Policy tightrope

THERE have been concerns that rising inflation and the country remaining in recession will be leading to what is known as stagflation. Coined in the 70s during the oil shocks, stagflation is a confluence of rising prices, high unemployment and essentially an economy that is in recession. Unlike the economic events of the Great Depression wherein the economy went into a tailspin of falling demand, output and prices, stagflation can put an economy into a dilemma of which policy levers to move. As we are generally aware of, price increases are caused by both supply and demand conditions. In a recession economy where unemployment is high, demand tends to fall and retreats itself into essential consumption. This in turn will send signals to firms to decrease production.

Presently, the country is slowly getting back into the economic groove. With quarantine restrictions remaining in place, continuing wait for the vaccine rollout and relatively unchanged number of daily cases since November, unemployment is likely to continue to about 6 percent to 8 percent range in the first quarter of the year with about 3 to 4 million unemployed.

The general observation is that prices will fall. What have been used to resuscitate demand is a combination of fiscal and monetary policies to create jobs and increase consumption beyond the essential base. Fiscal policies can be in the form of subsidies to consumers or direct paycheck stimulus (as in the case of our ayuda) and monetary policies are usually focused on increasing money supply by cutting interest rates and reserve requirements. This remains to be the playbook in this pandemic.

Presently, the country is slowly getting back into the economic groove. With quarantine restrictions remaining in place, continuing wait for the vaccine rollout and relatively unchanged number of daily cases since November, unemployment is likely to continue to about 6 percent to 8 percent range in the first quarter of the year with about 3 to 4 million unemployed. With muted demand in general and still a large number of people without jobs, the expectation is that prices will be generally weaker. This will conform basically to the Central Bank’s band of inflation of 2 to 4 percent even taking into consideration the base effects. Most people focused their expenditures primarily into the essential portions of their consumer basket, which will be food and utilities that have a combined share of about 60 percent of total basket. The Central Bank is able to bring down interest rates and release more money into the system because they initially saw no threat of inflation rising from the demand side for the most of 2020. However, the impact of the typhoons and f loodings in November 2020 and the continuing increase of the ASF disease in Luzon and some areas in the Visayas affecting livestocks, primarily hogs, have unnecessarily created supply chokes. These supply chokes have continued to push pork prices up, which in turn have increased the prices of meat substitutes. This has also spilled to other food items in the basket, including rice. Food inflation actually started to pick up as early as October 2020 when it increased to 2.3 percent from 1.5 percent in September. It was 6.2 percent in January and we are looking at it possibly at 8.1 percent this February. If the supply chokes remain unchecked (which is possible since agricultural output and harvests have timelines), it will pick up to double digit by June, including impact of base effects. Under this scenario, overall inf lation can breach 6 percent by April and will possibly remain at that level until September.

This rising level of inf lation nonetheless do not necessarily point to stagflation. It will not reach double digit levels and unemployment will likely ease in the 2nd half of the year assuming the economy gets out of the recession by the 2nd quarter. The scenarios on the overall economy can change significantly by the 2nd half as vaccine rollouts begin and relaxed quarantine restrictions can help boost confidence. Nonetheless, it is not easy to address the inflation pressures as this is a question of supply of essentials. Putting price controls may unnecessarily add to the pressures, especially if supply remains weak. The approach is really a combination of time-bound increased importation and lowering of tariffs (this must be limited to the levels until local producers can catch up to past capacity), subsidies for the high transaction costs for local producers, addressing the ASF pandemic, and more importantly, digitizing the livestock industry. Since there are a lot of factors to consider in order to address this challenge, it will not be easy to lower the supply pressures immediately. Let us hope as well that oil prices do not go beyond their pre-pandemic levels as they will add pressure to overall domestic transaction costs.

This is where you have the policy tightrope. The Central Bank would like to sustain the low interest rate environment to entice lenders and borrowers to increase loan uptakes. This is necessary for the recovery to be sustained. However, if inflation remains above 5 percent, this will mean that real interest rate will be -3 percent. It could push up borrowing rates of government and firms. Hence, it is unlikely that the BSP will keep rates unchanged for the rest of the year leading to a likelihood that policy rates have to increase, which can cool the revving up economic engine. The economic managers have to work closely to ensure that this supply choke is addressed within the 1st half of the year. Otherwise, the full benefit of easing restrictions, vaccine rollout and increasing confidence will be capped leading to a lower than expected recovery this year.

BILLEASE operator First Digital Finance Corp. (FDFC) is teaming up with an Indonesiabased financial technology (fintech) player Xendit to offer “pay later” solution via cardless installments.

The collaboration allows Xendit's merchants to include Billease as a payment option for consumers, who are usually unbanked or uncarded.

"By offering Billease at checkout, merchants can give their customers the option to split the cost of their purchases into installments either monthly or bi-weekly with no hidden fees," FDFC said.

The customers may pay for their purchases online via installments over a period of 3, 6, 9 or 12 months with monthly interest rates ranging from 0 percent to 3.49 percent.

Amid the digital shift, FDFC CEO and Co-founder Georg Steiger said consumers are looking for alternative methods to pay online transactions and merchants who can offer such flexible payment options.

"We're excited to partner with Xendit to help Filipino merchants grow more by removing unnecessary challenges customers face at checkout, especially for those who are unable to use credit and debit cards," he added.

Yang Yang Zhang, Managing Director of Xendit Philippines, said the firm's partnership with FDFC was necessary given the increasing demand for installment solutions.

"At Xendit, we aim to give our merchants the options needed to help their business grow by offering all types of payment methods," the Xendit official said. "That's why we’re excited to bring our Paylater solution to online retailers in the country."

Y Combinator-backed fintech firm Xendit enables businesses to accept and send payments across multiple channels, including debit and credit cards, online banking, e-wallets, over-the-counter outlets and online installments.

Recently, FDFC said in an interview with the Businessmirror that it was eyeing to at least double the transactions and credit disbursal for Billease this year, driven by its partner merchants.

With this, the fintech firm said that it was focused on scaling up its "buy now, pay later" partnerships.

The digital credit app operator teamed up with several e-commerce firms including Dragonpay, Shopify, Magento, Prestashop and Woocommerce last year to launch the installment payment scheme. Last month, Billease partnered with insurance technology startup Maria Health to provide accessible health coverage.