Consumers and businesses will face the same financial and economic challenges concerning inflation, trade, and the environment in the new year. Fortunately, the country should now be able to better navigate trying conditions with substantial spending and patience from the government.

“The good thing about the risks is that these are a repeat of 2022 and 2023. The key word is the same, that is, FUDD: fear, uncertainty, doubt and disruption,” Jonathan Ravelas, senior adviser at Reyes Tacandong & Co. and former BDO Unibank Inc.’s chief market strategist, said at the Rotary Club of Makati meeting last Tuesday, 26 January 2024, at the Peninsula Manila.

New taxes

“Of all the economic players, it’s only the government that has the propensity to spend. That’s why the new Finance Secretary is tasked to make new taxes. That’s the only way for us to bring the economy forward,” he added.

Ravelas said inflation will likely remain elevated, restraining consumption of various goods and services among the public. He expects the average inflation this year to settle at 5.6 percent before improving to 4.5 percent in 2025.

“Despite that, and the remaining challenges from the pandemic, we have normalized. We seem to have adapted to these challenges,” he said.

Apart from analyzing historical economic data, Ravelas, who was recognized as one of the world’s  most accurate forecasters by FocusEconomics Consensus Forecast, took inspiration from the name of President Ferdinand “Bongbong” Marcos Jr., also known as BBM, to summarize the Philippine economic story in the near future as BBM 2: Babagsak Muna Bago Babangon Muli (Economic growth will decline before rising again).

“Very few have recovered from the pandemic due to inflation. But if you’re part of the one percent ultra rich, you probably did not feel anything,” Ravelas said.

Due to inflation, he expects consumers to buy goods at small volumes which could translate into an economic growth of 5.6 this year before further expanding to 6.3 percent in 2025.

“The Philippine economy being resilient does not mean everybody is happy. It’s just that we love the budget meal or shrinkflation,” Ravelas said.

Major inflation risk: US attacks vs Houthis

A major inflation risk, he said, is the US attacks against Yemen’s Houthis, an Iran-backed rebel group that has launched missiles towards US vessels and cargo ships in the Red Sea, which could disrupt oil supply.

“That’s why we saw recent oil prices move up by 4 percent. The cost of shipping also spiked. This is a real risk,” Ravelas said.

Core inflation, which includes all items except gas and food, stood at 6.6 percent last year, according to the Philippine Statistics Authority.

“These are the costs for education, telecommunications, and restaurants. If the US continues to make noise in the Red Sea, this could become a full Middle East crisis. Of course, the one that will benefit is the US because it sells arms and has the biggest supply of oil,” Ravelas said.

To manage inflation, the Bangko Sentral ng Pilipinas raises its policy rate, making the costs for borrowing for various purchases more expensive.

“Consumption has gone down but is still resilient with strong remittances from overseas Filipinos. But trade is slowing down because of the high interest rates,” Ravelas said.

He added real estate demand has weakened. “Vacancy rates are the same as in 1997 and 1998 or during the Asian financial crisis,” Ravelas said.

Bright spots and feasible solutions

To ensure long-term economic growth, Ravelas advised the government to boost its spending, including strategic borrowing which he compared to bodybuilding.

“If you moderate your eating and you don’t eat carbs, you become lethargic. It’s okay to eat a lot of carbs because we’re a growing economy, so forget about the debt-to-GDP ratio of 60 percent,” he stressed.

“The last time was 80 percent during the Asian financial crisis in the 1990s, so we can hack it,” Ravelas continued.

He said government loans should help build infrastructure nationwide which the tourists will greatly appreciate, along with a depreciated peso.

While peso depreciation entails certain disadvantages, Ravelas said its temporary occurrence could help spark tourists’ interest in the Philippines.

This means, he said, that economic managers should consider flexible rate policies on foreign exchange under certain circumstances.

“When you go to a store and they offer you a discount, even though you had no plans to buy, you would buy. That’s the thing we need to do in the Philippines. We need to allow people to see the Philippines in their light,” he said.

“Like last year, there were so many tourists that came in because of the weaker peso. We were weaker than Thailand. But is it worth the risk to travel in the Philippines?  We’re doing bad at airports,” Ravelas cautioned.

ESG projects

Aside from these, he recommended that businesses should be allowed to carry out their environment, social and governance or ESG projects in a stretch for a reasonable period.

“The Philippines is trying to implement a set of ideas but it’s immediate compliance. We need to be able to extend it in such a way, maybe ten years from now to comply because if we were to comply with ESG, that’s inflation,” Ravelas said.

Global reports say some foreign governments have suspended or relaxed ESG rules on firms as businesses tend to hike consumer prices as a pass-on cost from quickly shifting to environment-friendly resources, such as solar battery-powered facilities.

“In other countries, they’ve suspended it already. When you talk about ESG, it makes everybody feel good but at what cost? We need to talk to the government and say it will be over a period of time,” Ravelas said.

Last, he said businesses should tap digital tools and local materials to reduce costs of operations. “Try to think how to source your raw materials locally. Use online or digital tools and social listening which means how to reach customers,” Ravelas said.