Complexity
The Philippines now nurses the highest inflation rate in the ASEAN region, running at nearly twice the pace of many of our neighbors. They must be doing something right; we must be doing something wrong.
The elevated inflation rate we now experience is the outcome of a complex array of factors. Nothing is gained by over simplifying the matter: either by attributing it to external factors beyond our control or arguing that it is due entirely to the tax reform program undertaken by government.
Like us, many of our neighboring economies are nearly completely dependent on oil imports. But they have managed to rein in their inflation rates.
Like us, some of our neighbors are growing rapidly. But they avoided the supply shocks that stoked inflation for us.
When he returned from state visits to Israel and Jordan this weekend, President Duterte attributed our inflation problem to US President Donald Trump. That raised most eyebrows.
Economics is not the President’s area of strength. Besides he has the habit of condensing his thoughts and even leaving his sentences incomplete. He has little patience for the tedious discourse economists are heir to. But, as Chief Executive, it is part of his duties to be conversant with economic problems – especially as they can quickly transform into political problems. Inflation is one such issue.
The elevated inflation we must now fight tooth and nail is a perfect storm composed of many elements, some of them structural and others seasonal.
The food price shock is entirely seasonal. The rice buffer stock was completely mismanaged. The monsoon rains interrupted food deliveries. Our backward fisheries industry and weak logistics system kicked up fish prices the past few weeks.
The shock is also structural. Our agriculture has been stagnant, with costs comparatively high. We need to urgently capitalize this sector, suffering as it does from decades of emphasis on social justice rather than productivity issues.
The monetary response to early indications of overheating was probably late. Consumer demand has been pumped up by increasing spending on infra, the rebates from the lower personal income tax rates and the huge educational subsidies and by increased investments. This has led to supply issues that pushed up prices.
Global prices for crude oil are indeed beyond our control. The higher prices are magnified by the excise taxes imposed on the commodity – but ultimately only marginally.
The depreciation of the peso magnified the costs of all imports. This, too, is the result of many things: weak exports, a surge in the importation of capital goods in anticipation of fast economic growth and a reduction in our gross international reserves.
Foreign hot money did flee our stock market, driven by a range of concerns from the financial crisis afflicting Argentina and Turkey to more attractive returns elsewhere to the possible negative effects of the looming tariff war between the US and China. Only on this relatively minor aspect, considering the complex range of factors, does the stupid trade war initiated by Donald Trump impact our elevated inflation rate.
Zamcelco
Zamboanga City has been a promising node of economic expansion for years. The city’s progress has been hampered by power shortages. Rotating brownouts discourage more investments from coming in.
The principal cause of the power shortage is the inefficiency of the Zamboanga City Electric Cooperative (Zamcelco), supplied by four generating companies. The cooperative has failed to solve the very high systems loss in its network that is the major factor behind its unsustainable debt.
Zamcelco was put under the management of the NEA some months back – although only to oversee the transfer of the facility to a new investor. The investor is needed to pay down the cooperative’s billions in outstanding debt and bring in the capital to upgrade the distribution network.
Two weeks ago, Zamcelco did enter into an investment management contract with a private company. I wrote about this last week, mentioning that the deal is hounded by two prominent issues: the Zamcelco board displacing the bids and awards committee to deny extension of the deadline for bidders to improve their bids; and the apparent violation of the NEA prohibition against taking in a management partner linked to another electric cooperative to guard against conflicts of interest.
Zamcelco argues that the dissolution of the bids and awards committee was entirely within the power of its board. The cooperative also says the investment management contract sealed two weeks ago was with a company involved in power sector businesses but not with another electric cooperative. Therefore they did not violate NEA guidelines.
The Zamcelco board insists the P2.5-billion investment management contract it entered into was to the best interest of the city it serves. It will immediately pave the way for the repayment of the outstanding debt and bring urgently needed capital to reduce systems loss.
We do hope they are right. No one wants Zamboanga City’s power woes to fester any longer. For all its economic potential, this center of commerce has been hobbled too long by its ancient and inefficient power distribution service.
The next few months will tell us if the city’s residents did get the best deal possible. The NEA will have to publicly state if their conflict of interest concerns have been allayed.
At any rate, the deal should bring in a new corporate board and a new management complement. This will hopefully reflect in better service.