Inflation, if left unchecked, could lead to massive job losses, which could lead to political unrest and social tension.
Roberto Herrera-Lim, Southeast Asian analyst of the New York-based political risk consulting firm, Eurasia Group, said in an e-mail interview with abs-cbnnews.com/ Newsbreak that “If inflation pressures persist well into next year, and it feeds into further price increases, or leads to an economic slowdown and, ultimately, job
losses, then we may start to see discontent turning to unrest.”
Inflation is a widespread concern especially among emerging economies. In the June issue of Global Political Risk Index (GPRI) published by Eurasia Group, it said that inflation pressures in Southeast Asia would persist with elevated rice prices, wage increases, and rising fuel costs.
GPRI is a measure of a country’s ability to absorb political shocks. It connects economic with political, social and security risks, which guide Eurasia’s clients—multinational corporations, financial institutions, governments and non-governmental organizations—in navigating unfamiliar but promising new markets.
In the June GPRI outlook for the Philippines, Eurasia analysts wrote: “The government is facing food and power crises, increasing the fiscal deficit and risking antigovernment unrest.”
Nine-year high
The Philippines announced Thursday that inflation rate in May 2008 reached a nine-year high at 9.6 percent. This continues a steep upward trend that started in January 2008, when headline inflation was at 4.9 percent, almost double than 2007’s average of 2.8 percent.
The National Statistics Office said that food prices, which weigh heavily in the computation of inflation, rose 14 percent in May compared to the same period in 2007. The 31 percent increase in prices of rice, the country’s staple, accounted for much of food price hike.
Prices for fuel, light, and water inched up by 8.2 percent in May against the same period last year.
Troublesome combination
With the prices of food and fuel not expected to get any cheaper soon, these economic factors may spill over to social, political, and security aspects when job losses start to mount.
“It is when you combine the two—job losses and inflation—then things become troublesome,” Herrara-Lim said.
He cited the case of Indonesia in early 2006 when fuel prices more than doubled. “It led to the largest decline in Yudhoyono’s popularity.”
This explains why Indonesian and Malaysian leaders are busy using their savings for expansionary infrastructure projects. “This way, they are able to generate jobs that at least offset the loss in purchasing power,” Herrara-Lim noted.
Currently, indicators of potential instability have not yet been that alarming. Street protests in Indonesia, for example, “have been relatively moderate,” Herrera-Lim said. He added that the larger protests were over higher prices of tempeh, or fried tofu, a popular
vegetarian cuisine hit by doubled soybean prices.
Imported problems
In May, Herrera-Lim’s outlook on the high rice prices in the Philippines was that these would not create domestic unrest “because the population probably understands that this is a global phenomenon.”
This time, he thinks the fuel price hike will also be considered an imported problem. “I don’t think there’s a sense among the general population—aside from the opportunists—that government leaders are manipulating prices for their private or political benefit. In this sense, their justification for the price increases are, to the larger population, believable.”
He noted that governments, including the Philippines, have been better at informing their citizens that local prices of fuel mirror global prices. “Except for producer countries like Venezuela and Saudi Arabia, everyone who imports oil is feeling the pain, whether you are talking of the United States or developed economies in Europe, or of countries such as Indonesia, the Philippines and India.”
“Governments have done a decent job of communicating the fact that in many cases, domestic fuel prices are just reflecting global crude oil price movements,” he said.
Watch the exchange rate
Imported problems—such as rising commodity, agricultural, and fuel prices—have made the Philippines’ high inflation rate experience similar to that of other countries in the region.
He said, however, that we have been able to keep inflation down in the past due to the appreciation of the peso against the dollar. A stronger peso translates to lower interest payments of the country’s dollar-denominated debts.
Recently, the peso has been weakening again, with exchange rates a few centavos shy of P44 to a dollar. It ranged from P41 to P42 in the early months of the 2008.
We should then watch the weakening peso because this means “inflation pressures are likely to creep up at least for the near term,” Herrera-Lim cautioned.
Among the Southeast Asian countries, he cited Vietnam as the one with a real problem. “They have had massive credit growth over the past couple of years, which, created demand-side inflation. They also did not let their currency appreciate in an effort to remain competitive, but this only magnified the effects of imported inflation as the US
dollar weakened.”
Subsidies and price controls
Herrera-Lim said that what they at Eurasia worry about these days is the tendency of governments in the region to adopt populist moves.
“Governments throughout the region, not just the Philippines, are implementing programs that supposedly address the higher cost of living, but which actually distort pricing.”
He cited examples of populist moves that the Philippine government tend to also take: “electricity subsidies or price controls.”
He noted though that “The Arroyo government already has other problems to deal with independent of the fuel crisis, and these relate directly to its credibility because of the scandals over alleged electoral fraud and supposed kickbacks in the broadband scandal.”
“For this reason alone, we don’t think the government will have the clout to push through with difficult and controversial reforms.”
Silver lining
Amidst the food and fuel price hikes, however, is one silver lining: “Governments [are] recogniz[ing] the need to maintain the credibility of their fiscal targets by dropping open-ended subsidy programs. So while they take the higher inflation, which appears inevitable, they at least keep some confidence that they can manage the macroeconomy.”
He said welfare payments, or those that are directed to the portion of population that needs assistance the most, are much easier to target and control.
Meantime, he said there appears to be anecdotal data that the hike in fuel prices is influencing consumers to change their buying behavior and lifestyle.
He cited a US government report in March, which said that the total miles driven by citizens fell by 4.3 percent year-to-year. It was important since, he said, “It was the first drop in the March driving statistic in 30 years and the largest since data collection began in 1942.”
“So, higher prices are beginning to have an effect on usage, which may eventually help prices to fall.”
RELATED STORY
» GMA stable, no domestic unrest from rice problem—Eurasia
Filed under: Uncategorized
