Perfect inflationary storm coming soon

Just because we have not had a problem with inflation for more than 6 years now doesn’t mean that we should treat is as nothing but superstition like the White Walkers in the Game of Thrones.

OPEC’s intent to cut back oil production for the first time in 8 years (See Bloomberg story on OPEC) taken together with the depreciation of the Philippine Peso to a seven-year low and the Duterte Budget Secretary Ben Diokno’s promise of record deficit spending to more than 3% of GDP – the highest in seven years – should be a cause for concern for the inflation hawks. (Btw, the Bureau of Internal Revenue Commissioner Dulay has curiously not released the BIR’s collection performance for any period since the new administration began – not even for the Mr. Duterte’s First 100 Days report.) The 3 events taken together may just lead to the perfect inflationary storm. As it is, the inflation rate has risen from 1.9% in June 2016 to 2.4% in November. Even more worrisome, food inflation has reached 3.3% – which hurts the poorest Filipino families the most.

Are the local businesses out there worried about this awakening demon? Are there concerns for the marginalized sectors of society who bear the brunt of the inflationary pain? Or am I alone in worrying about the Pandora’s Box of cost-push inflation?

Inflation is coming!


Eyes Wide Open in the Coming Elections

I normally reserve this space for my musings on my professional interests. Today, I write as a Filipino citizen.

Many of my friends treat the candidacy of Mar Roxas as a referendum on the administration of Noynoy Aquino and rightfully so. Mar has been an indispensable driving force for the programs of the government over the last six years and is accountable to a large degree for its successes and failures.

Let me get the failures out of the way first. I have been a vocal critic in social media of the ineptitude in transportation and traffic management and more particularly of the airport administration. The “achievements” in this areas have been mostly too little too late. That said, no administration in the past, present or future can be perfect. I say continue to criticize but be mindful that the quest for Shangri-La is only for naive dreamers.

Nobody can deny that the Aquino administration has managed to burnish the country’s credibility in public governance and economic management, particularly among the country’s trading partners, foreign investors and creditors. This is no small feat and the impact of this accomplishment is significant in our global economy. Our public debt management is under firm control. The country is the absolute darling of the global credit markets and we have achieved an investment-grade rating that no one would have even dreamed of before this current government. We all would like to see the investment in infrastructure, in public health and safety, in grassroots livelihood and poverty reduction. What the Aquino administration has managed to accomplish is ensuring the health of our public finance so that all that is good and right can now be delivered by the next government – without the need to hock the future of our children to our creditors.

We have seen the highest average growth rates ever of the Philippine economy on the back of “Daang Matuwid”. No government can deliver the needs of its citizenry by itself and would always need the private sector to move lockstep with it. At the GDP growth we have achieved, the private sector now has the ability to match the programs of government. The next government will have to then focus on ensuring that the economic growth can now trickle – perhaps even pour – down to the poorest sectors of our economy. Which brings us to the Presidential elections.

I fully understand how many of my friends hanker for the change that will bring about greater equity in our society. The economic elite of this country has not been known for its concern for the masses and that is putting things mildly. I fully understand the yearning for BIG CHANGE.

I can see that many of us equate continuity with indifference to the plight of the country’s countless needy. This is a fair concern. But let us not be pushed towards a reckless path just because we are fed up.

Duterte means big change. Or at least this is the rallying cry of his more rational supporters. Is it a change towards the right direction? Allow me to ask a few questions that could perhaps be the start of a more meaningful debate among the supporters of the Presidential candidates.

We want an end to corruption. The Aquino administration has taken the boldest steps of any Philippine government in this respect. Not enough, you say? Duterte can do better? How can an individual who nonchalantly declares that he has been cheating (copying) since Grade One have the moral compass to do more? This candidate thinks that revealing this tidbit is even amusing and charming!

We want to see an end to impunity and to the senseless killing of reporters and the helpless communities that they are trying to defend. We need the Freedom of Information Law and many other initiatives towards a fairer society. Sadly, we have seen how Duterte has been contemptuous of his obligation for greater transparency. A “magbubukid” named Emilio Aguinaldo? C’mon, have you ever seen anything as condescending and insulting of the voting public as that exchange in the last Presidential debate?

