A mountain of Filipino economic challenges await Marcos’ team

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(Bloomberg) — After his landslide victory in the presidential election, Filipino Ferdinand “Bongbong” Marcos Jr. now faces soaring inflation and limited revenue to meet his ambitious infrastructure goals.

Several names have been floated as potential candidates for his economics team when the new administration takes power next month. The late dictator’s son is building his cabinet amid lingering questions about his family’s wealth and tax obligations.

What is certain is the severity of the economic challenges ahead, even after a better than expected GDP surprise in the first quarter. While just a few weeks ago policymakers sounded more confident about containing price growth, inflation has worsened around the world, including in the Philippines. The central bank is expected to decide on its benchmark interest rate on Thursday, with a slim majority of analysts expecting rates to rise in line with global and regional trends.

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Here’s a look at what’s high on the agenda to keep the Philippines’ post-Covid economic recovery on track:

Inflation

Faster-than-expected inflation has rattled central bankers around the world. Consumer price growth in the Philippines came in at 4.9% in April, the highest in more than three years and beating the central bank’s target of 2% to 4%.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno, whose term ends in mid-2023, said last week that policymakers were “ready to adjust” monetary settings if there is a “significant risk” of supply-induced price pressures that affect demand.

Higher borrowing costs and pressure on consumers and businesses should draw the attention of officials looking to ease the burden through fiscal policy.

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Marcos promised aid and loans to pig farmers to lower pork prices and increase supply. He also said he was in favor of suspending the oil excise tax to control rising fuel prices.

Infrastructure… and how to pay for it

Marcos moves into the presidential palace on a promise to follow many of his predecessor’s initiatives, including an ambitious infrastructure program with more airports and railways outside the capital and a renewed focus on infrastructure digital.

As more shovels hit the ground beneath Marcos, the investments are a “key element of the country’s favorable medium-term growth outlook” underpinning their BBB credit rating, Fitch Ratings analysts said in a 12 report. may.

Fitch’s negative rating outlook for the Philippines, as confirmed in February, however, underscores that infrastructure ambitions will not be easy to fund.

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“Investment efficiency is key,” analysts said in the report. “Mismanaged public infrastructure investments could also contribute to public debt growing faster than nominal GDP over the medium term, putting pressure on sovereign ratings.”

If Marcos delivers on his tax promises, it will be difficult for the government to pay those higher bills. He said he was against new taxes that will impact consumers because he doesn’t want to increase the burden on a population still recovering from the pandemic.

Current account deficit

Long a bogeyman for investors, the current account deficit and fiscal pressure expose the peso to capital outflows and volatility.

The twin deficits and shrinking reserves of external financing mean the peso is “one of the region’s most at-risk currencies” in the event of an emerging market rout, Makoto Tsuchiya, an economist at Oxford Economics, said in a statement. note of May 10.

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So far this year, the peso has fallen about 2.8% against the dollar on Tuesday.

Soaring global energy costs prompted the central bank to raise the outlook for this year’s current account deficit by more than 60% in March to $16.3 billion. Russia’s war in Ukraine, the normalization of US policy and China’s economic slowdown are also weighing on exports.

Marcos’ team won’t find a quick fix for the budget deficit either. Officials estimate that GDP needs to grow by at least 6% over the next five to six years to help reduce the bill.

Consumption and Mobility

Like many Southeast Asian economies, the Philippines is seeing the benefits of reopening post-Covid. A tourism top-up helped convince analysts at United Overseas Bank Ltd. that the economy can grow by 6.5% this year, just short of the official target of 7% to 9%, they said in a May 12 report.

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Google mobility data also shows that people are returning to stores to drive business and the consumer-driven economy. But as private consumption paved the way for favorable growth figures in the first quarter, it will be difficult to maintain this pace as operations return to normal.

“Gains are unlikely to be as robust going forward, especially with rapidly rising inflation, the still-sluggish labor market and households having to rebuild savings lost over the past two years,” he said. said Miguel Chanco, chief economist for emerging Asia at Pantheon Macroeconomics. said in a May 12 report.

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