What would it take to shield PHL from supply chain woes?

INSULATING the Philippines from supply chain disruptions that could accelerate inflation requires making the necessary investments to increase farm sector productivity and improve the country’s logistics network, according to local economists.

The country’s inflation woes have been caused mainly by supply chain disruptions which are bound to worsen as the Christmas season fast approaches, according to Alvin P. Ang, who chairs the Ateneo de Manila University’s Department of Economics.

The increase in inflation has prompted the Bangko Sentral ng Pilipinas (BSP) to raise interest rates by 75 basis points in July and signal that another hike is possible this month.

“It’s [inflation] mostly supply-driven, that’s why it remains elevated. [Unfortunately], we have no control over global stresses. But we have to start preparing for [our] long-term response,” Ang told the BusinessMirror on Thursday.

Ang said these long-term responses would mean addressing agriculture productivity concerns and making strides toward achieving energy security.

Part of these long-term measures, University of the Philippines School of Economics Director for Research Renato E. Reside Jr. said, includes addressing the country’s infrastructure constraints.

“Long-term solutions to address supply and logistics issues could be to develop more ports—and indeed more of hard infrastructure in the country, not just airports and seaports, also roads, bridges, etc.,” Reside said.

Reside said logistics issues are broad and can cover everything from the fragmentation of the world into various trade blocs that have lesser trade now than before the pandemic, to the congestion of ports caused by the shutdown to prevent the spread of Covid-19 and the lack of truck drivers.

Persistent challenges in the logistics sector will ultimately lead to higher inflation. Reside explained that congestion slows the movement of goods and drives the cost of deliveries higher.

This has led to rising costs of these goods as well as the containers used to ship them globally. The increase in the cost of containers, Reside noted, has been particularly dramatic due to the congestion.

“Part of the congestion can be traced to the relatively strong US economy, which the Fed is now trying to slow down,” Reside told the  BusinessMirror on Thursday.

The decision of monetary authorities to raise interest rates in order to stem inflation leads to undesirable consequences such as an increase in unemployment, according to the local economists.

However, Ang said it was difficult to say how the recent central bank pronouncements will impact unemployment, given that firms are still recovering from the pandemic.

“As demand continues to increase, so will firms continue to hire or maintain activities,” Ang said. “Although, the highest cost of money may affect [the] expansion plans [of firms].”

Reside said the aim of rate hikes is to forestall increases in inflation as well as inflation expectations. However, these undermine consumption and economic growth.

Nonetheless, he said, the decision to raise interest rates was made by the BSP and other monetary authorities to soften the impact of ongoing crisis to economies like the Philippines.

“The ultimate aim is to support growth and to prevent a larger problem and a harder landing for our economy. Ultimately, the rate hikes are meant to reduce the persistence of unemployment,” Reside said.

Medalla said they are looking at revising their current forecast of 4.3 percent downward nearer the ceiling of their 2 to 4 percent target range. (Story here: https://businessmirror.com.ph/2022/08/03/bsp-chief-sees-local-prices-easing-in-2023/)

The PSA will release the official inflation estimates for July on Friday while the National Income Accounts for the second quarter as well as the results of the latest Labor Force Survey will be released next week.

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