Inflation

Bracing for Tougher Times Ahead

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By Al Labita

AFTER nearly a decade of a benign uptick, the country’s inflation rate – the cost of buying goods and services — is threatening to disrupt the economy’s growth trajectory. Currently pegged at a year-to-date 3.5 percent, the rate is poised to dangerously breach the central bank’s five percent band limit as prices of basic commodities showed signs of an upward trend. Blame the inflation’s looming downsides on the wave of disastrous events unleashing cost-push pressures on an economy susceptible to price distortions.

By and large, the Moro separatist attacks in Zamboanga city, the destructive 7.2 quake in Bohol and the mind-boggling storm surge in Eastern Visayas had conspired and dented the economy. Admittedly, the fortuitous incidents triggered waves of price elasticity with a seemingly upward bias. Most likely, inflation will soar to five percent by end this year as monetary authorities had earlier projected.

BSP Under Pressure

That forecast, however, was anchored on pre-crisis scenarios or at a time the economy was robust. But with the economy under siege by inflationary pressures, monetary authorities are likely to clamp down on money supply – technically referred to as M3 – to rein in any sudden gyration of inflation. This ensues once inflation rate breaks through the five percent threshold level which is very likely, taking into account the new challenges on the ground.

Intervention measures, which can be damaging to the economy in the long run, can range from a hike in interest rates to tightening of overnight lending and borrowing policies. For those in the corporate sector, an economy’s downward spiral could hurt profits and limit stock price appreciation. A regime of high Inflation rate also robs companies of market value since they are forced to raise prices of the goods they sell to recoup investment costs. While they can pass on the costs to the consumers, the goods they sell are in the final reckoning become worthless each day.

Poverty and Prosperity

Given the economy’s new twists and turns, Bangko Sentral is likely feeling the pressures to revise upward its inflation expectation to factor in a creeping surge in prices. A single percentage rise in inflation can spell a difference between poverty and prosperity.
Lately, inflation – the bane of any economy – was acting up anew as supply bottlenecks erupted in calamity-stricken areas, creating an artificial shortage of basic commodities.

What exacerbated the situation was the massive destruction of farm-to-market roads constricting the extent of the delivery system to where the commodities are critically needed. Based on Department of Agriculture (DA) data, food production areas bore  the brunt of super typhoon Yolanda with damages piling up to nearly P7 billion. Rice fields and fisheries stocks accounted for the biggest losses at P2.23 billion and P1.16 billion, respectively.

Toll on Aggie

Yolanda also took its toll on high-value crops such as coconut, mangoes, cassava, bananas and vegetables. Overall, the DA estimated that the calamity dislocated 214,522 metric tons of goods from 134,085 hectares of farmland. The figures exclude devastated agricultural infrastructure, facilities and equipment for irrigation systems in Eastern Visayas, a key food production basket. Leyte province alone chalked up P2.22 billion in losses, about half of which represents ruined palay.

Amid a grim picture in the agriculture sector, the government’s think tank, the National Economic Development Authority (Neda), is less upbeat about the economy’s growth prospects. In a statement, it predicted that growth of local output – or Gross Domestic Product (GDP) – in this year’s last quarter could be trimmed by 0.3 to 0.8 of a percentage point to 4.1 percent.

Hardly significant, the reduction would nonetheless bring down the government’s GDP target of attaining 6-7 percent GDP growth target by end this year, quite ambitious for an economy weakened by a string of disasters, both man-made and natural. Such bleak outlook, Neda says, could linger through 2014 because of the reduced production capacity in typhoon-affected areas.

Opportunity and Risk

What bears watching is the extent of the government’s fiscal spending to mount a multi-billion peso rehabilitation program which can be potentially inflationary. Officials boast that with improved tax revenues, the government has more than enough fiscal space to go on a splurge. Initial estimates placed the rehab cost at P10 billion to defray the costs of repair of infrastructure and other facilities.

In effect, the government has no choice but to part with its revenues which otherwise could have been wasted in the pockets of the notoriously corrupt and the inept. The choice is simple: reconstruct and resuscitate a disaster-ravaged economy or risk prevalence of abject poverty.

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