Economy 3 MIN READ

Costly fertilizer: There’s more to our inflation woes

Fertilizer prices have been on the rise, prompting farmers to use less of it to grow their crops. This causes yields to go down, threatening the country’s food supply and elevating food prices even more.

November 16, 2022By Ina Calabio
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Fertilizer prices have drastically soared globally since 2021, owing to the surging cost of production, supply disruptions, and export restrictions.

The rise in energy prices has played a part in the upsurge of fertilizer production costs, as high natural gas prices led to a reduction in ammonia production, a key input in nitrogen fertilizer production. Meanwhile, surging power prices likewise pushed China – a major producer and exporter of urea and phosphate (types of fertilizer) globally – to impose restrictions on their fertilizer exports to stabilize their domestic prices and secure domestic supply, which then significantly reduced global supply.

Should we be worried?

In 2021, the Philippines imported 83% of its total fertilizer supply, of which 41% came from China, making the country susceptible to the upsurge in global fertilizer prices.

Based on the Fertilizer and Pesticide Authority (FPA) 2020 data, 45% of the country’s fertilizer imports comprised of urea, followed by ammosul (ammonium sulfate) comprising 22% Their average retail prices peaked in May 2022, reaching PHP 2,992.08 (prilled urea), PHP 2,969.47 (granular urea), and PHP 1442.6 (ammosul) per 50-kilo bag, as of the week from May 30 to June 3. Prices have grown by more than 100% compared to the same period last year.

Retail prices (end-of-month) of fertilizers have substantially risen since 2021. Source: Fertilizer and Pesticide Authority (FPA).

The surge in fertilizer prices has significantly impacted local farmers, prompting them to reduce fertilizer application, which then resulted in lower yields in agricultural commodities such as rice, among others. As of the November 3 data of the Bureau of Plant Industry (BPI), the country has already imported 3.2 million metric tons (MT) of rice, exceeding the 2.8 million MT full-year rice imports in 2021. This is to make up for the supply shortfall due to lower yields and the destruction caused by recent typhoons.

The United States Department of Agriculture (USDA), in its recent grain and feed update report (as of October 3), has already revised its production and import projections for the Philippines given the impacts of scant fertilizer application and calamities to rice yield. Milled rice production for MY 2022/23 is seen to decline by 3.51% to 11.975 million MT from 12.411 million MT, while imports are expected to increase by 3.0% from 3.3 million MT to 3.4 million MT.

While urea and ammosul prices have slightly tapered since May, they are still elevated and will remain so as China has extended its export restrictions until the end of 2022, keeping global supply tight. Moreover, the impending rise in export prices of the country’s major rice trade partners could pose challenges, especially given the increased rice import projection for the country and the impact of the peso depreciation.

Just recently, the country’s inflation hit a 14-year high of 7.7% in October, with food inflation accelerating to 9.8%. And until global market issues subside and interventions to boost local food production become palpable, we can expect more surges in food prices.

INA 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.

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Economy 2 MIN READ

November 2022 Updates: Better-looking growth outlook

The Philippines posted higher-than-expected GDP growth in the 3rd quarter of 2022, improving the economic outlook for the year. Nonetheless, elevated prices are expected to linger, pushing continued BSP action as global headwinds remain.

November 15, 2022By Metrobank Research
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The country’s inflation rate hit another all-time high of 7.7% in October, primarily driven by a faster acceleration in the prices of food and non-alcoholic beverages due to the impact of recent weather disturbances on the food supply.

Inflation is still seen to remain elevated in the coming months, peaking in the fourth quarter as global headwinds remain. Nonetheless, the economy has a better outlook as GDP for the third quarter of 2022 grew by 7.6%, beating market expectations, driven by strong consumption and export performance despite soaring prices.

Meanwhile, interventions by the BSP as well as an expected seasonal increase in OFW flows and exports seem to strengthen the peso as the USD/PHP exchange rate has remained at the PHP 57 to PHP 58 level after hitting PHP 59 in early October. However, interest rates in the coming months are expected to rise given the consistent hawkish statements by the US Fed and the Bangko Sentral ng Pilipinas’ signals of matching the Fed’s action.

