2024. 

Food continues to be dominant in the weighting pattern in the consumer basket. With El Niño, therefore, inflation could likely gain some momentum both during its incidence, and after. We need to monitor how the strong dry spell condition could be eased by the government’s mitigation measures.

The other upside risk to inflation is the proposed ₱100 wage increase recently passed by the Philippine Senate. While one can very well echo our economic managers and private employers’ concern about the price effects of such an adjustment, it is always good to see the other side, too. It was only recently that the minimum wage was increased after so many years that it was pegged at ₱537 a day. As of January 2024, the current ₱610 a day minimum wage is only ₱502 a day in real terms. Some statistics show that nationwide, some 2.4 million workers are paid the minimum, but over eight million earn below that. 

Assuming away any political motivation behind their move, the senators’ proposal simply attempts to help minimum wage workers cope with the last few years of high inflation in the country. A catch-up, this could be inflationary unless one, firms do not adjust their share of the profit to absorb the cost of the adjustment and two, such an adjustment is not supported by any productivity gains. Firms could very well use any of their savings from the implementation of CREATE (Corporate Recovery and Tax Incentives for Enterprises) Act’s incentives system.

Department of Finance’s estimates put the government’s foregone taxes in favor of corporates at around ₱476.8 billion for five years. Firms may have the choice to use these savings to fund the additional adjustment in workers’ income. The impact on job creation may also be addressed by what the Labor Department announcement in terms of various measures to assist small business to keep their workers’ jobs. There are also exclusions to this mandated wage.

Since this is a new development, the BSP may have failed to reflect this in its matrix of upside risks, other than the previous wage adjustments approved in various regions in the Philippines for implementation starting this year.

Dubai crude oil prices have also been acting up recently on account of the latest hostilities in the Red Sea and continuing conflict in Ukraine. However, if the proposed ceasefire could come through next week, this could pull down prices of fuel and energy. However, as the market expects oil supply to be rather tight in 2024 and 2025 given the continuing shortfall among the OPEC countries, oil prices could reverse into an uptrend. Oil production is also likely to slow down with the voluntary cuts among the OPEC members. If the announced meeting in March resolves to continue with the voluntary cuts beyond quarter 1, global and domestic oil prices could push up inflation even closer to the risk-adjusted BSP inflation forecasts. If second round effects are triggered, a breach is also possible.

How we wish we are wrong, but the BSP itself admits that the previous tightening moves would have negative carry-over effects on the country’s economic growth in 2024. It links back to inflation in that lower growth could also fuel some supply shocks. 

In contrast, while ending up the year below the minimum target of 6.0 percent, the Philippine economy nevertheless proved and could be more resilient. This scenario mirrors the global prospects of a little higher growth than last year, falling inflation and job markets holding up, as the IMF’s Kristalina Georgieva recently put it. 

The bigger challenges should be recognized this early. Yes, inflation may be cooling, and we hope we are proven wrong with our reservations because of the upside risks. But our National Government has many miles to go in rebuilding buffers against future shocks, reducing fiscal deficit and slashing public debt. 

How we also wish that after the restrictive economic provisions in the 1987 Constitution are liberalized, we should be getting more slices of foreign investment pie. It’s good the NEDA recognizes that more complementary spade work is crucial in easing the cost of doing business, promoting good governance and rolling out more infrastructure.