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Economic team wields inflation tool kit

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rice NFA
The government faces public discontent due to prolonged short supply of cheaper rice from the National Food Authority. -- AFP

THE PHILIPPINE ECONOMY is ready to face headwinds from rising inflation and further depreciation of the peso which have intensified in recent months, economic managers said on Tuesday, saying the government has all the tools it needs to handle these “temporary” challenges.

“We have a lot of tools. We can face temporary adversity and we are very confident that we can overcome whatever temporary adversity we are facing,” Finance Secretary Carlos G. Dominguez III said in a press conference ahead of the government’s regular Philippine economic briefing for local and regional economists later that day.

Mr. Dominguez said that people should “take a long view of our situation as a country” when assessing the elevated inflation rate and the twin deficits consisting of current account and budget shortfalls.

“We should look at the strengths that the Philippines has,” he said.

The government recorded a P154.5-billion deficit last semester, 28% bigger than the year-ago gap and exceeding a P143.8-billion target by seven percent. It further expanded to P279.4-billion as of end-July, 36% wider than in last year’s comparable period.

The current account deficit meanwhile stood at $3.1 billion last semester, touching the central bank’s forecast for this year.

A senior central bank official signaled a fourth hike in benchmark interest rates this year, as monetary policy makers boost efforts to tame the nearly decade-high inflation and support the local currency.

“We have to deliver a very strong rhetoric about having a strong follow through (policy action),” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo told the media briefing.

“Whether it’s 25 basis points or 50 basis points, that would be determined by the data that would come out between now and the Sept. 27 meeting of the Monetary Board.”

The central bank’s policy-making Monetary Board meets next on Sept. 27 after raising its benchmark rates at the past three meetings by a total of 100 basis points.

Annual inflation hit 6.4% in August, the highest since March 2009, prompting BSP Governor Nestor A. Espenilla, Jr. to say earlier this month that the monetary authority’s most crucial task at this stage was to bring inflation back within its 2-4% target range.

Consumer prices have been under pressure in part due to the weaker peso, which is languishing near a 13-year-low against the US dollar.

“We need to maintain the credibility of monetary policy. We need to deal with the depreciation of the peso because it has some inflationary pressures moving forward,” Mr. Guinigundo said. “We cannot be indifferent to an excessive swing in the exchange rate because that would affect the inflationary expectations of the general public.”

At the same time, he noted that “[t]here are signs that inflation has already peaked in August,” adding that “[w]e continue to see inflation peaking in the third quarter of 2018 and for the rest of the year — from October, November to December — that those non-monetary measures that the Economic Development Cluster committee decided on about two weeks ago will provide some support to the decline of inflation moving forward,” the BSP official also said during a press conference held before the briefing.

Shortly after the August inflation data was reported, economic managers submitted a draft executive order (EOs) for President Rodrigo R. Duterte’s consideration that details immediate and medium-term responses to surging prices of basic goods. These moves are designed to increase the supply of fish, rice, vegetables and meat.

“If the inflation rate of those four products were only halved, our inflation rate would be around five percent. This is the situation we have,” Mr. Dominguez said.

“The EOs are precisely targeting those products plus sugar, because sugar prices have been very high in the last few months. We’re awaiting the release of both administrative as well as executive orders addressing these issues.”

Socioeconomic Planning Secretary Ernesto M. Pernia said in the same briefing that the targeted 2022 poverty level can still be achieved despite current challenges. “Inflation, the destruction (by typhoons) are going to be temporary or gusts of wind that would slow the progress on poverty reduction. But it’s temporary and the administration has four years to go, there’s a lot of time to make up for small setbacks… we can still achieve the poverty target,” he said.

Budget Secretary Benjamin E. Diokno meanwhile said that the current fiscal deficit is in line with the government’s thrust to increase its infrastructure investments.

“Government spending continues to boost economic activity. Our expansionary fiscal policy is prudent, sustainable and supportive of development objectives,” he said.

“The strong momentum in infrastructure spending will be sustained,” Mr. Diokno added, noting that revenue agencies have lately been topping their collection targets, hence, helping to finance this priority thrust.

Mr. Guinigundo said even the growing current account gap — fueled largely by a widening merchandise trade deficit — has a silver lining. While it weighs further on the peso, the growing deficit has been fueled by increased importation of capital equipment and other materials businesses need to expand.

“Over time as investment-led economic activities result in the expansion in the potential capacity, there could be subsequent rise in goods exports, eventually alleviating current account deficit,” he said.

Turning his attention to the peso’s depreciation — by nearly eight percent year-to-date — Mr. Guinigundo said its weakness should ease towards yearend. “For the rest of the year, overseas remittances as well as BPOs (business process outsourcing receipts) will be coming in a bigger way. This is the holiday season, so you would expect that the exchange rate will start shaping up,” he explained.

Malacañang itself is hopeful that the expected increase in cash remittances from overseas Filipino workers (OFWs) in the coming months will somehow break the fall of the peso, and that steps being taken by the Executive branch will temper inflation, which has been hitting multi-year highs this year.

“The remittances are coming in for December. So, we remain confident that the peso can recover… Historically, the peso becomes strongest come December because our OFWs remit more than usual in time for the holiday seasons,” Presidential Spokesperson Harry L. Roque, Jr. said in a briefing in Malacañan Palace on Tuesday.

He added that the Executive was “hoping that inflation will not worsen because of institutional steps already taken by the government to help rein in inflation.”

Also on Tuesday, Trade Secretary Ramon M. Lopez told reporters in Pasay City that retail prices of rice should “normalize… in two weeks” as a result of non-tariff steps the Executive has taken, including issuing suggested retail prices (SRP) for choice agricultural products.

The Department of Trade and Industry, he added, will deploy teams to check that retailers follow the Department of Agriculture’s SRP of P39 per kilogram for regular-milled rice.

“Part of the implementation is to make sure that items covered by the SRP are made available. That’s the reason why we’re coming out with that ruling: pag di nila ginawang (if they do not make these items) available, ire-recommend namin ang revocation of the license,” Mr. Lopez said. — Elijah Joseph C. Tubayan, Melissa Luz T. Lopez, Arjay L. Balinbin, Janina C. Lim and Reuters