Considering these new developments, we have revised our forecasts for 2022 (GDP, inflation, and RRP rate) and 2023 (inflation and RRP rate) in the table below, as we continue to monitor further movements:

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

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Economy 3 MIN READ

On Exchange Rates: Watch and Listen for Signals

The behavior of exchange rates is heavily influenced by a variety of factors, such as OFW flows, foreign direct investments, reserves, terms of trade, inflation, and interest rates. What may be less known is that transparency and signals from the central banks can also influence exchange rates.

November 10, 2022By Anna Isabelle “Bea” Lejano
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Movements in the USD/PHP rate are commonly known to be driven by overseas Filipino workers (OFW)’s remittances, the volume of exports, and differentials between the key policy rate of the Philippines and the US. However, there is also another factor that may not be as apparent: the signals communicated by the central banks.

Central banks, such as the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP), hike the key policy rate to curb inflation, ensure orderly market conditions, and manage volatility in the exchange rate.

Expectations on the key policy rate also play a crucial role in the movements of the exchange rate–not just on actual movements in the key policy rate. So, the central banks may give signals to manage expectations and subsequently, currency movements.

Case in point: though the US Fed Funds rate (FFR) was unchanged in May 2013 (see graph above), signals from the US Fed that it will tighten monetary policy led to the immediate depreciation of the USD/PHP rate, even if actual FFR hikes started in December 2015. Because markets priced in the hike and anticipated that returns for US investments will be higher than that of the Philippines, the peso depreciated.

The same situation happened in 2021. The US Fed signaled a tapering of its quantitative easing (QE), where the central bank buys securities from the open market to bring down interest rates and raise the money supply. The US Fed aslo signaled rate hikes for the following year. Because of these signals, the market priced in the anticipated tapering of QE and the contractionary monetary policy of the US Fed. This led to the depreciation of the peso even before 2022, earlier than the US Fed hikes.

In the same way, the BSP also sends signals to manage fluctuations in the exchange rate.

BSP Governor Felipe Medalla announced that the BSP would match the US Fed hikes point by point way before the Monetary Board meeting on November 17 and even before the Federal Reserve Open Market Committee (FOMC) meeting on November 2, where it was widely believed that the US Fed would hike its FFR by 75 basis points or 0.75 percent.

Even if the BSP’s meeting was still weeks away and the US Fed hiked by 75 bps resulting in only a 25-basis point policy differential between the RRP rate and the FFR during early November, the peso stayed at the PHP 58/USD level. The BSP’s intervention in the FX market by selling dollar reserves also likely aided the peso from being volatile and from further weakening.

The average policy rate differential between the PH and US is 100 bps or more, at least in 2022. So, a 25-basis point differential should have depreciated the peso.

Mr. Medalla said that the signaling was done to temper any impact on the peso because of the recent US Fed hike before the BSP Monetary Board meeting. This shows that statements from the central bank can preempt the foreign exchange market from reacting, even if there are no actual hikes. Thus signaling from the central bank can influence currency movements as much as actual policy rate hikes.

Since the BSP signaled that it would match the Fed point by point for the remainder of the year, a 75-bps hike in November and a possible 50 bps hike in December by the US Fed would likely bring RRP rates at the 5.50 percent level by yearend.

Meanwhile, US FFR rates are seen to settle at 4.50 percent, maintaining a 1 percent policy differential from the RRP. Hopefully, these signals from the BSP could help the peso from further depreciating.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Economy 3 MIN READ

Saving adequate reserves for the rainy days

Despite the decline in the country’s GIR, or Gross International Reserves, it remains in good shape as the BSP has built up higher buffers over the years for times like these.

October 21, 2022By Ina Calabio
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Foreign currency reserves have been falling at the fastest pace globally since 2003, according to Bloomberg, a provider of financial news and analytics software.

These are assets held by central banks to back liabilities and which help manage external shocks that impact on their currencies (e.g., preventing their respective currencies from rapidly devaluing or depreciating). And central banks have been intervening to lend support to their currencies.

Bloomberg data show that reserves have declined by about USD 1 trillion, which is partly attributed to devaluation changes as the dollar continues to strengthen, posing an impact on various currencies globally.

For the Philippines, the GIR is likewise in decline, currently for the 7th consecutive month, posting USD 95 billion by the end of September 2022 (BSP preliminary data). The decline is attributed mainly to the country’s payments of its foreign currency debt obligations and an adjustment in the value of gold holdings as the price of gold fell in the international market.

