* This is my article in BusinessWorld on November 13, 2018.
Last week, the October inflation and 3rd quarter GDP
growth data were released by the Philippine Statistics Authority (PSA) and the
numbers confirm the fear of many observers of deteriorating macroeconomic
fundamentals of the Duterte administration.
The big jump in inflation rate was triggered by the TRAIN
law. Only 2.9% in December 2017, went up to 3.4% in January 2018 (first month
of TRAIN law), 3.8% in February, 5.7% in July, 6.4% in August, 6.7% in August
and same 6.7% in September. The year to date (ytd, January to October)
inflation rate then is 5.1% or nearly double 2017’s 2.9%.
The good news is that this may be the peak inflation for
the year. Any upward pressure in prices because of the provisional fare hikes
and wage hikes implemented this November will be compensated by low world oil
prices. WTI oil peaked at $76.4 a barrel last Oct. 03, down to $60.6 a barrel
on Nov. 11.
The bad news is that compared to many neighbors in Asia,
the Philippines has the biggest jump in inflation this year compared to last
year. Some countries even experienced decline in inflation despite the high
world oil prices (see Table 1).
The high inflation rate coupled with rising interest
rates as the BSP tries to temper price uptick via monetary policy has resulted
in low consumer confidence.
Recall the basic macroeconomic equation, GDP = C + I + G
+ (X-M), where C is household consumption, I is investment, G is government
consumption, and (X-M) is net exports less imports. C is huge, 61% of GDP and
the three others constitute only 39%. C growth has been declining, 6.2% in Q4
2017, went down to 5.7% in Q1 2018 (with TRAIN law), 5.6% in Q2 then 5.2% in
Q3. This is bad.
As a result, overall GDP growth of the Philippines has
been pulled down, from a high 6.9% in 2016, 6.7% in 2017, and only 6.3% in 2018
Q1-Q3. By way of recommendations, the following may be considered by the
Duterte government.
One, suspend part two of TRAIN excise tax hikes for oil
and coal, full year 2019 and not reinstate them after the May 2019 elections.
Two, freeze or suspend raising the Motor Vehicle User’s
Charge (MVUC) or road user’s tax, (RA 8794). Like oil tax hike, this has
inflationary pressure, a good observation and proposal from the Senate
President Pro Tempore Ralph Recto.
Three, continue the agricultural trade liberalization,
replace the quantitative restrictions (QR) with low tariff and remove NFA
importation monopoly.
Four, cut VAT rate from 12% to around 8% and reduce the
exempted sectors. Malaysia is the best example for this, it has a gross sales
tax (GST) of 6% until May 2018 then abolished it in June, a campaign promise of
PM Mahathir. Its average inflation rate four months before (February 1.4%,
March 1.3%, April 1.4%, May 1.8%) was 1.5%, became 0.3% four months after (June
0.8%, July 0.9%, August 0.2%, September 0.3%).
---------------See also:
BWorld 259, Inflation, fare hikes and TNCs competition, October 17, 2018
BWorld 263, Institutional decline and garbled competition regulations, October 31, 2018
BWorld 264, Energy by legislation promotes corruption, November 14, 2018
BWorld 265, Integrated PPP vs Hybrid PPP: The case of Kaliwa Dam, November 15, 2018
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