When it rains, it pours.
Through the first nine months of this year, all the trends seemed against us. The price of oil was rising sharply. The peso was in retreat. Hot money was fleeing our market.
Each compounded the other. A weaker peso magnified the cost of imported oil. The flight of hot money magnified the peso’s weakness. The international prices for crude oil we simply could not control.
Add to this unhealthy dynamic the mismanagement of our rice supply. That led to shortages of cheaper rice varieties poorer consumers wanted to buy. Speculation caused a sharp jump in the prices of this most staple commodity.
Then typhoons came and devastated a large portion of our harvest. Climactic conditions, more expensive fuel and a fishing industry that was simply behind the curve in the use of technology caused a spike in fish prices. A weak logistics system magnified the effects of poor farming methods to push up vegetable prices.
All these factors pushed up the inflation rate. The effects of higher inflation were unevenly distributed as is always the case. The poor, who spend 70 percent of their income on food, bore the brunt of the inflationary uptick.
Since inflationary pain becomes more unbearable as one slides down the income ladder, it was tempting for politicians to politicize the prevailing inflationary conditions by blaming everything on the tax reform program. They demanded the tax reforms to be rolled back. This would have meant consigning our domestic economy to purgatory, diminishing the fiscal space required to social and economic investments needed for us to be competitive.
These opportunist politicians are doing our people a disservice. They foster a simplistic view of economic development as they tried to score political points by sniping on the reforms undertaken. They stymie a more comprehensive public understanding of what we need to do toward building a modern economy.
For their part, our policy-making institutions responded quickly to the challenge posed by conditions of elevated inflation. The monetary authorities jacked up interest rates to fight back overheating. Cheaper rice was imported. The measure to shift rice trading to a tariff-based regime moved more quickly to the legislative mill.
Our growth targets took a beating during the episode of elevated inflation. GDP growth, discounted for inflation, fell back slightly. The pace of growth over the next year will likely be slower than expected.
But, in general, we kept our targets optimistic. The infra program, that will deliver high multiplier effects for the domestic economy, proceeded as scheduled. The balance of the tax reform program continues to be pushed even as populist political groups peddled the wrong idea that rolling this back is the thing to do.
Because government stuck to its guns, we are better positioned to take advantage of a turnaround.
Peaked
By every indication, the turnaround is beginning to happen.
International prices for crude oil began a rapid descent since last month. The speed with which oil prices retreated matches the pace of decline in 2008, when the cloud of international recession began to gather.
A glut in supply explains the sudden reversal of oil prices. That glut, in turn, reflects concerns of a global economic slowdown driven, among other things, by the looming trade war between the US and China.
The peso has regained its footing, posting sustained gains against the US dollar. As of this writing, the peso threatens to push back into the $1:P52 level. That can only enhance the beneficial effects of a lower oil price.
A clear trend toward the consolidation of the peso’s exchange rate encourages international investors to return to our market. That, in turn, will help prop up our stock prices and restore the capacity of our best companies to reinvest in the economy.
Rice prices have climbed down. A shift to tariffs will likely bring down rice prices by as much as P4 per kilo. This is welcome news for our consumers.
The prices of fish and vegetables have begun normalizing after the spikes that happened during the rainy months. This will benefit the poor disproportionally.
With oil prices in retreat, the peso regaining strength and food prices declining, analysts are expecting a sharp reduction in the inflation rate. This will help hugely in regaining our growth momentum.
Those who tried to politicize the inflation rate as a means to advance their own political ambitions now hold an empty bag. They should not have attempted to advance their political careers by misrepresenting how economies work.
Even during the bleakest months, when elevated inflation threatened to gobble up our growth, our economic managers did not yield to transient challenges. The Build, Build, Build program proceeded as scheduled. Over the next months, spending on modernizing our infra will pump adrenaline into the domestic economy.
The fighting targets, since the start of this administration has been to grow the economy by seven percent or better in order to reduce poverty to 14 percent or less by 2022. With the turnaround we see, those remain viable targets.
At some point, sooner rather than later, our monetary authorities might consider returning to a program of reducing interest rates. Such a program will increase the appetite for investments. Our economic expansion cannot be sustainable or inclusive unless it is fully investments-led.
We have to remain focused on drawing in investments. That is nearly as important as keeping the pace of the infrastructure program. New investments will make the cost of modernizing our infra base worth it.