Headline inflation steered to the upside at 5.3% in August 2023 after a consistent downtrend in the prior months, driven primarily by the uptick in prices of food and non-alcoholic beverages, particularly rice prices.

The August inflation print came in higher than our anticipated print, which indicates that the upside risks projected from increasing global rice prices have already fed into headline inflation faster than expected.

Rice inflation has increased sharply to 8.7% in August 2023 from 4.2% in the previous month (see below). This has been the highest uptick since the 2018 rice crisis where rice inflation soared to its highest level of 12.6% in October 2018, bumping up headline inflation to 6.9%.

As we know, rice captures 8.9% of the Consumer Price Index (CPI) basket, and therefore any significant changes in rice prices translate to lower or higher headline inflation.

Source: DA Price Monitoring

Retail prices of rice from the regular-milled to the special kind have gone up sharply to PHP 43 – PHP 60 in August from PHP 38 – PHP 52 in NCR markets, an average of 16% year-on-year growth.

Source: PSA, DA Price Monitoring

September price cap and rice inflation

In an effort to mitigate further escalation of inflation driven by higher rice prices, the national government has implemented an Executive Order establishing a nationwide price limit for rice. According to the directive, ordinary milled rice can be retailed for a maximum of PHP 41 per kilogram, while the price cap for well-milled rice stands at PHP 45 per kilogram.

How would this impact rice inflation in September?

Looking at average prices of rice in September last year versus this year when price caps were implemented, we can still see average prices to grow by 6.1%. It is important to note that the price caps only covered regular-milled and well-milled rice, while special and premium rice sold in the market continued to follow prevailing market-determined retail prices (see below). Moreover, 100% compliance from retailers may not be guaranteed as this may result to losses despite the subsidies.

After a number of iterations, we may see rice inflation settling at 6.6%-7.0% (at 95% confidence interval) in September (see below), an improvement versus 8.7% in August, but it remains to be at an elevated level. This falls between the rice inflation prints in July and August 2018 at 5.1% – 7.5% where headline inflation settled at 5.8% – 6.6%.

While this may not be the case for the September 2023 headline inflation because of many moving parts in the CPI basket, we can expect headline inflation to still settle at an elevated level despite the price control. This takes into account other factors such as the new round of increases in fuel prices this month.

More sustainable fix sought

While price movements may have been controlled for a short while, higher global rice prices are seen to persist in the succeeding months. Thus, economic managers are looking to temporarily cut tariffs on imported rice from 35% to 10% to help reduce retail prices and ensure enough rice stocks given the impending El Niño. How could this impact inflation in the succeeding months? We’ll talk about that next.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

The US Federal Reserve kept interest rates unchanged in its Open Market Committee (FOMC) meeting on September 20, maintaining the Fed funds rate target range at 5.25%-5.50%.

The Bangko Sentral ng Pilipinas (BSP) likewise maintained the benchmark interest rates at its current level of 6.25%, for the fourth time since it its first pause.

See our report below on monetary policy rate updates and views, in light of the recently concluded FOMC and BSP Monetary Board meetings.

REPORTS

Policy Rate Updates (September 21, 2023) 

There is now an upward bias in our forecast for the country’s policy rates as inflation risks remain elevated.

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WHAT HAPPENED LAST WEEK

Lackluster activity seeped into the peso government securities (GS) market early last week, despite the Fixed Rate Treasury Note (FXTN) 3-25 maturity that freed up around PHP 140 billion of liquidity in the market.

Investor interest was mostly seen for short-term peso GS with sizable volume being dealt for 0.5-year Retail Treasury Bond (RTB) 3-11 given the value it provides against similar-tenored Treasury Bills (T-bills). The Bureau of the Treasury (BTr) was then seen partially awarding only around PHP 10 billion for the reissuance of FXTN 7-70 and capped the high of the auction at 6.373%, or near the bottom range of market expectations.

