Inflation still top risk to PHL growth

A REACCELERATION of inflation is still the biggest headwind to the Philippines’ economic outlook this year, which may pose a risk to the central bank’s easing cycle, a Moody’s Analytics economist said.

“The acceleration in inflation is the biggest risk for the Philippine economy and these are coming from both domestic and external factors,” Moody’s Analytics economist Sarah Tan said in an interview on Money Talks with Cathy Yang on One News on Wednesday.

“Domestically, I think the risk is that food inflation remains elevated due to frequent weather disruptions that could hurt domestic supply,” she said.

In January, inflation remained steady at 2.9% although food inflation alone accelerated to 4% from 3.5% in December.

Several storms hit the country late last year, which resulted in billions of pesos worth of agricultural damage.

“Externally, I think we worry that the tariffs imposed by the US could cause global inflation to rise due to the disruptions to supply-chain networks,” Ms. Tan said.

However, she said that the impact of the US President Donald J. Trump’s restrictive trade policies on the Philippines will likely be minimal.

“If we take a step back and look at the trade relationship between the Philippines and the US, it is quite clear that the Philippines’ trade deficit with the US is rather small, especially when you compare that with other economies, be it globally or with ASEAN (Association of Southeast Asian Nations) economies.”

“That really means that the Philippines is unlikely to be high on President Trump’s list,” she added.

Since taking office in January, Mr. Trump has already slapped a 10% tariff on Chinese goods as well as duties on all steel and aluminum imports beginning March.

On the other hand, Mr. Trump’s plan to impose reciprocal tariffs on all countries that charge duties on US imports may have a more significant impact on the Philippines.

“If there’s a universal reciprocal tariff that’s going to be imposed by the US, then that will hurt the Philippines because the duties that are levied on US imports into the Philippines is higher than the other way around,” she said.

“If there is a matching of tariffs, then that will make Philippine goods to the US more costly and less competitive, which will ultimately hurt our Filipino manufacturers and exporters.”

The US is typically the top destination for Philippine-made goods. In 2024, exports to the US were valued at $12.12 billion or 16.6% of total export sales.

“I believe the impact on the Philippines is rather small given the low trade exposure with the US. That said, there are indirect channels of impact on the Philippines,” Ms. Tan added.

RISKS TO EASING
Inflationary pressures from these risks could prompt the Bangko Sentral ng Pilipinas (BSP) to be more cautious about further easing, Ms. Tan said.

“If we have inflation accelerating again beyond the BSP’s target, that could delay the timing and magnitude of a potential policy easing in the Philippines,” she said.

“If that is the case, then the combination of borrowing costs and inflation staying higher for longer will be a recipe for further weakening in private consumption which is not great for the economy, given how it’s the main driver of growth.”

The BSP surprised markets after it left the benchmark unchanged at 5.75% at its Feb. 13 meeting. This after the central bank cut rates at three straight meetings since it began its easing cycle in August.

Ms. Tan was the only economist in a BusinessWorld poll of 20 analysts that correctly predicted the hold.

“It is a balancing act that the BSP has played. They have to balance both inflationary risks as well as the strength of the peso.”

“But that said, we don’t expect the pause to be felt very long. In fact, the next rate cut could come as early as in April, which is the next time the Monetary Board will meet,” she added.

Despite the pause, BSP Governor Eli M. Remolona, Jr. has said that a rate cut is still on the table at the Monetary Board’s next rate-setting meeting on April 3.

He also said the central bank is still on an easing path, signaling the possibility of up to 50 basis points (bps) worth of cuts this year.

“With inflation now largely back on target, and GDP (gross domestic product) growth still slightly below the government’s expectations, these will prompt the next rate cut sooner rather than later,” Ms. Tan added.

The Philippines’ GDP expanded by a slower-than-anticipated 5.2% in the fourth quarter. This brought full-year 2024 growth to 5.6%, short of the government’s 6-6.5% target.

Meanwhile, Ms. Tan said the upcoming midterm elections in May could provide a boost to spending.

“In general, elections, whether it’s national or midterm, they have to give a boost to the economy, especially through the consumption channel.”

“So, we will see spending on campaign-related goods and services increase. But at the same time, you know, all that increase in demand could also signal bad news for inflation,” she added. — Luisa Maria Jacinta C. Jocson