June 24, 2022
MANILA – When President-elect Ferdinand Marcos Jr. takes office at the end of the month, the problem of how to tackle high prices of consumer goods and services will be waiting for him and his economic team.
With the war between Russia and Ukraine expected to drag on—dragging along with it the current oil price spike episode—ING Bank Manila senior economist Nicholas Mapa said that in the near term, inflation can be expected “to become more pervasive as price pressures spread to more items in the CPI (consumer price index) basket and firms begin to pass on higher costs.”
More importantly, Mapa explained that higher inflation will drive up borrowing costs as the Bangko Sentral ng Pilipinas attempts to cool the red-hot economy and prevent runaway inflation from burning away much of the recent economic gains.
“The growth momentum will likely be capped as inflation whittles away purchasing power. Higher borrowing costs, in turn, will stunt nascent investment outlays,” Mapa said.
Rizal Commercial Banking Corp. chief economist Michael Ricafort also noted that “producers and manufacturers would end up with tighter profit margins as their ability to pass on higher costs of fuel and other inputs would be limited.”
As a whole, “higher global oil prices would effectively be a drag on economic growth and recovery from the pandemic,” he said. “Every $30-increase in global crude oil prices would bloat the country’s oil import bill by an equivalent of 1 percent of GDP (gross domestic product) that would otherwise have gone to more productive economic activities such as spending and investments by consumers, businesses, and other institutions.”
As policymakers debate the use of remedial measures to ease the pain of consumers caused by high fuel costs, Mapa warned against dole outs that could aggravate inflation.
“The government appears determined to press on with stimulus efforts, which may be supportive of growth but could stoke even more inflationary pressures at a time when price pressures are already elevated,” he said.
On the other end, the temptation remains to implement populist measures like temporarily suspending excise taxes on fuel to ease the pain at the pump.
This prompted Department of Finance chief economist Gil Beltran to reiterate the warning of President Duterte’s economic team against the proposal.
“It would be a policy mistake to suspend fuel taxes since it will be the top 10 percent of the population that will gain the most as they account for nearly half the fuel consumption in the country,” he said. “The appropriate policy instrument to address elevated energy prices is targeted transfers to vulnerable groups rather than blanket non-taxation to all.”
Indeed, which policy is best to implement, given the prevailing uncertainties, remains unclear for now.
What is clear is that, in the sphere of economics, tough—and, most likely, unpopular—decisions await the incoming Marcos Jr. administration.