Post-auction, players showed buying interest in medium- to long-term peso GS on renewed appetite for duration. Buying momentum carried out in the succeeding sessions, but key economic releases on the global front were a cause for concern for some market participants. This eventually tempered the rally.

Despite elevated US yields, buying interest, mostly in longer-tenored bonds in the 15-year space, caused risk sentiment to turn at the end of the week. The scarcity of supply in the back-end l

Consumption is expected to continue to moderate in the succeeding quarters as pent-up demand fades and consumer sentiment remains pessimistic on big-ticket items amid higher interest rates, according to the Bangko Sentral ng Pilipinas (BSP). Nonetheless, seasonal consumption growth may still be seen in the fourth quater.

Meanwhile, headline inflation steered to the upside at 5.3% in August 2023 versus 4.7% previously, and after a consistent downtrend in the previous months. This was driven primarily by the uptick in prices of food and non-alcoholic beverages, restaurants and accommodation services, and transport.

Nonetheless, BSP Governor Eli Remolona Jr. recently said the inflation uptick in August doesn’t warrant another hike, indicating that the central bank may pause in its next monetary policy setting on September 21 and keep the benchmark interest rate at 6.25%. The recent uptick in inflation was driven by supply shocks, which Remolona noted to be temporary and would dissipate quickly.

Lastly, the dollar-peso exchange rate has remained stable at above the PHP 56 level, which was breached in August. Nevertheless, these levels remain stronger versus last year’s performance in the same month, when the currency pair rapidly depreciated from PHP 56 to above PHP 58 levels.

Considering these developments, particularly the rise in inflation, we have revised our full-year inflation forecast for 2023 to 6.0%, outlined as follows:

For more information on the performance and outlook for several macroeconomic indicators, as well as local macroeconomic news, please download the full report below.

REPORTS  

Economic Updates (September 15, 2023)

With the uptick in inflation in August, we have revised our inflation forecasts for 2023.

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The Philippines has lately been receiving a stream of investments to build an energy infrastructure using more sustainable sources—a strong indication of what has been a long trudge towards transitioning to green energy.

In August of this year, the Bureau of Investment (BOI) reported that it had so far approved nearly PHP 720 billion in investments. This is already 48% of the agency’s PHP 1.5-trillion target for 2023. Of this amount, one-third is accounted for by renewable energy (RE) projects, which is a big chunk of all active investments for the year.

The approved investments cover solar, hydroelectric, and ocean energy projects. One of them is a solar floating panel that can generate 835-kilowatts of energy. Some domestic firms, such as AC Energy Philippines, Citicore, and Aboitiz Power, have begun building, or in the process of building more facilities.

Foreign firms have also started to pour in money to tap into the country’s RE sector. Malaysia promised USD 50 million (about PHP 2.7 billion) to fund RE projects. Leaders from Qatar and Australia have also recently shown interest in providing support for RE projects not just in the Philippines, but across Southeast Asia.

More recently, the Philippines is getting more assistance to encourage investments into its RE projects when it secured a USD 750 million loan (about PHP 42.5 billion) loan from the World Bank for the country’s environment protection and climate resilience projects. As the World Bank said, the loan intends to “support ongoing government reforms to attract private investment in renewable energy.”

Current Renewable Energy Landscape

All these investments are intended to meet the requirements set by the Department of Energy (DOE), which is to increase the renewable energy-based capacity of the Philippines to 15,304 megawatts by the year 2030, under its National Renewable Energy Program (NREP). Energy sources being eyed include geothermal, hydropower, solar, wind, biomass, and ocean energy.

As of 2021, renewable energy sources already capture 22% of the power mix, and the NREP aims to further boost renewable energy power generation to capture 35% – 50% of the power mix by 2040.

