In the Philippines, there is a noticeable trend of easing inflation. According to official reports from the central bank, the initial headline inflation rate stood at 8.7 percent in January 2023. However, a significant decline has been observed since then, with the rate dropping to 4.7 percent by July 2023. Notably, the Philippines has been grappling with notable inflationary pressures within the region. This situation raised questions about the strategic approach President Ferdinand “Bongbong” Marcos Jr. would adopt to address this concern.
To counter the elevated inflation levels, the central bank has employed a strategy of interest rate hikes. Presently, the benchmark interest rate is maintained at 6.25 percent, a relatively higher level compared to other Southeast Asian nations. As outlined in the May monetary policy report, the central bank’s current plan is to retain these interest rates for the time being. This stance is based on the anticipation of a decline in inflation to 5.5 percent for the year, with an expectation of it dipping further to below 4 percent in 2024. It is essential to note that these projections hinge on the assumption that there will be no significant supply-side disruptions.
The Philippine economy is notably sensitive to price fluctuations in critical sectors like food and energy. This sensitivity is attributed to two main factors. Firstly, the Philippines heavily depends on imports for items like rice and energy sources such as coal. Consequently, any global surge in the prices of these commodities directly impacts the country’s costs. Unlike nations with substantial domestic coal reserves or self-sufficiency in rice production, the Philippines absorbs the impact of increased prices for imported goods.
As of February 2023, the inflation rates for food items and energy remained considerably high at 10.8 percent and 8.6 percent, respectively. In recent months, however, there has been a gradual decline, with food prices easing to 6.3 percent by July 2023 and energy prices further subsiding to 4.5 percent. This shift can be attributed to a calming in global energy markets, resulting in decreased costs for coal and oil, which had previously experienced significant spikes.
Nevertheless, the imposition of restrictions on rice exports by India could potentially exert pressure on food prices within the Philippines. While the country doesn’t heavily rely on direct rice imports from India, a reduced overall supply could lead to more widespread price increases. Additionally, concerns arise regarding the impact of weather conditions on crop yields, particularly in light of the El Niño weather pattern this year. These dynamics necessitate a wait-and-see approach.
Another factor contributing to the Philippines’ higher inflationary pressure compared to its neighbors is its economic structure. Numerous sectors within the country, including electricity, operate within a strong market-oriented framework. Consequently, consumer prices for electricity reflect the actual costs incurred in its generation, leading to relatively higher electricity costs in the region.
In contrast, many Southeast Asian countries adopt economic structures with greater government intervention, shielding consumers from price fluctuations. For instance, in Indonesia, state subsidies and market interventions mitigate the impact of price hikes. Conversely, in the Philippines, consumers directly bear the brunt of price increases, contributing to the challenges posed by inflation.
Initial expectations for the 2023 budget envisioned optimistic trajectories for the peso, inflation, and economic growth. These forecasts were relatively accurate, as the Philippine economy appears poised for a favorable post-pandemic trajectory. Notable indicators include robust growth, a strengthening peso, and a continued moderation of inflation into 2024. The extent to which these outcomes can be attributed to President Marcos’ economic policies remains a topic of debate. Regardless, his administration will undoubtedly be associated with these achievements.