Soaring inflation won’t dent RP’s fiscal position – report

Skyrocketing inflation is unlikely to leave a huge dent on the country’s fiscal position as the spike in consumer prices is expected to result in more revenues, GlobalSource Philippines said in its latest report.

The report, co-authored by former Finance Undersecretary Romeo Bernardo said that the country’s accelerating inflation is not likely to have an impact on the government’s fiscal position.

 Bernardo said that while the news on the high inflation pushed short-term yields in the money market, its impact on the country’s fiscal position is not worrisome.

“We note how the surprise inflation news had reflected immediately in the money market.

Short tenors rose by more than 100 basis points (bps) and longer tenors by about 70 bps on average. While this is disturbing, the impact on the country’s fiscal position may not be as bad as one would expect.

According to recent budget sensitivity estimates of the Department of Finance (DOF), a 100 bps increase in Treasury bill rates raises revenues by approximately P5.8 billion while raising disbursements by only P4.7 billion, with a net effect of P1.1 billion,” Bernardo said.

Bernardo said this is because collections flow from the 20 percent withholding tax on interest income on almost all financial instruments, mostly private and including bank deposits, while payments are made based on interest rates on rolled-over domestic debt and incremental borrowing.

“Hence, it would seem that the effect of a rise in interest rates, at least in the immediate term, would be an improved budget balance,” he said.

The National Government (NG) hopes to balance the budget this year. Last year, the deficit stood at P12.4 billion, significantly better than the P63 billion that was programmed for 2007.

Philippine inflation rose 8.3 percent year-on-year in April, the highest level since 2005. The latest figure is also well above expectations of seven percent and up from the previous month’s inflation rate of 6.4 percent due mainly to rising food prices.

Bernardo also said that skyrocketing inflation should not be too much cause for worry as this is caused mostly by supply-side factors such as food and fuel.

“We are not overly concerned about this development as indirect effects of supply-side factors are known to be transitory, lasting only for the short to medium term. So far, a wage-price spiral, which is what central bankers normally fear, remains a dormant prospect even as wage pressures appear to build,” Bernardo said.

GlobalSource expects inflation to hit anywhere between 7.5 percent to 7.8 percent this year but Bernardo said the price increases are likely to taper off by the fourth quarter of the year when the rice supply crunch is expected to have eased.