April 18, 2018

Philippines Economy Risk of Overheating Containable

World Bank (WB) warned that even though Philippines is one of fastest growing economy in south east Asia, it faces several domestic risks such as overheating, higher inflation and climbing fiscal deficit (source: philstar). 

The question about the comment of WB is that, what do you mean by overheating? The term overheating is not use in economics (when I was a student of economics, I’ve never use this terminology) because it is ambiguous (not specific). WB, being leader in the economics industry, if I may suggest, should be careful in using terminologies, as it may trigger public disturbance. 

With regards to inflation rate, it is very observable that Philippines monthly inflation rate is on upward trend from December 2016 to December 2017 at 1.30% to 3.30% respectively (data source: PSA). It is undeniable that prices of goods and services in the Philippines are increasing under short term perspective. 

Philippines Monthly Inflation Rate (2006=100)

But looking at the long-term side, we would observe that Philippines 2017 inflation rate is not so high compared to previous years (we will see a down trend). This signifies that inflation is still containable, but prices of goods could go up further in the next months (short term) as demand for goods and services increase (due to increasing income of the people). But as supply matches demand (more businesses produce products), prices will go down leading to decline in inflation rate (this is the long-term perspective). Thus, rising inflation in the Philippines could be an opportunity for businesses, as this signifies strong consumer spending (rather than shortage in supply). 

Philippines Yearly Average Inflation Rate (2006=100) 

In terms of government debt, as of Feb 2018, total debt is P6.8 Trillion, 65% is domestic debt while 35% is foreign debt (source: PSA). I would not worry much about government domestic debt in the short term since most of the maturity are long term; of P 4.4 Trillion domestic debt 75% is classified long term (P3.3 Trillion). Foreign debt on the other hand amounted to P2.4 Trillion, 12.6% of Gross National Product. While it’s very clear that government debt is a huge amount, this could be compensated by increasing tax collection. Bureau of Internal Revenue (BIR) reported P1.779 Trillion tax collection in 2017 which is 12.92% higher compared to 2016 (source: businessworld). Assuming that tax collection will continuously increase in the next 5 years, Foreign Debt will significantly decline in less than 5 years. 

It’s good to remind a country about the basics of monetary and fiscal policy, and I must agree that for Philippines to be one of the Tigers of Asia, it should be able to manage the economy very well; but right terminologies must be use.

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