Economist’s grim forecast: Philippines faces stagflation amid rising prices and slower growth

courtesy: Bilyonaryo.com

If an economist, closely watching the Philippines, is to be believed, the country is headed for ‘stagflation’ amid higher consumer prices and slower economic growth.

“The bigger story now is that we are seeing inflation head north and GDP [gross domestic product] growth head south,” Nicholas Antonio Mapa, senior economist for the Philippines at Dutch financial giant ING, told Bilyonaryo.com on Thursday.

This was Mapa’s assessment after the Bangko Sentral ng Pilipinas (BSP) announced an unscheduled 25-basis-point (bps) hike in the policy rate to 6.5 percent on Thursday, amid a prolonged fight against elevated inflation.”

For instance, many economists lamented that the one-month rice price cap imposed by the government did little to significantly lower the price of the Filipino staple food.

Mapa expects headline inflation to average 6 percent by end-2023 — it’s poised to be the highest annual rate of increase in prices of basic commodities since the 8.2 percent recorded during the global economic downturn in 2008.

Unfortunately for the BSP, it “has no precision strike capability to hit inflation,” Mapa lamented. “What the BSP does have is a sweeping tool that will need to hit economic growth first, to achieve slower inflation.”

As such, the combination of expensive goods and services, which lessen consumption, and high interest rates that temper the appetite for both consumer and corporate borrowings, led Mapa to slash his GDP growth forecast for 2023 to only 4.7 percent, way below the government’s 6-7 percent goal.

Even so, Mapa sees economic growth as low as 4 percent as the worst case for this year. “With interest rates like that and inflation above target, we could see growth really slow. Economic growth is the collateral damage for rate hikes,” he said.

I also see the Philippine peso struggling amid souring investor sentiment in the Philippines,” Mapa added.

Bloomberg recently reported that amid a supposed exodus of foreign funds, Philippine stocks are trading at their cheapest in 13 years compared to stocks elsewhere in Asia.

For Mapa, “sentiment is souring because investors see economic growth slowing.”

What could be worse? Mapa said he fears that “slower growth invites a credit rating downgrade and loss of confidence with no improvement in inflation.”

The Philippines’ investment-grade credit ratings allow the government to borrow at cheaper rates, hence a downgrade risks jacking up public borrowing costs.

President Ferdinand Marcos Jr.’s economic managers will review the administration’s near-term macroeconomic targets in the first week of November, National Economic and Development Authority (NEDA) Undersecretary Rosemarie Edillon disclosed during the Second SGV Tax Symposium last Wednesday.

Since the first-half GDP growth of 5.3 percent disappointed, economic output needed to grow by 6.6 percent during the second semester to hit at least the low end of the full-year target, Edillon noted.

Next month’s “special” meeting of the Cabinet-level Development Budget Coordination Committee (DBCC) will come at a time when the economy is struggling due to high inflation, persistent government underspending, as well as heightened geopolitical risks wrought by the surprise war between Hamas and Israel.

The DBCC meeting will also be watched by the market closely amid rumors of a shakeup in the economic team, including the supposed exit of Finance Secretary Benjamin Diokno to be reportedly replaced by Batangas Representative Ralph Recto, right after the barangay elections on October 30.