‘Philippines most vulnerable to high inflation, weak external position’
The Philippines stands out as the most vulnerable in the region to a combination of higher inflation and a weaker external position, according to Australia-based investment bank ANZ.
In its macro weekly report titled “Assessing Vulnerability to Oil Prices,” ANZ said a sustained supply-side-driven rise in global oil prices would be a headwind for the region’s economies that are mostly net oil importers.
ANZ said the transmission to domestic inflation in the past was strongest in the Philippines and Thailand, and weakest in Indonesia and Malaysia.
Based on estimates, ANZ said the pass-through of a 10 percent rise in global oil prices on domestic energy inflation is 2.2 percent for the Philippines following Thailand’s 2.8 percent.
On the other hand, the pass-through on headline inflation is 0.2 percent, next to Thailand’s 0.3 percent.
ANZ said the impact of a 10-percent rise in oil prices on the net fuel balance is about 0.6 percent of gross domestic product (GDP), next to Thailand’s 0.9 percent, South Korea’s 0.8 percent and Singapore’s 0.7 percent.
According to ANZ, the energy weight, including vehicle fuel, household fuel and electricity in the inflation basket in the Philippines is pegged at 9.1 percent.
The commodities team of ANZ sees oil price reaching $100 per barrel by the end of this year before declining to $97.5 per barrel. The year-to-date average price of oil is at $82.6 per barrel.
The ANZ report, however, has factored in recent events on the oil market brought about by the unexpected Hamas attack on Israel.
Inflation in the Philippines averaged 6.6 percent from January to September, well above the two to four percent target range of the Bangko Sentral ng Pilipinas (BSP).
ANZ said inflation in the Philippines has yet to return to the central bank target range after accelerating for the second straight month to a five-month high of 6.1 percent in September from 5.3 percent in August.
“The speed and extent of the pass-through from rising global oil prices to inflation will vary across economies, depending on the duration of high oil prices, the composition of the inflation basket, domestic fuel price structures, regulatory control, and policy intervention,” it said.
It added that transmission to inflation would be fastest in economies where pump prices are allowed to adjust, just like in the Philippines, Singapore, South Korea, Taiwan and Thailand.
“The increase in gasoline prices has been most prominent in the Philippines and South Korea,” ANZ said.
Data from the Department of Energy showed gasoline prices increased by a total of P15.30 per liter, diesel by P13.80 and kerosene by P8.94 since the start of the year.
“The Philippines stands out as relatively more vulnerable due to its high dependence on oil and the faster increase in the price of oil compared to other energy sources. Notably, it already raised electricity tariffs in September,” ANZ added.
The investment bank warned that the current account of the Philippines is likely to remain vulnerable because it runs the largest food deficit in the region.
Likewise, weather-related risks to food prices are elevated in the Philippines.
ANZ pointed out that the risks of rate increase are highest in the Philippines despite the fact that the BSP already emerged as the most aggressive central bank in the region after it raised key policy rates by 425 basis points between May last year and March this year to tame inflation and stabilize the peso.
ANZ sees inflation accelerating to six percent this year from 5.8 percent last year before easing to 3.5 percent next year and to three percent in 2025.
It expects the BSP Monetary Board to maintain a hawkish pause by leaving interest rates untouched until next year before delivering a 50-basis point hike in 2025.