Some ASEAN economies (see table below) are in a similar situation. Their foreign currency reserves went down rapidly, owing to increased imports, foreign debt payments, and foreign exchange interventions to defend their currencies, among others.

In Thailand, for instance, the accelerated depletion of reserves was due to its increased imports of oil to store ahead of winter. For Indonesia, the recent fall in its foreign reserves was likewise due to its foreign debt payments and its central bank’s intervention to stabilize its currency.

A host of factors have forced central banks of ASEAN countries to use up their GIR.

Managing volatility, balance of payments

The BSP holds international reserves to support the foreign exchange requirements of the country when the supply of foreign exchange from commercial banks is limited to meet demand, thereby managing volatility in the exchange rate. It also serves as a stand-by fund to finance any deficit in the country’s balance of payments (BOP).

Thus, whenever the BOP deficit widens and needs financing from the reserves, the level of reserves is consequently reduced. Alternatively, when there are surpluses arising from the net inflow of foreign exchange in the country’s external transactions, the level of international reserves builds up.

For instance, a surplus from BSP’s purchases of foreign exchange from its FX operations, higher income from its foreign investments, and an increase in the net foreign currency deposits of the national government all increase the country’s foreign reserves.

In the same manner, the country was able to significantly shore up its reserves in the past years, hitting all-time-high levels during the pandemic. This can be attributed to gains from the BSP’s foreign exchange operations, income from foreign investments, foreign currency deposits of the national government with the central bank, and additional allocation of Special Drawing Rights (the international reserve asset created by the IMF to support its member countries), given the IMF’s efforts to boost global liquidity amid the pandemic.

Now that the country is faced with external volatility, it has tapped into this buffer.

The Philippines’ GIR levels (in millions of US dollars) are still substantial compared to pre-pandemic levels.

The traditional gauge of the GIR’s adequacy is if it can finance at least three months’ worth of the country’s imports of goods and payments of services and primary income. Thus, while the country’s GIR faced another dip recently, it is still more than adequate to cover 7.6 months’ worth of imports of goods and payments of services and primary income.

Compared to its neighbors, Indonesia and Malaysia, the Philippines is in better shape.

With all the market volatility right now, the wisdom of having substantial foreign currency reserves has become more apparent.

INA 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 in the front row at the gigs of her favorite bands.

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Economy 2 MIN READ

Decoding the mystery behind consumer spending

Consumer spending is largely driven positively by several macroeconomic variables, which could broadly offset the possible consumer spending contraction caused by high inflation.

October 19, 2022By Anna Isabelle “Bea” Lejano
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Consumer spending, a measure of all our spending on goods and services, is a crucial component of our economy.

It drives our country’s economic growth, comprising around 73-74 percent of the Philippines’ gross domestic product for the past five years. Even at the height of the pandemic, consumer spending was still a big part of GDP, capturing 74-75 percent in 2020.

With all the geopolitical tensions and the subsequent market volatilities happening in the country now, i.e., climbing prices, high inflation expectations, depreciation of the peso, etc., will consumer spending still be robust in the remaining months? Will it be able to sustain our economic growth?

To answer these questions, we first have to know whether these global events actually drive consumer spending, or, maybe at the very least, how correlated they are with consumer behavior.

Factors affecting consumer spending

To do this, we looked into remittances (in US dollars) from overseas Filipino workers (OFWs), the USD/PHP exchange rate, the inflation rate, and inflation expectations (as proxied by the 10-year Philippine treasury bond rates) and analyzed whether their movements could help explain consumers’ spending behavior.

Our results show that all these variables have a statistically significant relationship with consumer spending. That is, they all have correlations or relationships with consumer spending that are not simply caused by chance or luck.

Note, however, that the strength of their effect, or relative importance, on consumer spending vary. Let’s rank them from highest to lowest.

What affects spending the most?

First, the strength of the positive effect of inflation expectations on consumer spending was the biggest. When inflation expectations are high, consumer spending also strengthens in anticipation of future higher prices. People would rather spend now than later.

OFW remittances were second to inflation expectations in terms of having a strong positive link with consumer spending. The higher the US dollar remittances sent by OFWs to their families in the Philippines, the higher their capacity to spend here in the country, and this boosts consumer spending.