Among major power plants with renewable energy sources, geothermal energy generates the most power, followed by hydropower, solar, and wind. The chart compares the actual mix for 2021 and the 2040 Reference (REF) and Clean Energy Scenarios (CES)

Bright prospects await solar and wind power sources with prospective increased capacity in the future, potentially adding 27,357MW and 14,988 MW respectively into the power mix by 2030. (Source: Global Energy Monitor; Geothermal: as of July 2023, Hydro: As of May 2023, Solar & Wind: as of January 2023)

The potential increase in capacity from solar and wind will lead the Philippines to become the top green power producer in Southeast Asia, overtaking current leader Vietnam. (Source: Global Energy Monitor; Geothermal: as of July 2023, Hydro: As of May 2023, Solar & Wind: as of January 2023)

“From laggard to leader”

The swift growth in renewable energy sources comes at a possibly critical time for the country’s energy sector. A valuable lesson we have learned from Europe’s energy crunch last year is the importance of energy independence. Boosting renewable energy sources is a move towards the right direction.

Moreover, the country has made strides in facilitating a more investor-friendly environment for those looking to invest in renewable energy ventures within its borders.

Just late last year, the Department of Energy has released a circular that amended 2008’s Renewable Energy Act, granting permission for full foreign ownership of renewable energy initiatives, encompassing the exploration, development, and utilization of solar, wind, hydro, as well as ocean or tidal energy resources.

Moreover, according to a study by the Institute for Energy Economics and Financial Analysis (IEEFA), a standout feature of the Philippines is the emergence of Philippine Stock Exchange-listed renewables developers and operators. This is apparently an edge over many Southeast Asian nations that lacked such listed companies.

There’s also support from the current administration for more environmentally sustainable forms of energy sourcing in an effort to address climate change. In the most recent State of the Nation Address, President Marcos reiterated the Department of Energy’s goal to increase the contribution of RE to 50% of country’s entire energy mix.

Enhancing investments in renewable energy sources not only plays a significant role in bolstering energy independence and security but also offers more benefits that can contribute to growth.

What could those benefits be? Find out in the second and final part of our series next week.

ALEXANDER VILLAFANIA is a writer for Metrobank’s Wealth Insights. For almost 20 years, he authored stories on science, technology, and education as a journalist for several local news organizations. He has since transitioned to writing more about financial literacy, believing that helping people develop a healthy relationship with money is key to enabling positive socio-economic and environmental change.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

Headline inflation steered to the upside at 5.3% in August 2023 versus 4.7% previously, and after consistent downtrend in the previous months, driven primarily by the uptick in prices of food and non-alcoholic beverages, restaurants and accommodation services, and transport.

This month’s inflation print came in higher than Research’s anticipated print, which indicates that the upside risks projected from increasing global rice prices and transportation fare hikes have already fed into headline inflation.

Given this recent development, Research reverts its FY average inflation estimate back to 6.0% (from 5.6%) for 2023 but maintains its 4.6% forecast for 2024.

Download our report for full details.

Inflation Report

August 2023 Inflation steered upward

Four commodity groups recorded lower year-on-year inflation, five (5) posted faster inflation, and four recorded stable inflation.

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As most economies grapple with stubbornly elevated inflation globally, China recently reported a drop in its consumer price index (CPI). Its July CPI inflation fell by 0.3% year-on-year, thereby bringing its economy into deflation.

This triggered worries of another deflation crisis like Japan’s in the 90’s that may have rippling effects to the global economy.

Drivers of China’s deflation

China’s recent negative inflation growth was driven primarily by decreasing transportation and food costs, which account for 14.5% and 20% respectively of its Consumer Price Index (CPI). Easing energy commodities (and access to Russian oil) have translated to lower transportation costs while a recovery from African swine fever resulted in an oversupply of inventory in the world’s largest producer and consumer of pork.

It would be premature to call this trend deflationary since core CPI, which excludes volatile energy and food prices, still grew by 0.8%. But it cannot be denied that China’s recovery since the end of its lockdown has been disappointing.

