Inflation leaps to 3-year high of 4%

Inflation leapt to its highest level in more than three years at four percent in January from 3.3 percent in December as the implementation of the tax reform law translated to higher prices, the Philippine Statistics Authority (PSA) reported yesterday.

This was the highest level for the consumer price index (CPI) since averaging 4.3 percent in October 2014.

Excluding selected food and energy items, core inflation picked up to 3.9 percent in January from three percent in December.

“The push in inflation is partly due to TRAIN, considering particularly the excise on fuel and additional sin taxes,” Socioeconomic Planning Secretary Ernesto Pernia said.

He reiterated, however, that the effects of the TRAIN, which overhauled the country’s tax system for the first time in two decades, would be “minimal and temporary.”

The CPI last month also touched the higher end of the two to four percent target between 2018 and 2020 as well as the 3.5 to four percent forecast for January set by the Bangko Sentral ng Pilipinas (BSP).

Although inflation was at the top end of the forecast for the month, BSP Governor Nestor Espenilla Jr. said the higher reading was expected “due mainly to the combined first round effects of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN), oil prices, and food to some extent.”

“We think these are temporary drivers of inflation and would eventually stabilize,” he said.

The TRAIN Law signed by President Duterte last Dec. 19 lowered personal income tax rates but raised the excise tax rates slapped on oil, cigarettes, motor vehicles, and sugary drinks.

Based on its December assessment, the BSP’s Monetary Board forecasts inflation to pick up to 3.4 percent this year before easing to 3.2 percent in 2019. Inflation kicked up to a three-year high of 3.2 percent last year from 1.8 percent primarily due to higher pump prices of petroleum products.

The benign inflation environment and robust domestic demand have allowed the BSP to keep interest rates low over the past three years to support the growing economy. It last raised rates by 25 basis points in September 2014.

DICT Acting Secretary Eliseo Rio Jr. is confident the third player they will select to compete with our telco duopoly will not be hampered by the fact that Globe and Smart/PLDT already control 70 percent of the frequencies.

Speaking before a normally skeptical audience of fellows of the Foundation for Economic Freedom, Secretary Rio explained his strategy would make the third player focus on areas where the duopoly is weak. Fixed broadband service, helped by the international gateway Facebook is building and government will operate will enable the third player to establish its hold on a segment of the market ill-served, if at all by the duopoly.

Secretary Rio is also banking on the third player being able to leapfrog technology and become strongly competitive as soon as three years from the time government gives them a license. He explained that the duopoly cannot get rid of their legacy network because half of their subscribers are still on call and text mode.

But a small telco owner I consulted said the money is still on 2G service (talk and text) and that’s a strength of the duopoly. Because government has no more frequencies for 2G to assign, he thinks this will be a liability for the third player.

On the other hand, the DICT chief expects the new player to immediately go to the fourth and fifth generation or 4G/5G service. The duopoly has introduced 4G, but implementation is spotty. Sec. Rio expects the commercialization of 5G technology to coincide with the development of the third player’s network.

And if the third player happens to have a Chinese telco as a major partner and technology provider, local subscribers will quickly benefit from China’s leadership in all matters related to telco and online services technology. Even the US is behind China in these areas, specially in applications like digital payments system.

The DICT Secretary told his audience that even now, the threat of a third player supported heavily by government is making the duopoly consider massive investments to upgrade their systems. He pointed out that until recently, the duopoly appeared to be contented with their current level of service.

Sec. Rio said they still plan to fix outdated policies of NTC, specially with regards to spectrum allocation and management. The amount of spectrum assigned to a telco impacts on the cost to build capacity, network performance, ability to offer new multimedia services and general customer satisfaction.

Indeed, an analyst in the telco sector thinks policies on the equitable assignment of frequencies to telcos should be in place before a new core player enters the market. This will ensure, the analyst said, that it can survive a sector dominated by two strong players.

But Sec. Rio insists the available frequencies are enough for the third player to compete. He is not worried that the new player will not be able to offer talk and text because he said, that’s a thing of the past and will soon fade away. The battle will shift to the provision of efficient and reasonable internet access service, he said. That means 4G or 5G.

His priority now is to get that third player. Sec. Rio said that his job is dependent on the early selection of this third player.

It could be a consortium of small telco players with a foreign partner. Or if the revised public service law already approved by the House is passed by the Senate and signed into law by President Duterte, a foreign player can come in as a 100 percent owner. But he said, a foreign player would need the network of the smaller telcos and cable companies to quicken their market penetration.

But the small telco owner I talked to said the network of the small telcos are mostly obsolete and will be of no benefit to the third player who is set to introduce new technology. About the only contribution of the small telcos is their franchise.

Sec. Rio said they no longer intend to give the frequencies for free to the third player. They also do not want to do the usual auction other countries do to award the frequencies to the highest bidder. This will reduce the capital the third player can use to set up facilities here.

Neither does DICT want to do the usual “beauty contest” that NTC does when awarding frequencies. The last “beauty contest” conducted by NTC, the Secretary said, tied them up in court suits by the losers.

They are thinking of a reverse auction. The bidder must commit the highest five-year financial investment. The committed investment shall be indicated on a yearly basis to cover installation, operation and maintenance of fixed – wired and wireless – networks, mobile networks and national and international services.

The winning player must deposit with the designated bank or give a bank guarantee for the committed investment of the first year within 30 days from award. Thereafter, the new player must deposit the succeeding year’s committed investment within the same period from the anniversary date until the fifth year.

The player will be permitted to draw from the deposit for payments through letters of credit to implement its rollout only for capital and operational expenses. Any unused deposits at the end of the fifth year shall be forfeited in favor of the national government.

The Secretary explained such a plan would prevent the duopoly from buying out their competitor like what happened with San Miguel, BayanTel and Digitel. Sec. Rio told me the estimate for the required investment given by the private sector during the public forum last week was round $5 billion for five years or $1 billion (P50 B) a year.

I am not sure the Secretary’s plan will work, but we will see soon enough as he said the deadline to select a third player is May this year. But those who attended his public consultation asked for an extension since they have to negotiate for financing. Maybe a month’s extension is enough, Sec. Rio told the FEF fellows.

But a latebreaker says that the President has rejected DICT’s request to move the deadline. Exciting to see what’s next.