Crossroads (Toward Philippine economic and social progress)
Philippine Star, 3 October 2018


Inflation continues to be the concern of the moment. Actions that are designed to tame it are being undertaken by the fiscal and monetary authorities.

We, therefore, comment on the efforts to tame the inflationary tendencies.

The inflationary short-term outlook. The conditions that lead to more inflation depends on how factors that push inflation evolve separately. The government tries to to neutralize the inflationary factors by taking actions along fiscal and monetary fronts and in conjunction with other policies.  Lately, the monetary authorities have acted much more vigorously.

Fiscal trade-offs. Fiscal management is committed to pursue the infrastructure program and the expenditures designed to support it are part of existing overall demand.

Thus, recent public discourse on next year’s budget have focused on huge cuts of up to P100 billion for public education and health sectors.

Though presented as efforts to shift the budgeting process to mainly “cash budgeting” by trimming “budgetary obligations,” the process already reveals the directional priorities in the face of tighter resources.

If fiscal effort must not cause an inflationary push, some of the measures at cutting overall demand has to be in the form of pruning where some wiggle room is available. With the commitment to pursue the infrastructure spending as a strong priority, all other sectors are likely to pave the way for sharing in the cuts to be made.

Where artificial scarcities of goods could be removed, the government has taken the needed adjustment. It has liberalized the rules to enable the import of rice and other essential goods by lifting existing protectionist measures against such imports. Enabling imports of cheaper goods would tip the scale in favor of more supply, hence holding back further price increases.

Even as these are being undertaken, there are developments that cannot be controlled. The price of imported crude has been rising, due to market uncertainties arising out of the Middle East situation and the cartel decisions of OPEC (Organization of the Petroleum Exporting Countries).

Their price trajectories of domestic energy products follow the price of crude in accordance with the energy law. This week alone, a hefty rise of gasoline and diesel prices would add to energy inflation. Since energy taxes follow rising sales of energy, this would mean rising revenues. Until some threshold is reached.

Beyond $80 per barrel of crude over time, some provisions of the energy excise taxes could be suspended. Should that occur, government revenues financing major priority government expenditures would be threatened. Cuts in some government expenditure programs would be ordained. This could affect even the subsidies for the poor and possibly even those for infrastructure.

At that point, any effort to sustain or maintain the existing spending commitments would raise the fiscal deficit. The government is committed to a level of three percent of GDP as a deficit target.

The government, in fact, has already moved toward a 3.2 percent of GDP fiscal deficit target for the 2019 budget year, an admission of growing deficit calculations in government finances.

Anti-inflationary monetary measures. As the country’s monetary authority, the Monetary Board of the Bangko Sentral has stepped up measures to deal with the inflationary situation.

During the early part of the year, monetary authorities acted a little modestly, perhaps a little too confidently. The result was that the core inflation targets were breached beyond their range.

Waking up to the challenge, monetary authorities had to take an increasingly more aggressive stance. Since the beginning of 2018, monetary authorities have undertaken progressive measures to raise the policy interest rates.

The first of three policy interest rate increases took place February, when the Monetary Board raised rates by 25 basis points. In May and in June, it did so with 25 basis points each time.

The central bank on Aug. 9, took a stronger measure by raising the policy interest rate by 50 basis points. And seeing that inflation was still continuing at its pace in the following month, the central bank, on Sept. 27 decided to raise the policy interest rate by another 50 basis points.

So far, monetary authorities have raised the policy interest rate by a total of 150 basis points. This effectively raised the going interest rate from three percent at the beginning of the year to 4.5 percent by Sept. 27.

By taking the progressive steps in raising the policy interest rate, the central bank aims to modulate money supply through credit creation. At the same time, higher interest rates enable savers to hold on to their assets and earn more. Also, the central bank also has other tools to control money supply.

The monetary authorities made it known that the measures they have taken indicate the central bank’s resolute commitment to provide macroeconomic stability. They expect that by 2019, inflation would be restored back to a range of two to four percent, most probably nearer the upper range.

Positive factors. The interest rate hikes this year, especially the last two rate adjustments of August and September, are designed to achieve macroeconomic stability. They also supply some brakes against inflationary factors.

They also align the country’s monetary policy along with the growing normalization of monetary policy in advanced economies which is departing from the near-zero-interest rate regimes that helped to jumpstart economic recovery from the great recession of 2008.

The rise of policy interest rates will also help to prevent net outflows of capital from the country, provided that sufficient premium is kept from the rates in the stronger economies. That keeps the exchange rate from depreciating further.

On the fiscal reform front, something must be said on the passage of the TRAIN package 2, which has been rechristened, TRABAHO, to emphasize jobs. The bill has already passed the House and is in the Senate for final passage.

If the Senate acts with speed and the major features of the investment incentives reforms are retained, it could rejuvenate the industrial and agricultural development program in time. That helps to improve the balance of payments, if those new investments produce more export revenues and greater domestic efficiency.

This could be the missing vehicle for strengthening the economy’s competitiveness and dynamism.