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MADRID,
Spain—The
Philippines will shed more than one percentage point out
of its gross domestic product (GDP), experience higher
inflation, and force the Bangko Sentral to jack up
interest rates in 2008 and 2009 due to high food and oil
prices, according to the latest study released by the
Asian Development Bank (ADB).
The
“Food Prices and Inflation in Developing Asia: Is
Poverty Reduction Coming to an End?” estimated GDP
growth based on two scenarios, the first one assumed
that the 57.7-percent increase in world food prices in
the first quarter of 2008 will be carried through to the
fourth quarter.
In the
second scenario, the 66.5-percent growth in world oil
prices is added on top of the 57.5-percent world food
price increase.
“Note
that the results shown in this section do not represent
projections, but should be taken as mere indications of
how regional economies could respond to a food- and
fuel-price shock,” the ADB said as a reminder.
On the
first scenario, the ADB said GDP in developing Asia will
decline by 1.05 percentage points in 2008. The report
also said that the People’s Republic of China, Indonesia
the Philippines and Singapore will all experience more
than one-percentage-point reduction in GDP in the first
year.
In
scenario 2, regional GDP growth sinks by 1.41 percentage
points. Among the 10 developing Asian economies in the
model, only the Philippines will experience a further
reduction in GDP growth of more than one percentage
point between scenario 1 and scenario 2.
“This is
perhaps reflective of the Philippines’ greater reliance
on imported food and oil. Conversely, the limited impact
for Hong Kong, China may be due to its dependence on the
PRC, which is a large supplier of both its food and
oil,” the ADB said.
The ADB
study also showed that using the first and two scenarios
and projections of fixed and flexible interest rates,
the Philippines’ GDP is seen to decrease by as much as
3.48 percentage points under a flexible interest rate
under scenario 2 in 2009.
The
study showed that in 2008, under a flexible interest
rate regime, GDP will decrease by 1.40 percentage points
under scenario 1 and 2.49 percentage points under
scenario 2. If interest rates are fixed, GDP will be
reduced by 0.84 percentage point under scenario 1 and
1.36 percentage points under scenario 2.
In 2009
GDP reductions are higher. If interest rates are made
flexible, GDP is seen to decline by 2.15 percentage
points under scenario 1 and 3.48 percentage points under
scenario 2.
However,
fixed interest rates will cause GDP to fall by 1.31
percentage points under scenario 1 and 1.50 percentage
points under scenario 2.
“In
short, inflation needs to be nipped in the bud to limit
its impact on long-term growth. Allowing currencies to
appreciate, combined with monetary policy tightening are
desirable tools in addressing this issue. Economic
growth will suffer in the short run [but] it is the
price the economy must pay in order to return to its
long-term high-growth path,” the ADB said.
“In the
interim, governments may undertake targeted subsidy
programs to alleviate the impact of rising inflation on
the poor,” the report added.
The ADB
explained that fixed interest rates are only acceptable
in the short run, especially when rising inflation is
caused by cyclical factors. While countries may opt to
keep interest rates fixed, the current spike in global
food prices are caused by both structural and cyclical
factors.
“Keeping
interest and exchange rates steady amid inflationary
pressures caused by structural factors imposes the
danger of inflation becoming ingrained in the economy.
This may bring down productivity growth and undermine
the economy’s ability to maintain its long-term
sustainable growth path,” the ADB said.
In the
long-run, the ADB said the notion of food security
should move beyond a relatively static focus on food
availability to higher productivity.
“As a
majority of the poor in developing
Asia live in rural areas and depend on agriculture, higher
agricultural growth will raise farm output, reduce
prices and raise incomes of poorer farm households,” ADB
chief economist Ifzal Ali said in a statement.
The ADB
said that yields of food crops in most Asian economies
are low in comparison with other major producing
nations. Technology improvement has also become
increasingly important along with efficient use of
water, power and other key inputs.
Ali said
farmers will face complex adjustments as they make the
transition to new farming systems and technologies.
Meanwhile, the report said the rise in oil prices is
critical in analyzing food-price increases since
fertilizer prices move in tandem with energy prices.
Fertilizer prices are highly dependent on petroleum and
natural-gas prices.
“In 2009
the growth in food and oil prices is assumed to revert
to the baseline rates in the Oxford Economics model. But
as food and fuel prices continue to rise, these economic
responses could well be underestimates,” the report
stated.
Further,
due to higher global prices, inflation is expected to
increase, which is seen to dampen private consumption.
The ADB
said global food-price increases translate to higher
prices in developing Asia, particularly since food
carries a large weight in the Consumer Price Index of
many of the region’s economies.
In the
first scenario, regional inflation rate is seen to rise
by 1.65 percentage points in 2008, with individual
country consumer prices climbing by at least 0.53
percentage point.
In the
second scenario, regional inflation was seen rising by
2.37 percentage points in 2008. However, the ADB said
results are further magnified in the second year under
both scenarios, since the model takes time to adjust to
food- and oil-price shocks.
“With
food and oil accounting for a large share of consumer
price indexes in the region, and with a majority of
countries being net food and oil importers, the
consequent rise in developing
Asia’s prices is not surprising,” the ADB said. |
