A REACCELERATION of inflation is still the most prominent obstacle to the Philippines’ economic forecast this year, which may present a threat to the central bank’s easing cycle, a Moody’s Analytics economist stated.
“The uptick in inflation poses the greatest danger for the Philippine economy and these originate from both local and international contributors,” Moody’s Analytics economist Sarah Tan remarked in an interview on Money Talks with Cathy Yang on One News on Wednesday.
“On the domestic front, I believe the concern is that food inflation continues to remain high due to recurrent weather disturbances that could negatively impact local supply,” she noted.
In January, inflation held steady at 2.9% although food inflation surged to 4% from 3.5% in December.
Numerous storms struck the nation late last year, resulting in agricultural damages amounting to billions of pesos.
“From an external standpoint, I think we fear that the tariffs enacted by the US could trigger a rise in global inflation due to interruptions in supply-chain networks,” Ms. Tan stated.
However, she indicated that the effect of US President Donald J. Trump’s restrictive trade measures on the Philippines is likely to be negligible.
“When we take a step back and evaluate the trade relations between the Philippines and the US, it is evident that the Philippines’ trade deficit with the US is quite minor, particularly in comparison with other economies, both globally and within ASEAN (Association of Southeast Asian Nations) economies.”
“This essentially implies that the Philippines is improbable to rank high on President Trump’s agenda,” she added.
Since assuming office in January, Mr. Trump has already imposed a 10% tariff on Chinese products along with duties on all steel and aluminum imports starting in March.
Conversely, Mr. Trump’s proposal to impose reciprocal tariffs on all nations that impose duties on US imports may have a deeper impact on the Philippines.
“If a blanket reciprocal tariff is implemented by the US, it will adversely affect the Philippines because the duties imposed on US imports into the Philippines are higher compared to the reverse,” she pointed out.
“If tariffs are reciprocated, then it will make Philippine products to the US more expensive and less competitive, which ultimately would be detrimental to our Filipino manufacturers and exporters.”
The US generally serves as the primary market for Philippine-made products. In 2024, exports to the US were valued at $12.12 billion or 16.6% of total export revenue.
“I believe the effect on the Philippines is fairly minimal given the low trade exposure to the US. Nevertheless, there are indirect channels of influence on the Philippines,” Ms. Tan added.
RISKS TO EASING
Inflationary pressures stemming from these risks could compel the Bangko Sentral ng Pilipinas (BSP) to exercise greater caution regarding further easing, Ms. Tan asserted.
“Should inflation begin to accelerate beyond the BSP’s objectives, that could postpone the timing and extent of potential policy easing in the Philippines,” she stated.
“If that turns out to be the case, then maintaining higher borrowing costs and prolonged inflation will create a situation conducive to further weakening in private consumption, which is not favorable for the economy, especially considering it serves as the main growth driver.”
The BSP surprised the markets when it kept the benchmark unchanged at 5.75% during its February 13 meeting, following a series of rate cuts over three consecutive meetings since initiating its easing cycle in August.
Ms. Tan was the sole economist in a BusinessWorld poll of 20 analysts who accurately anticipated the hold.
“It is a delicate balancing act that the BSP is performing. They must weigh both inflationary risks against the strength of the peso.”
“That being said, we don’t foresee the hold lasting for an extended period. In fact, the next rate cut might occur as soon as April, during the next Monetary Board meeting,” she remarked.
Notwithstanding the pause, BSP Governor Eli M. Remolona, Jr. mentioned that a rate cut remains a possibility at the Monetary Board’s upcoming rate-setting meeting on April 3.
He also indicated that the central bank remains on an easing trajectory, hinting at the potential for up to 50 basis points (bps) in cuts this year.
“With inflation largely back on target, and GDP (gross domestic product) growth still slightly beneath the government’s expectations, these factors may lead to a cut in rates sooner rather than later,” Ms. Tan noted.
The Philippines’ GDP grew by a slower-than-expected 5.2% in the fourth quarter. This brought the full-year growth rate for 2024 to 5.6%, falling short of the government’s target of 6-6.5%.
Meanwhile, Ms. Tan indicated that the forthcoming midterm elections in May could stimulate spending.
“Generally, elections, whether national or midterm, tend to provide a boost to the economy, particularly through the consumption channel.”
“Therefore, we will observe an increase in spending on goods and services related to campaigns. However, simultaneously, all that heightened demand may also signal negative implications for inflation,” she added. — Luisa Maria Jacinta C. Jocson
