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  • Writer's pictureZiggurat Realestatecorp

Why the Philippines Is So Vulnerable to Food Inflation

Among emerging Asian economies, it has the fewest tools to fight the global food crisis.

In late June, Ferdinand Marcos Jr., then the president-elect of the Philippines, made a curious move: he appointed himself agriculture secretary, chief of the country’s food policy. The Philippines, like many countries around the world, is facing skyrocketing food inflation due to supply issues and high fuel costs. But taking the reins himself likely won’t give Marcos additional options. His policy choices are very limited in the short term, especially in comparison to countries such as India, Thailand, and Vietnam. The Philippines is the most food-insecure country in emerging Asia due to its reliance on imported food to feed its expanding population, and Marcos’ self-appointment is a worrisome sign for his country’s food self-sufficiency amid a looming crisis.

From Indonesia’s palm oil export ban to India’s refined sugar shipment prohibition, Asian economies have fought the global rising tide of food prices through a wide range of weapons, including food nationalism, subsidies, and price controls. So far, the most aggressive policies have come from India, where on top of export controls of wheat and refined sugar, the country also lowered excise duties on fuels (a key input for agriculture production), subsidized fertilizer, and raised interest rates.

And it’s easy to see why. India’s food and beverage consumption as a share of total household expenditure is 46 percent. Adding fuels that adds up to a staggering 53 percent. Moreover, a high share of rural employment means that the government has to not only fight food inflation to preserve household purchasing power but also help with livelihoods, as higher costs erode profit margins. But India isn’t alone—Thailand and the Philippines also have high household shares of food and beverage weight in the consumer price index basket.

As a result, inflation-fighting has been aggressive in Asia, especially for those countries with more options. Table 1 shows the policies that have been employed across emerging Asia to fight inflation, with India pulling out nearly all the stops on fiscal and monetary policies and market interventions. Thailand has mostly implemented fiscal subsidies and price controls, while Indonesia and Malaysia have gone heavy on fuel subsidies and export controls for agriculture (palm oil for Indonesia and chickens for Malaysia). One country has been notably quiet on nearly all fronts: the Philippines.

One key reason is that its options are more limited relative to the Asian countries that are net exporters of food. The Philippines has the largest food trade deficit in the region, at about negative 2 percent of GDP in the past three years. This number moves to negative 5 percent of GPD when adding in its fuel trade deficit. This means that as it relies on imports from India and others for staples such as rice, the Philippines does not have tools, such as good protectionism, to help it through this crisis. Instead, it falls victim to other countries’ food nationalism, as the squeeze on global supply impacts it most severely through shortages and higher prices.

At the other end of the spectrum, Thailand has the largest trade surplus—close to 4 percent of GDP—followed by Vietnam, and to a much lesser extent India. This gives these countries the option to use food protectionism should they choose to. A key worry is rice. India, Thailand, and Vietnam are the top three global exporters, respectively, and any protectionism by those market players will negatively impact the Philippines.

Subsidies are the most likely path the Philippines will take to fight food inflation. This move will be costly for the state’s coffers, which are already barren from pandemic-related expenditures and infrastructure spending. But the country will continue to be vulnerable while food protectionism is rising. It could raise interest rates to limit the depreciation of the peso, but the government has signaled it isn’t eager to do so and will only lift interest rates gradually. This leaves the peso vulnerable compared to the U.S. dollar, especially with the Federal Reserve raising interest rates aggressively, and risks making food imports more expensive. And with a population expected to grow to from 110 million today to 145 million by 2050, the Philippines’ food insecurity will remain an issue in the decades ahead.

Malaysia will also need to address its food deficit. While it has a surplus in palm oil, it grows very little rice and other agricultural products, which makes it vulnerable to the global food crisis. But its gas surplus offsets food commodity shortages, and its current fuel subsidies are dampening price pressures. Moreover, its central bank is also willing to raise interest rates. Coupled with lower inflation, this has put less pressure on the currency.

Even for India, Thailand, and Vietnam—the winners of the global food crisis—there is not much to celebrate, as key input costs rise. All three are net importers of increasingly expensive fuels, and Thailand has the largest fuels deficit of nearly negative 6 percent of GDP. These higher input costs erode profit margins and require additional government support. For example, Indian farmers may not be concerned about prices for government-subsidized fertilizer, but New Delhi is footing an ever-enlarging bill, and farmers still have to worry about higher fuels and electricity costs.

But in emerging Asia, the Philippines’ situation is most worrisome. Other than subsidies, it has limited tools at its disposable in the short term to fight inflation. Ultimately, the new administration needs to address this crisis by lifting domestic production, which is held back by a range of issues, including limited infrastructure to link farmers and markets. Subsidies are just costly Band-Aids that the country can ill afford and do not address the food insecurity issues that have plagued the Philippines.

While the global supply shock is beyond Marcos’s control, stopping the peso’s slide is still within the central bank’s mandate, and improving food production to reduce exposure to volatile global prices will be key to feeding his country’s rapidly growing population.

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