It can be recalled how global investors were ecstatic when the Chinese Communist Party (CCP) announced the end of its Zero-COVID policy in December 2022. The world’s manufacturing hub back in operations meant more efficient supply chains, which would help reduce costs, especially in countries that were still dealing with elevated supply-side inflation.

Consumer spending was also expected to explode as Chinese citizens were finally free to leave their homes and travel. However, the country started to realize the consequences of its prolonged lockdown.

Multinational corporations already started to diversify their manufacturing plants in other Asian countries such as India and Vietnam, leading to declining Chinese exports and jobs. Exports fell by 14.50% year-on-year in July versus -12.40% the previous month. While unemployment decreased to 5.30% from its 6.20% high in 2022, an alarming 1 in 5 young adults (16 to 24 years old) in urban areas remains unemployed.

Private sector investment spending also remains depressed. New bank loans and aggregate financing, a broader measure of credit, were only at CNY 345.9 billion and CNY 528.2 billion respectively from a staggering CNY 3.05 trillion and CNY 4.22 trillion the previous month. The lack of demand for real estate threatens China’s property sector, whose companies have started to default on their bond payables.

To make matters worse, the US President Joe Biden advocated to limit investment into China’s technology sector, citing national security issues.

Japan: The Bubble Economy

China’s problems today were compared to those of neighboring Japan in the early 1990s. Labeled the “Japanese Economic Miracle,” the country quickly recovered from its loss in the Second World War to become a technological and industrial powerhouse. Japanese electronics and automobiles were high quality yet inexpensive, so much so that the United States, which accounted for 40% of Japan’s exports, was quickly incurring a trade deficit.

In 1985, the Plaza Accord was signed – an agreement that would allow foreign exchange intervention to devalue the US dollar and help reduce the US’ growing trade deficit. The USD/JPY exchange rate fell from a high of 200 to the 128-level by 1987. With the stronger yen threatening to make Japanese exports less competitive, the government and central bank cooperated to boost public spending and ease monetary policy to drive up domestic demand. From 1986 to 1987, the Bank of Japan (BOJ) cut its policy rate by 200 basis points (bps), from 5.50% to 2.50%.

Easy access to cheap capital resulted in a growing asset bubble that saw Japanese corporations and individuals alike speculating on real estate and the stock market. From January 1985 to December 1989, the Nikkei 225 Index grew by almost 237%. By this time, Japanese corporations were profiting more from trading and positive revaluations while their core businesses started to lose to foreign competitors. Increasing asset prices allowed borrowers to assign larger amounts of collateral which led to an unending cycle of even greater borrowing and spending.

Japan’s inflation jumped to 2.4% year-on-year by April 1989 from a full-year average of just 0.68% in 1988. In response, the BOJ started a series of rate hikes totaling 350 bps that brought its policy rate to 6% by August 1990.

The shift to monetary tightening caused the asset bubble to burst, with property and stock prices falling in the years that followed. Declining asset prices resulted in growing debt ratios and unattractive balance sheets, further exacerbating the sell off. The Nikkei 225 Index dropped 63% from December 1989 to August 1992.

Chart 1. Nikkei 225 Index vs. Japan Consumer Price Index (CPI) year-on-year 1985-1995

The crisis eradicated as much as USD 2 trillion in value and left the Japanese in debt. Households prioritized saving which forced businesses to slash prices on goods and services to generate sales. This resulted in consistent disinflation which turned into deflation when the consumer price index (CPI) entered negative territory in 1995. Wages remained stagnant and businesses were forced to lay off workers, with the unemployment rate hitting a high of 12%.

The 1990s is known in Japan as “The Lost Decade” but the country struggled with bouts of deflation and disinflation well into the 2010s. It took the supply chain disruptions of the COVID-19 pandemic for businesses to start raising prices and profit margins, without alienating consumers. This has translated to renewed optimism in the Nikkei 225, but the index remains 20% below its 1989 high.