We want a government that is inclusive and fair.   The crass joke about raping a missionary is outrageous and despicable. I do not know of a single decent person who will cross that line under any circumstance. Certainly, none of my friends who profess to support Duterte. This candidate even has the nerve to demonstrate righteous anger with the backlash to his comments and even dares to insult our intelligence by justifying his act by saying he lost his temper? God help us, indeed.

We want a government that can act and deliver on its promises. Good public administration requires quiet toil, long preparation, consistency and steadfastness,  and incredible amounts of patient, hard work. Is this something that we can expect from someone who cannot even be bothered to prepare for a two and half hour Presidential debate? Someone who even facetiously claims that the debate questions were leaked to Mar beforehand? What a juvenile! The questions were about the most important issues of the land and each candidate is expected to have done his homework not just for the debate, but for the far more important task of governing 100 million Filipinos. Someone should ask the impatient and simplistic Duterte how fiscal policy should adjust to the fluctuations of the Philippine Peso in a case where extractive industries will be allowed to expand. I’m sure I would laugh out loud if I did not cry first.

Mar was the only candidate in that last debate who was well prepared and  could hit the ground running. End of story.

Let me end with an insight that I have in my own professional life. I realize that the company that I work for is good but is not perfect. It cannot offer all the opportunities for all its staff all the time – No company can. Because of this I need to make sure that I listen to every employee that asks for permission to leave and pursue opportunities somewhere else. In these conversations, I make sure that I understand what it is in our company that pushes the employees towards the new job quite apart from the intrinsic attraction of the new job itself. Whenever the “push” is greater than the “pull”, I ask the person to step back and reconsider because this situation is always a formula for career disaster.

Let me address my dear friends now. No government is perfect. No government can offer all the opportunities to all its citizens all the time – no matter how hard it tries. I realize the urgency, given the oppressive poverty in our country. I know that at some point, I will end up criticizing Mar and some his policies. But I will not be pushed into a desperate act of supporting a charlatan like Duterte just because the continuity being promised by Mar and Leni is not perfect.

Mar and Leni are the only viable candidates to lead the country in the next six years.

Who is afraid of the Philippine Peso appreciation?

The relentless appreciation of the Philippine Peso is hurting the local BPO industry. In a Business Processing Association of the Philippines (BPAP) survey conducted in late 2012, 47% of BPO respondents reported difficulty in hitting revenue targets, 40% reported losing business to other destinations, and another 40% reported cancelled expansion plans.

The BPO industry is looking to the Central Bank (BSP) for relief – largely in vain, I believe. As of November 2012, the BSP had already lost PHP 46.34 billion, up 21.09 percent from 2011, due to its US dollar purchases to arrest the peso’s rise. Under ordinary circumstances the BSP can use its interest rate tools to reduce the demand for pesos.   However, Philippine interest rates have already sunk to historic lows, with 91-day Treasury bill rates in January 2013 down to only 0.05%.

For sure, local BPOs need to aggressively embark on cost management programs. Nonetheless, the Philippine government may have avenues to help BPOs cope by emulating a novel plan by French President François Hollande. Mr. Hollande is carrying out a plan for a business tax credit coupled with higher sales taxes as a way to revive the French economy. Since a currency devaluation is not possible within Euroland, France is attempting a “fiscal devaluation”, an idea espoused by Harvard University economist Gita Gopinath (Gopinath on Fiscal Devaluation, Women in Economics). As part of the fiscal devaluation, Hollande offered French companies a USD 27 billion tax cut on salaries but he also lifted the two highest VAT rates.


Assuming the numbers add up, adopting a similar fiscal devaluation plan in the Philippines is appealing at a couple of levels. Higher VAT will make imports more expensive just like in a currency devaluation. The higher cost to import is offset by lower corporate taxes and lower taxes on salaries thus allowing local companies (including BPOs) to remain competitive. Further, a number of companies and professionals have been very creative in reducing their tax payments to government. The reduction in both corporate and compensation taxes reduces the incentive for this harmful type of “creativity”. Finally, the shift in focus of the tax effort towards consumption should also improve the country’s savings (and hence, the investment) rate.