WE NEED to take a breather from all the anxieties that tend to worry some economists and which speculators exploit to sow panic in the market.
While the inflation rate climbed to a nine-year high of 6.4 percent in August 2018, it was not the first time prices rose as fast. I can remember that in the 1980s the inflation rate was hovering at double-digits.
In more recent years, inflation rate averaged 7.6 percent in 2005 and 9.3 percent in 2008. As I understand, rapidly growing or emerging economies such as the Philippines usually register faster inflation rates compared with those of advanced economies because of stronger growth in demand and spending.
The good thing about the latest inflation figure is that it is supply-driven, which means it can easily be fixed. The food-price index, for example, increased 8.5 percent year-on-year, mainly because of perceived tightness in the supply of rice.
The solution, according to Economic Planning Secretary Ernesto Pernia, is to boost agriculture output and introduce policy reforms. The government’s economic team also committed to work together to reduce prices by bringing in more rice to the provinces, streamlining the licensing procedures for rice imports and prioritizing the release of essential food items in the ports.
I expect that as these measures take effect, prices will begin to stabilize at the start of the fourth quarter.
I also believe that the Philippine economy remains stable. Unfortunately, some people tend to exaggerate when it comes to negative news. From my many years of observing the economy, it is only now that a 6-percent economic expansion would be viewed as something bad, as if we had not registered slower GDP growth rates in the past. Data from the Philippine Statistics Authority show that the economy even contracted 0.6 percent in 1991 and declined another 0.6 percent in 1998.
While the 6-percent growth in the second quarter and the 6.3-percent expansion in the first half of 2018 were below the government’s target range of seven percent to eight percent, they were not as problematic as some people would like us to believe.
The peso may have depreciated to a 12-year low of 53.80 against the US dollar in the first week of September 2018, but this was mainly due to the general strength of the US dollar against most currencies amid the Federal Reserve’s monetary tightening.
In fact, most of the problems we encounter today emanate from the external environment, such as the Turkish currency crisis, US-China trade war, the Brexit or the United Kingdom’s impending exit from the European Union, the Argentine debt crisis, the tightening of US dollar liquidity, among others.
In the face of these external developments, we need not worry too much so as not to rock the boat. Remember that we are just a small boat that rides the waves of global economic changes. The last thing we need is to panic and make rush decisions that we might regret later.
My advice at this point again is to avoid radical changes in the current economic environment. Radical changes can go either way, and some countries that attempted to go against the tide eventually found themselves under the sea. You may want to study the case of Venezuela, which used to be the most affluent country in South America.
Investors always prefer predictability and stability, and any radical change can be viewed as a sign of panic.
Somehow, the current tight supply of rice in the market is exacerbated by panic among consumers who would now buy the staple in bigger bulk than they used to, for fear that supply may run out soon. The peso depreciation also continues because overseas Filipino workers and their families, as well as banks, would hold on to the dollar in anticipation that the greenback would gain further value in the coming days.
This is despite the fact that the financial market is awash with dollar liquidity. Data from the Bangko Sentral ng Pilipinas show that dollar deposits held by foreign currency deposit units of banks reached $37.3 billion as of March 2018, compared with outstanding loans of just $14.3 billion.
Even the BSP has enough dollar reserves to cover more than seven months of imports and payment of services. The gross international reserves stood at $77.83 billion at the end of August from $76.72 billion a month ago.
Credit rating agencies such as Fitch Ratings, Moody’s Investors Service and S&P Global Ratings continue to believe in the country’s capacity to handle the situation, with all of them keeping the investment-grade scores for the country.
While there are plenty of movements in the global economy, we can survive these challenges by waiting out the storm. In fact, we survived the 1997 Asian financial crisis and the 2008 global economic crisis stronger than before.
We have gone through the worst times, and these minor movements should not alarm us at all. What we need to do is to remain calm, just relax, and let the market determine our next course of action.
***
This piece first came out in Business Mirror on Sept. 11, 2018 under the column “The Entrepreneur.” For comments/feedback e-mail to: mbv.secretariat@gmail.com or visitwww.mannyvillar.com.ph./PN