Peso depreciation is also positively correlated with consumer spending. It was the third in terms of ranking. The weaker the peso, the higher the OFW remittances would be in peso terms and, thus, the higher the purchasing power.

Fourth in ranking is inflation, and it is negatively related to consumer spending. The higher the inflation, the weaker consumer spending tends to be.

Still growing

So, although the Philippines is in a high-inflation environment right now, consumer spending is still expected to be strong. The 10-year rates are going up (meaning, inflation is expected to further climb in the next few months), there is an expected seasonal increase in OFW remittances in the fourth quarter, and the local currency continues to weaken.

Again, the effect of these three variables together on consumer spending is expected to more than offset the drag created by current inflation.

The prospect of inflation peaking in the fourth quarter may lead to a slight contraction in consumer spending, and people may be more discriminating in they spend on.

As a whole, however, consumer spending will still grow in the fourth quarter because the other variables will dominate in terms of overall impact, largely offsetting the possible contraction pressure from high inflation.

This will most likely continue to be a major contributor to GDP and sustain economic growth.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Economy 1 MIN READ

October 2022 Updates: Preparing for more challenges ahead

The Bangko Sentral ng Pilipinas (BSP) hiked rates in September following the aggressive policy rate action of the US Fed. Further peso depreciation and BSP rate hikes are expected.

October 11, 2022By Metrobank Research
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The inflation print in September spiked to 6.9% due to second-round effects. Inflation is expected to remain elevated in the coming months, peaking in the fourth quarter. With the USD/PHP exchange rate hitting the PHP 59 level in early October, the local currency is anticipated to remain weak as the US Fed, at its meeting last month, signaled more aggressive rate action with no pivot until 2024. This may potentially push the BSP to further raise interest rates to lend support to the peso. Considering these new developments, we have revised our overnight rate and USD/PHP rate forecasts for 2022 and 2023 in the table below:

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

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Economy 3 MIN READ

Hiking to reach the “price stability” summit

Can future rate hikes by Bangko Sentral ng Pilipinas help fight inflation while managing economic growth? Can a difference of 75 basis points between the Philippines’ overnight rates and the US Federal funds rate do the job?

September 30, 2022By Anna Isabelle “Bea” Lejano
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Central banks globally have raised interest rates to help curb inflation (as explained in more detail here). In the Philippines, the Bangko Sentral ng Pilipinas (BSP) has been hiking the overnight reverse repurchase rates (RRP) to bring inflation back to the target range of 2% to 4% in the medium-term.

Aside from controlling inflation, another purpose of these hikes is to ensure orderly market conditions and to manage the volatility of exchange rates (without necessarily setting the exchange rate itself) since depreciation is an inflationary concern.

Like many other central banks, the United States Federal Reserve (Fed) is hiking the Federal Funds Rate (FFR) to quell inflation. However, the Fed has been more aggressive than the BSP; the former has so far hiked key rates by 300 bps (or by 3.0%) since January, while the latter has hiked by only 225 bps.

Policy rate differentials

The BSP appears to be taking care of maintaining a comfortable policy differential between the RRP and the US Fed Funds Rate (FFR); not doing so would mean the possibility of capital flight due to higher rates of return for US investments, as these are seen as a safe haven. When this happens, the peso would depreciate further, and this would add to inflationary pressures.

As stated by BSP Governor Felipe Medalla in a September interview with Bloomberg; “Clearly the Fed’s policies have affected our choices. We don’t want to match the Fed but, at the same time, we have to respond.” This is because the BSP needs to ensure price stability without damaging the growth of the country—a tough balancing act.

The table above also appears to show that the BSP is comfortable with a 75-basis point policy differential, at the very least. Note that on July 14, the BSP announced a surprising off-cycle rate hike by 75 bps, just a little after US data showed that inflation spiked to 9.1% in June, which was the highest since 1981. This was also amid Fed officials signaling a hike of 75 bps in their July 27 meeting.

The off-cycle 75-bp hike announced early on was likely done to avoid parity between the RRP and the FFR, since there was no scheduled BSP Monetary Board meeting that month. This can also imply that the BSP would only allow a 75-bp differential at the very least.

