Inflation has become a more prominent domestic topic. Reports of low rice buffer stocks and possible transport fare increases are adding to public worries. The issue could still fade if prices stabilize, but more persistent inflation in the coming months could trigger a populist reaction from the administration, some of it directed at regulators and the central bank.
Public apprehension that inflation could worsen has become more prominent after noticeable increases in the prices of fuel and some food products in January. If these perceptions worsen in the next few months, the near-term pressure on policymakers and bureaucrats to deal more forcefully with the issue is likely to increase. Annual inflation was at 4% in January, which hit the upper end of the government’s 2% - 4% target range and the highest since the 4.3% of October 2014.
This pressure would, however, not come from the streets, but primarily from the administration of President Rodrigo Duterte, which constantly worries that any incipient discontent could help revitalize the so-far moribund opposition. If the outspoken president becomes involved, the pressure would be populist in nature, with potential repercussions on public support for institutions and reform policies.
The Department of Finance and central bank (BSP) have attempted to talk down these perceptions by claiming that the higher inflation is being driven by the rebound in global oil prices, temporary increases in vegetable and fish prices, and higher taxes on cigarettes— relatively one-off events. The DOF wants to avoid the price hikes being blamed on the January implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law that has been its signature economic accomplishment so far and which is the basis for further tax reform legislation.
The DOF has only been partially successful in this regard because there are broad perceptions that the revenue measures in TRAIN have driven some of the price increases, either directly in the case of higher fuel taxes or through opportunism on the part of producers and manufacturers. What are now further seeding the domestic discussions on inflation is the fear that rice prices are vulnerable to manipulation in the next two months and anticipation that public transport operators may receive an approval for higher fares in March – both of which would hit the lowest income classes hardest because they are unlikely to significantly benefit from TRAIN’s income tax cuts.Transport and rice price dynamics
If fuel prices hold at their current level for the next few months, then the government may be forced to agree to a fare increase. Its relationship with the sector is already fraught due to the planned, expensive modernization of the ubiquitous jeepneys that are the main mode of public transport, and failure to concede on prices could further increase anti-government sentiment among drivers.
Insofar as rice is concerned, the apprehension is that low government reserves could lead to another spike in prices in late March or early April, when the overall supply of the grain is likely to be lowest ahead of the late April and May harvests. Specifically, the National Food Authority (NFA), which maintains the government reserve, says it has only two days’ worth, or about 64,000 tons, of milled rice in stock. The rest of the rice stock, which is with private traders and retailers, totals about 2.6 million tons, or 82 days’ worth.
Historically, the NFA keeps at least 15 days’ worth of buffer stock at this time of the year to stabilize prices and guard against regional shortages due to calamities or conflict. The NFA blames its low reserves on crises over the past 12 months that have caused it to draw down on its stocks, such as the conflict in the southern city of Marawi and the evacuation near Mayon volcano, as well as on policy that caps the price at which it can buy unhusked rice at 17 pesos per kilo, while market prices have been above 18 pesos for much of the past year.
The NFA would normally import rice – either on its own or delegated to the private sector – to moderate price pressures and rebuild its stock, but this has become more unpredictable in the past few years. The NFA plays several highly-politicized roles, including providing emergency supplies, importing rice to manage domestic prices and supporting local farmers by buying from them at above-market prices whenever farmgate prices are low. This has turned the NFA into one of the most-heavily subsidized state enterprises, and allegations of corruption from procurement to logistics are rife. Technocrats from the Budget Minister to the BSP governor prefer a reduced role for the agency, and that market forces and the private sector be allowed to drive prices more. Ranged against them are powerful cartels within the rice sector and corrupt officials who profit from the agency's interventionist role.
A populist reaction?
Given Duterte’s populist orientation, it is unclear how more inflation could affect his policy views on the rice sector, or on other economic policies. Volatile rice prices are arguably near the top of his concerns, and Duterte has proven to be tactical more than strategic on these issues. Thus, a spike in food price inflation may give him pause in quickly adopting the recommendation of technocrats to ride out the rice price volatility that is part of reforms. Just today, he also discussed with labor leaders the possibility of a USD10 monthly voucher for nearly four million minimum wage workers to help them cope with rising costs (and possibly as a way of making amends for pulling back from his promise to end contract-only employment).
Duterte has often deferred to Finance Minister Carlos Dominguez, his most influential adviser, and to his economic team, which would seem to constrain the administration from becoming too irresponsible on policy. However, the administration has not yet been tested by strong negative sentiments regarding its economic program. One clear near-term indicator is whether rice imports are accelerated earlier than the June target date, which is a sign that Duterte’s populist instincts have prevailed and that pressure to deal with inflation will increase, including possibly on the BSP.
