THURSDAY |JULY 03, 2008 | PHILIPPINES

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‘Government itself is in a bind on how to address the price spiral.’

Nouveau poor


Analysts predict that our inflation rate could hit double-digits over the next few months. That is really bad news, especially because the economy’s low levels of productivity cannot afford concomitant increases in wage levels.

There is an inflation pandemic sweeping across most countries today, without distinction between mature industrialized and emerging economies. But while many countries have reached higher standards of living for most of their populations, the opposite is true in the Philippines. There is a very small group of people who live comfortable lives, and there is a teeming mass of multi-millions surviving on day to day basis.

The most obvious reason for the rise in inflation rates is the spike in crude oil prices. In a matter of a few years, oil prices have risen from under $30 per barrel to $143, and still rising. In fact, the highest spikes happened like a mad rush only in the last so many months. In the fall of 2007, we were worried about 100 dollars per barrel. When it breached 100 dollars by mid-winter, we thought it would stabilize at that. It has now gone haywire.

In the Philippines, we’ve stopped marking the increases of gas on the pumps. It’s almost 60 now; by midnight of Friday it will be 61.50 or thereabouts, and when the oil companies buy 150 dollar crude, we should be paying between 70 to 80 per liter of gas at the pump.

That multifold increase in the price of oil has pushed up costs of production, transport and distribution of nearly everything. Economies that are entirely dependent on oil imports are seeing their balance of payments go awry, which pushes down the value of their currencies, and further fuels the inflation rate. What is keeping the peso at 45 to the dollar instead of lower is because the demand for dollars is weak, there being little manufacturing going on which means bigger imports. Meanwhile, there is the supply of foreign currency from our "bagong bayani" OFW’s ensuring us a lifeline.

The Philippines is one of those economies entirely dependent on oil imports. Our oil importation bill rose sharply even if our consumption grew only moderately. That, along with the clear inflation signals already present, undermined confidence in our currency and invited adverse speculation.

The deterioration in the peso’s exchange rate further increases the prices of fuel. Which, in turn, spurs inflation all the more. It is a vicious cycle.

It is a cycle that could even become even more vicious if wages are arbitrarily raised, if speculative hoarding of food happens and if the rich and upper middle classes, expecting greater inflation, start hedging on jewelry and precious metals. The Filipino-Chinese, who constitute the greater majority of both rich and upper middle-class, are prone to do this.

Government itself is in a bind on how to address the price spiral. It is not demand-driven, it is a cost-push. And even if the Bangko Sentral were to increase interest rates, the "usual" counter-attack against inflation, it could hardly make a dent. We are a small speck of an economy, and all that raising interest rates would effect is a further slowing-down of an already precarious economy. About the only salutary effect of a monetary solution is that it could prevent the peso value from sliding down further. And therefore, prevent gas prices and electricity rates from escalating much more.

One benefit of raising interest rates is that this policy instrument could help shore up the peso’s exchange value. Over the past two years, the rising peso has helped cushion the adverse impact of rising oil prices. But that is little comfort when the price of crude per barrel continues to shoot up, as it threatens to.

Meanwhile, the expected slowdown of the world economy, the rich nations themselves reeling from fuel and food prices, means slower growth or even a decrease, in our small basket of exports. Which means a stagnant economy plagued by high inflation. Stagflation, some economists describe it.

The greater cause for worry is that the inflationary spiral is happening when there is a looming shortage of food in the horizon. We could argue that there is no rice shortage, and that the market conditions are just pushing up the prices of this staple. But after what Frank did to Panay, which is the rice granary of the Visayas, I deeply worry.

The agriculture secretary, who cut short his trip to the US of A in the company of the footloose "queen" immediately flew to Panay last Friday. He thinks the Ilonggos could still re-plant their flooded-out palay fields, but at the moment, sheer survival is the order of their lives. When would they be able to re-plant, and where will they get their wherewithal, with even their homes blown away or washed off terra firma? Secretary Yap trembled at the sight that greeted him in Panay, with the stench of decay still in the air. The fishing industry there is devastated. Boats were destroyed, fishpens ravaged. For the first time in our lives, the specter of real hunger is real.

In the meantime, about the only thing our government can do is providing direct cash subsidies to the truly indigent. "Katas ng VAT" to keep bodies of the lumpen attached to their souls. But is that going to be enough? I fear not.

Already, the situation has made the middle class the "nouveau" poor. Dramatically, their lifestyles have changed. The upper middle classes have cut down on their shopping and their dining-out. Which means the malls will see more retail spaces and food outlets close down. The so-called mid-middle and the lower middle classes have truly become impoverished. Even the wet markets already experience the slowdown. Hardly any beef sells, a kilo of pork has become half-a-kilo, mostly ground so it could be stretched to feed more. Fish is just tilapia and bangus from the nearby inland lakes, because sea water fish is both a luxury and a rarity. Vegetables in this season are as high as high could be.

The struggle to keep the economy afloat is going to be extremely difficult for the administration of Gloria Macapagal Arroyo. When hunger becomes acute, anger takes over. And it will not be just the usual "lumpen" that the police forces could easily dissipate with brute force. She will soon face the anger of the nouveau poor.

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Email address: banayo_at@yahoo.com

 




















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