Terminal rate outlook

At the Federal Open Market Committee (FOMC) meeting in September, the Fed funds terminal rate outlook rose to 4.4% in 2022 and 4.6% in 2023. This would put rates in the 4.25% to 4.5% range in 2022 and the 4.5% to 4.75% range in 2023, since the Fed sets its fund rate in quarter-point increments. Thus, additional FFR hikes totaling 125 bps in 2022 and 25 bps in 2023 are to be expected.

If we consider at least a 75-bp differential between the RRP and FFR, this will bring the RRP to a rate of 5.25% by the end of 2022, and 5.50% by the end of 2023. This entails a total of 100 bps of remaining RRP hikes in 2022 and 25 bps in 2023.

We expect the BSP to continue hiking rates because we forecast that inflation will peak around the 4th quarter of 2022. Risks to the calls would include a lower 3rd quarter GDP growth, a slower acceleration of inflation in the coming months, and the strengthening of the peso in the 4th quarter, which corresponds to the export season and the seasonal increase in OFW remittances.

All of these could translate to lower RRP hikes than estimated.

Of course, the hope is that the RRP hikes will enable the Philippines to reach the “price stability” summit at the soonest possible time, without doing substantial damage to the economy.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Economy 3 MIN READ

What’s cooking? Costlier rice, that is

Extreme weather across major rice-producing countries will impact global rice production stoking worries of an upward pressure on global rice prices. For the Philippines, however, the real concern is Thailand and Vietnam’s upcoming collaboration to bump up their prices.

September 22, 2022By Ina Calabio
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Extreme weather across the world’s major rice-producing countries – drought in China and massive monsoon floods in Pakistan – is threatening the global output of rice. The drought in China is expected to reduce production by 3 to 6 percent (around 6.7 million metric tons), while an estimated 10 percent (around 0.86 million metric tons) in rice production is projected for Pakistan. This means projected production for China would go down to 142.3 million MT, and 7.7 million MT for Pakistan, as seen in the table below.

Rice balance sheets of China and Pakistan

Droughts and floods are wreaking havoc on the world’s rice supply. This table shows the computation of Metrobank Research illustrating the impact of such events based on the USDA’s status quo projection for MY (marketing year) 2022/23, which reflects their latest grain and feed update reports. Rice balances apply a marketing year (or marketing season), which means values refer to a 12-month period that starts with the harvest of rice (which may or may not coincide with the calendar year).

Is it a cause for worry?

While the drought could potentially reduce China’s production to 142.3 million MT, it still maintains a rice stock of more than 100 million MT. The status quo projection for China’s ending stocks is at 109 million MT.

If the country taps its buffer stocks to fill all the gaps in the decline in production, its buffer stock would go down to 102.3 million MT – a sufficient volume still above 100 million MT.

Meanwhile, Pakistan, one of the major rice producers and an exporter to China (19.5% of China’s total imports, or 1.2 million MT), has suffered from massive floods and is estimated to have a decline in production by nearly a million tons (0.86 million MT) which could potentially bring down their exports to 4.14 million MT.

Nevertheless, this may still have a minimal impact on China due to its large buffer stock and the possibility of sourcing imports from other major rice-producing countries such as Cambodia and Myanmar, which are set to boost production and exports and whose main export market is China.

In the Philippines, rice imports as of September 2022 are majorly sourced from Vietnam (82.2%), with some volume from Myanmar (7.2%), Thailand (5%), Pakistan (5%), and others (0.6%). While the Philippines imports some from Pakistan, which is facing production losses from the floods, the Philippine’s other trading partners, Thailand and Myanmar, are aiming to further boost their exports.

Moreover, the Philippines’ buffer stock is also sufficient to cover any gap from imports for the year as the country is projected to have more than 4 million MT of ending stocks. Thus, supply-wise, there would be no major impact on meeting the country’s rice demand.

The real potential concern

The domestic price of rice (wholesale) has been stable at PHP 39-40/kilo since September 2019. Meanwhile, the imported price of rice (Vietnam and Thailand) remains significantly lower than the domestic wholesale price (both the baseline export price and the price with a 35-percent tariff).

However, while there has been no significant upward fluctuation in both countries’ rice export prices since February 2021, Thailand and Vietnam are jointly seeking to make their rice export prices more competitive to aid their farmers amid the rising cost of production.

