Philippines inflation to put brakes on historic economic growth

After 2007 saw the best economic growth in three decades, the Philippines is now struggling to control surging inflation, meaning interest rates may have to rise, putting a cap on recent successes.

Economists and businessmen agree that while such a rate hike could be painful, it may be the best option for the country as it tries to navigate the rough seas of the global economy.

Cesar Bautista, head of a joint government-private sector council on national competitiveness, warned: "If inflation is too high, no growth or salary hike will ever match the increase. You will be risking a revolution."

Socio-economy planning Secretary Ralph Recto foresees gross domestic product (GDP) growth this year at 5.0 to 5.5 percent, while the Congressional Planning and Budget Office has brought its target down to 4.6 to 5.1 percent.

The figures, while respectable, are sharply down from the government's original target of 6.3 to 7.0 percent.

The Philippines entered 2008 with optimism after posting its best growth since 1976 at 7.3 percent, while inflation slowed to a 20-year low of 2.8 percent.

But a sharp rise in food and fuel prices has had a crippling effect on the country -- one of the world's largest importers of rice and a consumer of imported oil for virtually all of its transport needs.

Earlier this month, the government said inflation had surged to a 17-year high of 12.5 percent in August. Just weeks earlier, it announced GDP growth in the first half of the year stood at 4.6 percent.

The Philippine central bank raised interest rates by 25 basis points late last month, taking the overnight borrowing rate to six percent and overnight lending rate to eight percent in a bid to stem inflation.

The bank's deputy governor Diwa Guinigundo said the economy was strong enough to withstand the increase and was confident GDP growth could still go to above five percent this year.

Bautista, a former trade secretary, said such rate hikes were a good idea especially as the increases came in small increments.

"They have to... make sure the rate hikes do not completely stifle growth," he said.

President Gloria Arroyo has abandoned her plans of a balanced budget in 2009 and 2010, Budget Secretary Rolando Andaya said, with her cabinet instead announcing increased spending programmes on infrastructure and social services.

"Some of the policy measures which the government has announced seem to be going in the right direction," said World Bank country director Bert Hofman.

"Delaying the balanced budget target for a few years seems to be the right move."

Jose Vistan, an analyst with AB Capital Securities, said people have become more cautious with their spending.

"Consumer confidence suffered as people, in expectation of bad times, held back," he said.

"Real investments have also suffered because businesses tend to react ahead of consumer spending," Vistan added.

The government and many economists insist the Philippines is merely the victim of external forces.

"Our growth output only mirrors what major economies in the world are experiencing due to high food and oil prices which induced inflation and holds back consumer spending," presidential press secretary Jesus Dureza said.

"We definitely cannot attribute the (slowdown) to the local economy.

An economist at one of the country's largest banks, who did not want to be named, said: "They can't blame Gloria for this. It is a global and regional event."

Ed Francisco, executive vice-president at Banco de Oro, predicted the economic slowdown would be "temporary".

"By the end of the month, we should see signs of a rebound. There is still a lot of liquidity in the system. People have money to spend. When they start spending, it will have a multiplier effect," he said.

The central bank said a survey of business expectations found that the outlook turned bearish for the third quarter due to "the surging prices of fuel and other raw materials, rising domestic prices of food, especially rice."

"Respondents, however, were broadly optimistic that business conditions would improve in the fourth quarter," it said.