China and Japan: Not quite the same

People are quick to compare China to Japan because of the latter’s decades of experience with deflation. Aside from being geographical neighbors, both countries were the manufacturing hubs of their time and attracted significant amounts of foreign investment.

They both went on building sprees and severely overestimated the demand for real estate. Like the Nikkei 225, the China Securities Index (CSI) 300 was also on the rise and even managed to peak in February 2021 amid the pandemic but has since sold off due to loss of investor confidence, especially in the country’s inflated property sector and contentious technology sector.

But that is where the similarities seem to end.

Chart 2. China Securities Index (CSI) 300 vs. China Consumer Price Index (CPI) year-on-year 2018-2023

China’s problems today were not the result of loose monetary policy like what happened to Japan. Its economy did not overheat but rather, the country’s restrictive lockdown engineered a self-induced slowdown. To stimulate the economy, the People’s Bank of China (PBOC) has already cut its 1-year medium term lending facility rate from 2.75% to 2.50%. Chinese officials have recently announced plans for further monetary easing and fiscal support, which are the most appropriate actions they can take to avoid a recession. More government support was also promised for the struggling property sector to prevent more defaults.

Only time will tell if the Chinese government’s policies would help the world’s second largest economy truly recover from its post-pandemic woes. Compared to other nation’s governments, the CCP has been known for taking immediate and decisive actions with little internal resistance.

Once one of the fastest growing economies in the 21st Century, China will have to learn the hard way how to get out of a slowdown so that it does not get compared to its neighbor. As long as the country can reclaim once more its competitive advantage as the world’s top manufacturing hub and pull its property sector together, it should be able to conquer the threat of deflation.

EARL ANDREW “EA” AGUIRRE is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a master’s in business administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

Since succeeding Felipe Medalla on July 3, 2023 as governor of the Bangko Sentral ng Pilipinas (BSP), Eli emphasized the agency’s inflation-targeting role, described it as “structurally hawkish.”

It was also a demanding time for him as he took charge of BSP while local inflation remains well above target and borrowing costs already at a near 16-year high. This was a clear challenge for the new BSP chief to bring inflation back within the central bank’s 2-4% target range.

‘Raise rates if necessary’

Since taking the helm, Remolona maintained a hawkish stance regarding the BSP’s monetary policy direction. Although local inflation sharply moderated in recent months, he continued to emphasize that the BSP stands “ready to raise [rates] if necessary,” as supply side pressures and second-round effects still posed upside risks to prices.

The BSP chief has cited elevated rice prices out of Vietnam and Thailand, El Niño, the recent typhoons, and wage and transport hikes as some of the current risks to inflation—the same factors that have prompted the upward revisions in the BSP’s inflation forecasts in the recent MB Meeting.

Remolona also echoed the BSP’s view that local inflation will likely go back to within target by the fourth quarter of the year (and then likely reach below 2% in early 2024). He consistently affirmed that it would be a bigger mistake to reverse a premature easing, thereby making the case for a “prudent pause” for three consecutive meetings.

Battle vs inflation isn’t over

A notable change in the BSP’s rhetoric however, is how the current chief has cautioned against declaring that the battle against inflation has been won—contrary to previous pronouncements that the BSP “has done enough”.

Guidance on future interest rate decisions has also shifted from centering on the timing of rate cuts—counting months that inflation would likely be within target—to softening expectations that a pivot is forthcoming. Reiterating that it is “too early” to talk about cuts, Remolona also underscores that the BSP is “structurally hawkish”.

More recently, he also noted that the Philippine economy can tolerate a policy rate of as much as 6.8%, a level that will not impede growth, albeit 50 bps higher than the current level. We attribute this change in tone to a pick-up in inflation expectations given the aforementioned risks. As already emphasized by Remolona on different occasions, the BSP has maintained a hawkish bias for its primary mandate of promoting price stability through inflation targeting. This means that the BSP will tend to keep rates higher for longer, for its main purpose of moderating inflation back to target. This is in contrast with the US Federal Reserve, whose dual mandate includes maximum employment, apart from stable inflation.

