Typhoon to raise inflation expectations, draw monetary policy response

THE AGRICULTURE sector’s lackluster performance in the second quarter will continue this quarter and may further weigh on overall economic growth, with the destruction from typhoon Ompong (international name: Mangkhut) exacerbating inflation, analysts said.

Economists said the damage to agriculture will stoke inflation expectations, possibly leading to a more aggressive policy stance by the central bank, notwithstanding moves by the national government to address supply-side concerns.

“Because of the typhoon, agriculture will continue to contribute a measly amount to growth. Inflation can be moderated if the government carries out its plan of aggressively importing rice and other basic food commodities,” University of Asia and the Pacific Professor Bernardo M. Villegas said in an e-mail.

“Growth of GDP (gross domestic product) could be below 6%,” he added.

Reuters reported on Monday that typhoon Ompong destroyed 250,730 tonnes of paddy rice and 1,204 tons of corn over the weekend.

Nicholas Antonio T. Mapa, a senior economist with ING, said in a separate e-mail: “Agriculture generates roughly 9% of total economic growth. With the severe weather we’ve seen in August and September, we may see a similar struggle from the sector in 3Q.”

The economy grew 6% in the second quarter against 6.6% a year earlier, making for a 6.3% GDP growth average in the first half, which was also slower than the 6.6% average recorded a year earlier.

Agriculture, hunting, forestry, and fishing grew 0.2% in the second quarter from 6.3% a year earlier — accounting for 0.01 percentage points of GDP.

“The typhoon damage will likely exert additional price pressures on the food basket in the near term. The corn damage may have a longer lasting impact on feeds and eventually meat prices,” said Mr. Mapa.

Both economists said that the BSP will hike interest rates in its Sept. 27 policy meeting, which if realized, would add to the 100 basis-point increase made from May to August — and possibly weigh down consumption spending.

“The 50 bps rate hike by the BSP next week will be carried out in an attempt to anchor inflation expectations and we will have to see whether this forceful action will be enough to quell brewing inflation expectations,” said Mr. Mapa, noting that the economy “may have to contend with increased borrowing costs that could enervate the consumption and investment momentum alike.”

“The central bank will continue hiking benchmark rates, driving interest rates to higher levels. This will lead to further slowdown of car sales and housing units,” said Mr. Villegas.

Inflation in August accelerated to 6.4% from 5.7% a month earlier and 2.6% a year earlier. The eight-month inflation average was 4.8%, above the central bank’s 2-4% target range.

“If at all, rate hikes would need to feed into the economy, slow overall GDP before inflation is pulled lower, but at the cost of economic growth,” said Mr. Mapa.

However he said that monetary policy action may only do little to slow down inflation.

President Rodrigo R. Duterte is expected to sign within this month measures to address food supply shortage.

These include the immediate release of 4.6 million sacks of rice from National Food Authority (NFA) warehouses, authorizing the NFA Council to import of five million sacks of rice that will arrive next month and other five million early next year; streamlining the licensing procedures for NFA rice imports; facilitating the distribution of imported fish to wet markets; the formation of teams consisting of law enforcers and farmer groups to monitor the transport of rice from ports to NFA warehouses to retail outlets; the establishment of cold storage facilities for chicken; outlets to minimize farmgate and retail price differentials; and the priority release of essential food items in Customs ports.

The economists said manufacturing and the government’s infrastructure program will be major growth drivers this quarter, cushioning the slowdown in agriculture.

“Fortunately, manufacturing is still growing faster than services. Build, Build, Build, is gaining traction. The seasonal increase in consumption expenditures in the last quarter will keep the GDP growth for the whole year above 6%, still one of the highest in the East Asian region,” said UA&P’s Mr. Villegas.

Mr. Mapa added: “Going forward, investment in infrastructure will help in addressing these susceptibilities and safeguard the country’s agricultural output.”

Mr. Villegas said that the expected large inflows of overseas Filipino worker (OFW) remittances during the holiday season, complemented by the peso’s depreciation to 12-year lows, will boost consumption spending — which accounted for 56% of second quarter GDP.

“The peso-dollar rate will settle below P54 to $1 as massive remittances are expected in the last quarter since OFWs will be more generous with their remittances as they know that their relatives are facing higher prices for their daily expenditures,” said Mr. Villegas. —