Local rice prices may soon increase as Thailand and Vietnam increase their prices. (Source: Domestic Prices – PSA OpenStat, Export Prices – FAOStat)

Both countries are already in agreement to raise prices, which would certainly have an impact on countries dependent on them for rice imports like the Philippines. While the answers to “when” and “by how much” are still under negotiation, one thing is guaranteed: prices will rise. The Philippines should get ready for that.

INA 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.

 

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Economy 3 MIN READ

Peak inflation: Are we there yet?

Though inflation in the Philippines slightly eased to 6.3% in August (from 6.4% in July), it is highly likely that inflation has yet to reach its highest point given continued geopolitical tensions, second-round effects, and peso depreciation.

September 16, 2022By Anna Isabelle “Bea” Lejano
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You probably think that inflation is now easing, given the latest inflation data.

Not necessarily. The minor 0.1% relief posted by Philippine inflation in August was driven by the slower acceleration of transport costs arising from lower gasoline and diesel prices, as global oil prices declined amid recession concerns fueled by high US inflation prints and the slow economic recovery of China. This was also due to curtailed growth in the prices of food and non-alcoholic beverages since prices of meat, fish, and vegetables declined.

August’s 6.3% inflation rate was only a tad bit lower than the prior month’s 6.4%, which was the highest in around four years, or since October 2018.

However, hold that sigh of relief. It is unlikely that inflation has already peaked. For one, only three out of 12 commodity groups actually had a slower acceleration in prices in August. The other nine (i.e., alcoholic beverages and tobacco, clothing and footwear, etc.) posted higher inflation rates.

In addition, second-round effects (which we wrote about here) are expected to drive inflation even higher. Minimum wage hikes were enforced in 14 regions all over the Philippines last June 2022, and some are to be implemented in tranches until January 2023. Another jeepney fare hike is also due this September, apart from the hike implemented in July. These effects are seen to further add to inflationary pressures in the coming months.

Moreover, continued hawkish signals from the Federal Reserve may further contribute to peso depreciation. The peso hit the PHP 57 level in early September. If the local currency continues to weaken, this will result in costlier imports, which will substantially contribute to inflation since the Philippines is an import-dependent country.

On top of this, the Philippines has been experiencing supply shortages in certain food commodities (e.g., salt, sugar, and onions) due to various structural complications and harsh weather, prompting the need to increase imports. A depreciated peso and a shortage in supply that raises import dependence are a bad combination and may thrust inflation upwards.

Note that a further decline in global oil prices may help alleviate inflation in the second half of 2022, amid renewed recession and diminished demand concerns in the US, as the Fed is seen to maintain or be even more aggressive in its rate hikes given high US inflation prints for August. However, this may be offset by a cold winter in the northern hemisphere accompanied by limited energy supply sources, which may push energy prices up.

The Organization of Petroleum Exporting Countries (OPEC) also stuck to its global oil demand forecast of an increase of 3.1 million barrels per day in 2022, despite concerns of a recession and lower demand. This has recently rallied oil prices.

Thus, we expect Philippine inflation to peak at around the 4th quarter of the year, driven by second-round effects passing on to food, transport, and other non-energy commodities, and aggressive Fed rate action which may lead to currency depreciation. Continued energy supply constraints, especially during the winter season, may also push energy prices up, which will likely cascade to the Philippines.

As the Department of Trade and Industry (DTI) said, “stock up on your Noche Buena items”. Inflation is probably here to stay.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Economy 1 MIN READ

September 2022 Updates: Inflation, peso depreciation, rate hikes

The inflation print slightly eased in August 2022, but global market movements and the strengthening dollar will continue to put upward pressure on prices. Further peso depreciation and BSP rate hikes are still anticipated as the Fed continues to aggressively hike rates.

September 14, 2022By Metrobank Research
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The inflation print in August 2022 slightly eased to 6.3% due to the slower rise in transport costs and food and non-alcoholic beverages. Nevertheless, inflation rates in the succeeding months are seen to remain elevated as second-round effects, peso depreciation, and the upward pressure on global energy commodities remain.

With the USD/PHP exchange rate hitting 57 levels, further depreciation of the peso is anticipated as the US Fed signaled a continued hawkish policy stance, which will potentially push the Bangko Sentral ng Pilipinas (BSP) to raise interest rates to lend support to the peso. Considering these new developments, we note an upside bias for the overnight rates in 2022 and USD/PHP exchange rate for 2022 and 2023 in the forecast table below as we continue to monitor further movements:

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

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