6.4% – the inflation rate for August 2018 (up from 5.7% last July 2018 and highest since 2009).
P53.93 – the currency exchange for the peso for every one (1) US dollar, up from 53.75 the other day. The lowest value of the peso in the last 12 years.
P57.00 unleaded gasoline per litre. NFA Rice at P50-P60 per kg. Prices of commodities up by 10-30%.
Trade deficits – Export vs. Import
The economists paint divergent scenarios to the numbers. For one, the decline in value of the peso is attributable to the strengthening of the dollar. On the bright side, this means that this is good for exporters and the OFWs. According to investors last December 2017, the export industry would see a growth of up to 12-20% in 2018. But that was just a prediction.
The Philippine export industry faces challenges around the Southeast Asian region where the cost of labor is much cheaper than here. With that alone, the cost of export of goods manufactured in the Philippines would certainly be more expensive than say, the same goods made in Myanmar. Hence, while a strong dollar may be advantageous to some sectors, it may generally be bad for the country as a whole.
OFW remittances are another major source of dollar inflow to the Philippines. This country is one of the major exporters for menial labor to other countries. Unfortunately, OFW remittances will have its peaks and troughs because it is highly dependent on the geopolitical climate where the OFW is based. While the personal remittances had slightly risen during the first few months of 2018, these remittances were down 4.5% last June 2018 mainly due to the government’s decision to repatriate thousands of Filipino workers suffering from abusive working conditions in the Middle East. The countries that reported the largest decline in remittances were Saudi Arabia, United Arab Emirates and Kuwait (PDI, Aug 16, 2018). It is expected to improve as the year comes to an end.
It is easy to tweak the data to look like the economy is a rosy one. The question is, are we interpreting the numbers in favour of providing a make-believe picture or was the economy of the country in a better place before the TRAIN law and the Build, Build, Build program of the government?
An indicator of the gains of the weak peso is the trade deficit. In short, one must not only look at the export industry but the import as well. The import expenses minus the export is called the trade gap. The more we export, the better for our economy when the peso is weak because we’re getting more bang for the buck! The more we import, the larger the trade gap. This means that we’re losing because we’re buying “imported goods” at a higher exchange rate – the lower peso value vs. the dollar.
The bad news is that the country’s trade gap in June was $3.35B, more than twice higher than the $1.59B in the same month in 2017. Hence, benchmarking us as Asia’s worst performing currency.
What accounts for the higher importation? Basically, imports from other countries increase when one cannot cope with local production. The cost of local production is something that businessmen take into account. If the cost of labor (and the conditions of hiring and firing are burdensome to the business community, taxation and exemptions, local government business conditions, ease of doing business, etc.) is more expensive in the long run, the businessmen shift to importing finished products rather than manufacturing it in the country. Instead of opening a factory, they will open a company that manufactures elsewhere, and import finished goods.
The top imports were iron and steel (79%), cereals and cereal preparations (57%), electronics (35%), mineral fuel (32.5%), and transport equipment (27.8%) (Rappler, Aug 8, 2018).
What about inflation rate?
Economics 101 teaches us that inflation is the rate at which the general level of prices for goods and services rises, and consequently, the purchasing power of the currency falls. In short, they are inversely proportional to one another. As the inflation rate increases, the purchasing power of the peso declines proportionally. A low inflation rate is important for the economy, as it is a reflection on the autonomy of a nation to its own resources. Inflation rate is measured by the consumer price index (CPI).
In short, the higher the inflation rate, the lower the purchasing power of the peso. For those who earn in dollars or get remittances from relatives in dollars, the exchange from dollar to peso may offset the spending of the household due the weaker peso. The jump in cost of goods went to food and non alcoholic beverages. Cost rose faster for alcoholic beverages and tobacco, furnishing and household equipments, health, restaurants and miscellaneous services, and recreation and culture (tradingeconomics.com/philippines).
Central Bank and the interest rates
In order to curb and limit inflation (and avoid deflation) the central bank can intervene by raising interest rates. How does raising interest rates decrease inflation?
One of the reasons for inflation is that consumers use more money to spend for commodities, goods and services. When the central bank increases the interest rate, we have less money to spend because borrowing becomes more expensive. For example, if the interest rate is increased by 0.5-1% for every 1,000,000p borrowed (from 6% to 7%), that would mean paying back the principal by 10,000p more. Factors like duration of loan, down payment, etc will affect the final amortization. When borrowing becomes more costly, as a general rule, people hold back on expenses. With less spending, the economy slows down and inflation decreases.
The last quarter
Unlike the Arroyo administration where the inflation rate soared to 6.6% in March of 2009 (first quarter of the year), the current inflation rate increase comes at a time when we are in the “-ber” months. The last quarter of every year is the most volatile period in any economy. It’s important to also note that the exchange rate of the piso was 45.50-46 at the time of Arroyo.
Every government is like a business enterprise. The last quarter of the year is always the deal breaker. The Christmas holidays in the Philippines is one of the merriest. It’s also the longest Yuletide in the world. And the most number of days with no work.
While the long holiday is a treat for the Filipino community (peak arrival for the Balikbayans and OFWs), it has served as an albatross to the business community. The work force utilise their saved leaves for this moment. Operating a business at this festive occasion takes a toll on cost of labor. The trigger of spending is highest during the last three months of the year where employees get their 13th month pay and the Christmas bonuses. At the start of the new year, there is more spending for the various businesses – obtaining business permits from local governments, payment of real estate taxes, renewal of additional permits for business operations, etc. The outflow of cash is highest during the “-ber” season. And while it may seem for good reasons, remember the cardinal rule of inflation – higher spending means that there is a lot of cash going around and because it is the Christmas holidays, the importation is definitely much higher…triggering more inflation.
The aforementioned explanation may be a superficial one. The difficulty here lies in trying to find a win-win situation for the masses. While the middle class is now beginning to feel the effects of inflation (coupled with the effect of taxes on what is essential commodity to those who own vehicles and save for vacations abroad), it is the lower socioeconomic class that are most affected. Healthcare is relegated to the bottom of the totem pole, when having to decide between treating an illness or putting food on the table. The cycle of inflation comes at the worst time. And no other disruption can divert hunger from the political circus.