The specter of an El Niño weather pattern, causing drought and spurring inflation, is moving onto investors’ radars in the Philippines, though relatively low oil prices and Thailand’s rice glut will soften the blow.
Australia joined the United States and Japan last week in declaring the onset of an El Nino, which leads to lower-than-average rainfall in Asia. The Philippines is “especially vulnerable” due to its dependence on food imports, according to Barclays Plc. Even a mild rice shortage may push inflation closer to the top end of the central bank’s 2-percent to 4-percent target band, and there’s no room for monetary easing this year, Bank of America Merrill Lynch says.
During the last El Niño in 2009, Philippine inflation accelerated from 1.7 percent in August to 4.4 percent by December, and the 10-year sovereign bond yield rose 76 basis points to 7.88 percent over the year. A similar jump in inflation this time would reduce the allure of the nation’s debt, as the US moves toward raising borrowing costs. Consumer prices rose 2.2 percent in April from a year earlier, while Brent crude has averaged 8 percent less in 2015 than in 2009.
“Even if it adversely impacts May, June, July production, I don’t think it will push inflation up toward 6 percent to 6.5 percent,” said Patrick Ella, an economist at Security Bank Corp. in Manila. “It’s definitely offset by weak energy prices but not completely,” since food makes up a large part of the consumer-price basket, he said.
CPI basket
Food accounts for 47 percent of the Philippines’s consumer-price index (CPI), with rice alone making up 9 percent, according to a May 18 research note by Barclays’s economists, including Wai Ho Leong in Singapore. Thai stockpiles stemming from a government subsidy program are equivalent to about 40 percent of global trade and likely to keep prices depressed for the time being, they wrote.
Twenty-three of the Philippines’s 81 provinces are affected by drought and an additional 31 are suffering a dry spell, the agriculture department said on May 6. The Bangko Sentral ng Pilipinas (BSP) cited El Niño as a reason for adjusting its 2015 inflation forecast last week to 2.3 percent from 2.2 percent.
“Just in case El Niño adversely impacts rice production, we have additional supply coming in” via imports, BSP
Governor Amando M. Tetangco Jr. told reporters in Manila on Tuesday.
Severe drought is a key inflation risk and could also affect hydroelectric generation, pushing up power prices, according to a Bank of America note released on Wednesday that includes research by Jojo Gonzales, an analyst at Philippine Equity Partners in Manila. The lender forecast consumer prices will rise 2.4 percent this year and 3.5 percent in 2016, saying the risk to inflation is now “tilted to the upside.”
Bloomberg News
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