NOBODY expects the road to always be full of roses, or the skies always devoid of gray clouds. The Philippine economy is expected to continue to be a growth leader in Asia because of many factors, but it doesn’t mean no challenges will come its way to test its resilience.
For this year, I think rising inflation is among the first to come as a challenge, as far as the economy is concerned.
Inflation was recorded at 3.3 percent in December, which brought the average for the whole of 2017 to 3.2 percent, well within the government target range of 2-3 percent.
The New Year, however, opened with a 3.4-percent headline inflation rate in January, which rose further to 3.9 percent in the succeeding month. This brought the year-to-date average to 4.2 percent, which is above the government’s inflation target of 2-4 percent for the year.
In its latest policy-making meeting, the Monetary Board observed that inflation could climb further, owing mainly to price pressures emanating from pending petitions for adjustments in minimum wages and transportation fares.
Higher prices are expected as a result of increasing global oil prices as well as the Tax Reform for Acceleration and Inclusion Act (TRAIN), signed into law by President Rodrigo Duterte in December, and took effect on January 1, which imposed new excise taxes on oil, cigarettes, sugary drinks, and vehicles, among other goods.
The Bangko Sentral ng Pilipinas (BSP) expects inflation to average 4.3 percent this year and breach the 2-4 percent target range due to the impact on consumer prices of the first tax reform package as well as expected global oil price hikes.
The Monetary Board, the BSP’s highest policymaking body, kept the policy rate steady at 3 percent while also maintaining the prevailing rates for the overnight lending and deposit facilities.
BSP Governor Nestor A. Espenilla Jr. said in a statement that the central bank’s latest baseline forecasts show higher inflation outturns this year, such that its 2018 forecast was raised from 3.4 percent during the previous policy meeting in December.
So, the general worry is that higher inflation could dampen consumer spending, one of the economy’s major growth drivers, and eventually, dim the economy’s prospects.
Governor Espenilla has noted that the higher inflation rate was the result of transitory factors, and is expected to decelerate back to within the target range in 2019.
Nevertheless, the BSP, in line with its mandate to keep prices stable, is not being complacent. Specifically, the monetary authority has reiterated that it remains watchful against any signs of second-round effects and inflation becoming broader-based. The Monetary Board says it stands firm in its intent to take immediate and appropriate measures to ensure that the monetary policy stance continues to support the BSP’s price and financial stability objectives.
Thus, during its March 22 meeting, the Monetary Board decided to maintain its policy rate, the interest rate on the BSP’s overnight reverse repurchase (RRP) facility, steady at 3.0 percent. The policy rate serves as a guideline for banks in setting their lending rates.
True, inflation may be something to worry about, but the Philippine economy still has a lot of strengths to sustain its upward trajectory.
Overseas Filipino workers (OFW), our ever-dependable modern heroes, keep precious foreign exchange flowing into the economy. Cash remittances for the whole of 2017 increased by 4.3 percent to reach $28.1 billion, up from $26.9 billion in 2016. Last January, cash remittances further accelerated to 9.7 percent, bringing in a total of $2.4 billion.
The exchange rate seems steady at around P52 to a dollar, as the BSP maintains a watchful eye on speculative changes under a market-determined exchange regime.
Our dollar reserves are okay. As of end-February 2018, the country’s Gross International Reserves (GIR) stood at $80.4 billion, more than ample liquidity buffer and is equivalent to 7.9 months’ worth of imports of goods and payments of services and primary income.
Another source of foreign exchange, the business process outsourcing (BPO) industry, remains robust, while the tourism industry continues to gain from the Philippines’ improved relations with other countries, particularly China.
The new tax reform package may have contributed to higher inflation, but it also reduced the tax burden on millions of workers, which effectively increased their purchasing power.
In explaining the decision to keep policy rates unchanged, Governor Espenilla noted that the Monetary Board considered that prospects for domestic activity continue to be firm on the back of robust domestic demand, strong growth in credit and liquidity, and sustained recovery in global economic growth.
The Annual Consultation Report on the Philippines published by the Asean+3 Macroeconomic Research Office (AMRO) in Singapore on March 16 said that after expanding by 6.7 percent in 2017, the Philippine economy is expected to grow by 6.8 percent in 2018 and 6.9 percent in 2019 as exports remain buoyant while budget execution gradually improves.
The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country in September 2017 and data availability as of Feb. 15, 2018.
In simple words, the odds are still in our favor. We just have to remain vigilant to keep our gains and stay on the fast growth track.
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This piece first came out in Business Mirror on April 2, 2018 under the column “The Entrepreneur.” For comments/feedback e-mail to: mbv.secretariat@gmail.com or visitwww.mannyvillar.com.ph./PN
