The announcement by OPEC and Russia that they will slash oil production by two million barrels per day increases the chances of a world recession. If it happens, the impact on poorer countries like ours will be brutal.
Instigated by Saudi Arabia and Russia, the move is obviously political. Using the oil weapon is their way of hitting back.
But this is a bad time for an escalation of oil prices. The winter season is upon the Western economies and they already have energy supply problems arising from their overdependence on Russian gas.
For us, our transport sector has suffered cumulative increases (excluding this week’s increase) of P14.45 per liter for gasoline, P28.95 per liter for diesel, and P23.25 per liter for kerosene, based on the Department of Energy’s monitoring.
Transportation cost has been a main contributor to our inflation rate. In July, it increased to 18.1 percent.
Given that oil prices remain elevated, the government will have to continue giving subsidies to PUJ drivers and operators despite budget constraints.
Additionally, the government cannot exit its program for fuel cash subsidies for tricycle drivers and the Libreng Sakay Programs of the Department of Transportation, as well as the Metro Rail Transit Line 3, Light Rail Transit Line 2, and PNR “Libreng Sakay” for students.
Things will get worse if recession hits the major economies soon. Former US Treasury Secretary Larry Summers said it’s “more likely than not” the US will enter a recession.
“Historical experience suggests that the kind of inflation we have rarely returns to normal levels – target levels of around two percent – without some kind of recession,” Summers told CNN.
A recession would make lives more difficult for ordinary people. Many will lose jobs as businesses flounder from lackluster sales and an overall decline in national economic output defines overall mood.
Our apparel industry is starting to feel the pinch of a looming recession. Their clients, mostly in the US, are not selling enough garments and are having inventory build-ups.
So, our local garments industry is facing declining orders and many will “temporarily close” factories this year, hoping to reopen again soon.
“What you see in Cebu is the start, an effect of the slowdown,” Maritess Jocson-Agoncillo, executive director of the Confederation of Wearable Exporters of the Philippines (Conwep) told reporters in a press conference. She was referring to the layoff of more than 4,000 workers at the Mactan Export Processing Zone in Lapu-Lapu City, Cebu last month. Eventually, some firms with operations in Batangas and Bataan will also be affected.
The World Bank had conducted a study that indicated we may be edging toward a global recession in 2023. The World Bank doubts all the interest rate hikes by central banks will be sufficient to bring global inflation back down to levels seen before the pandemic.
For us, we already have an elevated level of government borrowings that’s still growing. Our peso has also depreciated the most in recent years and, without BSP’s obvious defense of it, should have reached the 60 to the dollar rate by now.
The rise in interest rates makes it more expensive for our National Treasury to service our national debt. As for our dollar denominated debts, like the $2 billion bond offering announced last week, the Treasury will require more pesos to buy the dollars to service that.
Junior has no choice but to introduce new tax measures to raise more government revenues. That will reduce the financial resources private companies need to invest in or keep their businesses running.
How did we get into this mess? For one, blame COVID and its lockdowns that caused serious supply-chain bottlenecks.
The supply chain bottleneck was serious. Manufacturers couldn’t produce enough of their products because they don’t have enough components or parts they need, like computer chips for cars.
One of my high school classmates living in Silicon Valley said he just bought a second-hand car at the price of a brand-new car. No new cars are going off assembly lines, so prices of second-hand cars have gone up.
As prices of products went up due to increased demand and constricted supply, the only thing government economic managers could do was to raise interest rates to dampen inflation. But raising interest rates is not going to bring more gas or microchips to market.
Worse, rising interest rates reduces investments in businesses, and reducing investment will limit future capacity, and thus future supply. But central bankers desperately need to look like they are doing something, anything, to reassure people inflation will not become entrenched and widespread.
Containing inflation by raising interest rates slows down the economy and eventually causes more unemployment. The dilemma of central bankers is how to pick the right interest rate at a time when many other economies are doing the same thing. Inevitably, business sentiment declines.
According to a survey by our Bangko Sentral, business sentiment weakened in the third quarter, with the overall confidence index (CI) declining to 26.1 percent from 35.4 percent in the second quarter. The lower index resulted from the combined effects of a decrease in the percentage of optimists and an increase in the percentage of pessimists.
The respondents’ less optimistic sentiment in the third quarter was attributed to: (a) higher inflation (i.e., faster rise in prices of consumer goods, services, raw materials and production costs), (b) rising fuel prices, (c) decline in sales and demand, (d) peso depreciation and (e) the continuing public health threat of COVID-19.
For the next quarter, the business sentiment weakened for the second consecutive quarter as the overall CI decreased to 43.9 percent from 46.4 percent a quarter ago.
For the next 12 months, the business sentiment also declined further as the overall CI decreased to 57.7 percent from the previous quarter’s survey result of 59.9 percent.
All these negative sentiments were before the OPEC production cut that will significantly increase oil prices. Even the price of coal and geothermal goes up too since these are indexed to oil.
So, enjoy the Christmas holidays because the new year promises a wild ride. We are living in exciting times.
Boo Chanco’s email address is bchanco@gmail.com. Follow him on Twitter @boochanco