When Metrobank compared the lengths of the Fed’s and the BSP’s most recent tightening cycles, we found that the Fed kept rates steady by an average of 11 months between the last hike and the first cut. Meanwhile, the BSP tended to pause for a longer period, 13 months on average, from the last hike to the first cut.

On policy rate guidance

When Remolona held his first Monetary Board meeting as BSP governor last August 17, he aligned his remarks with his previous statements during his first month in office, affirming that inflation will determine the central bank’s policy direction. Governor Remolona signaled that the monetary board sees no easing at least in the next meeting on September 21, and that the current policy rate is still low enough to not hurt growth.

While price pressures have significantly tempered, Metrobank expects the BSP to be vigilant on the upside risks to inflation mentioned earlier. These factors will be a major consideration for the BSP to keep interest rates higher for longer. Thus, we think the BSP will maintain current monetary policy settings until yearend to manage inflation expectations and the volatility of the USD/PHP exchange rate.

PATTY MEMBREBE and GERALDINE WAMBANGCO are Financial Markets Analysts at Metrobank – Institutional Investors Coverage Division. Patty, who is under the Market Strategy and Advisory Section, communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. Meanwhile, Geraldine provides research and investment insights to high-net-worth clients.

The Philippine economy posted a more muted growth of 4.3% year-on-year in the second quarter of 2023, lower than the previous quarter’s 6.4% growth and market expectations of 6.0%. This downward trend was driven by the contraction in government and investment spending, and moderating consumption spending.

Meanwhile, inflation has shown a continued slowdown in the latest July print of 4.7%. We expect this trend to persist in the succeeding months sans supply shocks. However, we also recognize looming upside risks emerging from higher rice prices which may feed into the headline inflation by yearend and until the following year.

The central bank governor recently noted that the recent economic growth performance is an indication of a broad-based slowdown in domestic demand and that the impacts of the monetary policy tightening are already manifesting in the economy.

Thus, the monetary board deemed it appropriate to keep the interest rate unchanged to allow for further moderation in inflation. The BSP further anticipates inflation to fall within its target by the 4th quarter of 2023, consistent with our view.

Lastly, hawkish signals from the US Fed amid still-stubborn inflation in the US has strengthened the dollar and led the USD/PHP exchange rate to breach the PHP 56 level. Nevertheless, the BSP remains undeterred and supportive of a market-determined exchange rate, focusing on its primary mandate.

Considering these developments, we have revised our full year GDP growth forecast for 2023 to 5.5% (from 6.0%), our full year inflation forecast to 5.6% (from 5.8%) for 2023 and to 4.6% (from 4.3%) for 2024, and our overnight policy rate forecast to 6.25% (from 6.0%) for 2023 and to 5.25% (from 5.0%) for 2024. See table below:

For the third consecutive time, the Bangko Sentral ng Pilipinas (BSP) kept the overnight reverse repurchase (RRP) rate steady at 6.25% in its latest Monetary Board meeting, as inflation continued to ease, possibly reaching the country’s inflation target by the 4th quarter.

BSP Governor Eli M. Remolona Jr. further said that the monetary board sees no easing in the interest rates in the near-term and indicated no cuts at least in the next meeting in September. He added that the BSP remains prepared to respond as necessary to keep inflation expectations anchored and to ensure price stability, which is the BSP’s primary mandate.

Below is Metrobank’s report outlining its current policy rate updates and views, in light of the recent BSP Monetary Board meeting.

Reports

Policy Rate Updates (August 17, 2023)

As expected, the central bank has remained hawkish in the latest Monetary Board meeting. We believe that the policy rate will remain at 6.25% for the rest of the year.

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