Economic challenges

Whatever you may hear from government sources, know that we are living with serious economic challenges. Some were caused by external factors, but many are self inflicted mistakes.

We hear a lot about inflation and we get the feeling it is a bad thing that our economic managers and the central bank should have managed better. Inflation hit 4.6 percent in May (4.1 percent in the first five months), definitely beyond the BSP’s sustainable range of two percent to four percent.

TRAIN 1 is being blamed for the higher inflation, but in fairness to DOF, the real measured impact is quite low. NEDA chief Ernie Pernia said “the contribution of TRAIN is only 0.4 of one percent. At the most siguro, one-half of one percent, 0.5 of one percent…”

Be that as it may, the ordinary man couldn’t care less. All he knows is that his gains from lower income tax had been wiped out by higher prices. For those at the bottom of our socio-economic pyramid who don’t pay income tax anyway, the higher cost of goods and services is an immediate and unbearable burden.

Then there is the fast depreciating value of the peso contributing to higher prices. It is down to a 12-year low against the dollar. The peso closed at 53.12 against the dollar last week and is the region’s worst performing currency. A widening trade deficit is to blame… the value of our imports are more than our exports.

Economists are right to say that the currency’s foreign exchange rate is not always a reflection of the economy’s health. A weak peso is not necessarily bad. Indeed, it may be good for the economy overall. But most people don’t get that.

We can tell them that China built its economy over the last few decades by keeping the yuan’s exchange rate artificially low. This is why the US, particularly President Trump, is complaining about unfair practices that made the US trade deficit with China balloon.

Again, most Filipinos may not care about China and Trump. It is the rising price of rice, chicken, pork, and vegetables in the wet market that worries them.

It may be better to explain that the weaker peso means OFW families get more pesos for the dollars OFWs send home. But those earning in other currencies that are also affected by the strong dollar may not benefit as much.

Indeed, official data released by the BSP last week showed remittances from overseas Filipinos fell the most in 17 months in April. Cash remittances in April totaled $2.1 billion, down 5.9 percent compared to the same period last year.

The BSP explained remittances from Saudi Arabia, Singapore, Australia, and the United Kingdom posted significant declines. The depreciation of currencies from these countries contributed to the lower value of remittances.

There is another explanation for lower remittances. Historically there has been some correlation between the depreciating peso and weaker OFW remittances. 

When the dollar is strong, OFWs tend to reduce their remittances home, thinking it is alright to just keep within the usual peso equivalent. But because the prices of fuel, electricity, food, and services have risen due to the weaker peso, their families end up tightening their belts.

Retail oil price is up 40 percent year-on-year (YoY) in April 2018. The misery of rising prices affects everyone, except those at the top of our socio-economic pyramid with plenty to spare.

The rise in the price of rice has aggravated our current woes. The percentage rise in rice prices has been significant, according to data from the Philippine Statistical Authority.

The Duterte administration allowed the buffer stock to go down to zero due to an internal policy dispute. President Duterte allowed a policy vacuum to linger on how to handle rice importation. This made a bad situation of rising international rice prices worse specially for consumers at our mass base who depend on government rice. The decision to import was made too late to matter.

Where do we go from here? Some analysts think the situation should improve soon. They expect inflation to fall, pointing out that inflation has already fallen month- on-month (MoM). An analyst in a major international bank expects inflation to peak in August.

Oil has pulled back from $72 to $65 a barrel. The peso is still expected to depreciate, but only mildly. A better second half of this year is predicted.

Inflation has become a political issue, and that hopefully means there will be greater push from the President to get the bill on “rice tariffication” to pass Congress. It is the hoped for solution to high food costs fueling our high inflation rate and overall social unrest.

Some analysts expect the government’s planned infrastructure spending to get going, creating jobs and boosting economic numbers.  Infra spending is expected to hit P1.1 trillion for this year.

Government identified 75 flagship projects worth $30 billion. Of these, government claims 34 will start this year. Most are under hybrid PPP model – with strong support from Japan and China.

But which of the 34 projects supposed to start this year are close to shovel-ready? It is difficult to shrug off the feeling that BBB is still in the realm of hot air as of today.

There is also a growing impression that sentiments from foreign investors have changed. Few want to hear about government’s growth story. Most are concerned about government’s ability to control inflation, to assure sustained economic growth. They will watch and wait, and that explains why foreign inflows have slowed down.

The first two years of the Duterte administration drummed up expectations of a government with political will to accomplish what the past administration dilly dallied on. One can only hope the Cabinet members in charge of infrastructure will finally get a sense of urgency, get their shovels and start digging.

 Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco.