Agri, services sectors seen to keep inflation low

With agriculture and the services sectors looking up, the inflation rate is expected to go down to as low as five percent this year despite the anticipated increase in personal consumption.

The National Economic and Development Authority (NEDA) said inflation could go down to as low as five percent down the road with the Department of Agriculture’s optimistic projections for the country’s food production, especially rice and corn.

Government economic planners were expecting the agriculture sector to be badly hit by the El Niño phenomenon this year but forecasts indicate that the country would be spared from the dry spell.

According to the DA, palay production would reach 12.5 million metric tons this year, tempered only by the reduction in the government’s budget for its rice production enhancement program.

NEDA Deputy Director General Gilbert Llanto said the economy in general is expected to pick up after the lean months of June and July, but the agriculture sector would continue to ensure stable food supply throughout the year.

"Considering what we have been through, we feel that the economy has bottomed out in February and May," he said, adding that "interest rates are coming down, our fiscal deficit is lower than expected in the first quarter."

Although the disruption caused by the Abu Sayaf crisis has pushed the peso-dollar exchange rate to new lows, Llanto said economic fundamentals remain strong.

"We’re sticking to our target of six to seven percent inflation rate," Llanto said. "Having said that, we expect inflation to peak June-July which are the lean months, but the rate would go down right after possibly to as low as five percent."

Even if rice production was disrupted, Llanto said government would still have enough time to import the shortfall.

Despite the declining contribution of the agriculture sector to the gross domestic product (GDP), food production still plays a critical role in determining whether the economy will grow or decline, especially with the lackluster performance of the industry sector.

"Services is the other key factor, especially telecommunications and information and communications technology-related services," Llanto said. "The cost of these services has been going down and their increasing affordability perks up consumption."

NEDA, however, is holding off any assumptions following the depreciation of the peso. The Bangko Sentral ng Pilipinas still maintains that the peso can still recover to P48 to $1 toward the end of the year, allowing the currency to post an average of better than P50 to $1.

The central bank’s optimistic outlook is based on the anticipated improvement in export earnings and increased dollar remittances towards the holiday season which finance officials said would boost the peso during the fourth quarter.

Earlier, NEDA said the financial sector had also began showing indications of renewed strength measured by the increase in the capital adequacy ratio of commercial banks.

"There was an upstick in the capital adequacy ratio from 16.5 percent in December to 16.8 percent in February," Llanto said. "Commercial banks are putting in more capital to strengthen their balance sheet. This way, any increase in non-performing loans could be offset by a strong balance sheet."

However, Llanto warned that this year’s performance would depend entirely on the domestic economy, given the weakness in the country’s two major export markets — the US and Japan.