Weslene Uy, Economic Fellow of the Stratbase ADR Institute
Duterte’s economic managers finally got a much-needed reprieve at the start of 2019. After months of struggling to contain increasing commodity prices, the inflation rate finally showed signs of slowing down. First, it clocked in at 6% in November, before easing further to 5.1% in December, recording a month-on-month deceleration of -0.3% and -0.4%, respectively. This is the lowest inflation rate since June. The latest inflation figure puts the full-year average at 5.2%, matching the Bangko Sentral ng Pilipinas’ (BSP) 2018 forecast but exceeding its 4% target.
In December, the inflation rate was attributed to the slower price increases in food and non-alcoholic beverages, as well as in transport.
While food items have been the main inflation drivers since August, its contribution to inflation has tempered since. Among the food items, rice, the staple Filipino food, contributed the most to inflation.
The unreliable rice supply is symptomatic of our country’s longstanding problems in our rice policy. Last year, the already tenuous situation was aggravated by the failure of the National Food Authority (NFA) to import rice on time. At one point, the NFA already depleted its buffer stock, pushing commercial rice prices even higher. Thankfully, the rice supply eventually improved with the harvest season and additional supply from imports.
Duterte’s economic team repeatedly called for a shift to rice tariffication from quantitative restrictions on imports to address lingering rice supply issues, a measure it deemed as fundamental to stabilizing food prices. By the government’s own estimate, the reform will lower prices by as much as P7 per kilo. The bill was finally ratified by lawmakers last November 2018 and is now awaiting the President’s signature.
Apart from rice, other food items that consistently drive inflation include fish, meat, and vegetables. The shortfall in supply in these commodities only unmasked the vulnerabilities of the agriculture sector. As a stopgap measure, Malacañang released Administrative Order 13 last September to streamline the importation of agricultural commodities.
External factors also played a hand in stoking commodity prices. In January 2018, crude prices just averaged at $66 per barrel. By October, it reached a peak of $79 per barrel amidst threats of US sanctions on Iran. The weaker peso also made it costlier to import crude, of which 90% are imported from the Middle East, with over a third sourced from Saudi Arabia alone. After opening the year at P50.5 against the dollar, the peso peaked at P54/USD in October.
However, in December, oil prices slumped to its lowest level since October 2017 due to excess supply, worsened by a gloomier outlook on global economic growth and the ongoing dispute between the US and China. With falling fuel prices, the Land Transportation Franchising and Regulatory Board (LTFRB) called for a provisional fare rollback of jeepneys in Mega Manila. For the same reason, the government also called off plans to suspend the next round of oil tax increase in 2019 under the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
To manage the rising inflation rate, the central bank raised interest rates five times since May 2018, bringing the overnight borrowing rate to 4.75% from 3%. According to the BSP, it adjusted the rate to curb inflation expectations, including those attributed to external uncertainties amid tighter global financial conditions and trade tensions, and to avoid second-round inflationary effects. In its last monetary board meeting for 2018, however, the BSP decided to keep interest rates steady, citing weaker price pressures, lower crude prices, and stabilization of the exchange rate.
For 2019, the BSP is already expecting inflation to fall to 3.5%, comfortably within its 2% to 4% target. In addition to expectations of lower global oil prices, the central bank expressed confidence that inflation will be in line with its target primarily because of the impacts of key reforms — the rice tariffication law and the successive interest rate adjustments — executed in the previous year. Monetary authorities are also expecting inflation to slip back to its target during the first quarter, earlier than its initial forecast of the first half of 2019.
While the easing inflation figure is a bullish start to the new year, our top bureaucrats cannot rest on their laurels just yet. The supply-side issues on food items, for example, require long-term reforms in the agriculture sector.
Of course, the upcoming midterm election incentivizes keeping inflation in check for our government officials. After all, economic issues are the top concerns of Filipinos. However, these reforms should go beyond the election cycle to be truly effective.
This article was originally published in BusinessWorld.