Bracing for change, P.S.

PHILIPPINES - In Brief 28 Feb 2022 by Romeo Bernardo

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When we issued our Forecast report on February 22, we had not expected that the risk we warned about that would be “disruptive to growth everywhere,” i.e., a war in Ukraine, would happen just two days later. The still unfolding event, with its immediate outsized impact on global commodity prices, is expected to bring changes to the global economic outlook, to how the US Fed will manage its exit from monetary accommodation and to even greater importance of geopolitical factors to financial markets and trade relations going forward. All these can be expected to affect our set of forecasts, starting with the pass-through of global oil and food prices to local inflation, a higher import bill and a weaker currency. We will be reviewing these forecasts when the situation has stabilized and there is more clarity in the external environment. For now, we note two things: The Philippines has limited direct exposures to either the Russian or Ukrainian economies through trade, investments and remittances, although Europe as a whole is a key partner in all respects.[1]The Philippines relies on imported oil mainly from the Middle East. In 2020, it bought 33 million barrels of crude oil and 103 million barrels of petroleum products.[2] As other fuel prices rise with oil, it is also important to keep in mind that electric power companies rely on imported coal.The BSP’s simulation showed that if crude oil prices were sustained above $95/bbl going forward,[3] the headline inflation rate could breach its 4% upper end inflation target. This is a conservative estimate as it does not yet factor in second round impacts on transportation, food prices and wages, among others. Separately, gover...