‘Nearshoring,’ policy action may be needed if Red Sea crisis worsens
A WORSENING Red Sea crisis could require the government to overhaul its import supply chain with “nearshoring” initiatives, while forcing it to respond to price increases with policy tools, Oxford Economics said.
“In the case the conflict in the Red Sea exacerbates rapidly and impacts transportation costs on a much more wide basis, the Philippines could see import prices rise, feeding through to domestic prices,” Economist Makoto Tsuchiya of Oxford Economics Japan said in an e-mail.
“In the short term, government will have to shore up efforts through monetary and fiscal policy to contain the damage from higher prices on firms and households, but high public debt and limited fiscal space could be an issue here,” he said.
Yemen’s Houthi rebels have attacked cargo ships and tankers, affecting shipping traffic through the Red Sea. The northern part of the Red Sea leads up to the Suez Canal and accounts for around 12% of global trade or 30% of global container traffic.
“In general, we think the impact of what’s happening in the Red Sea has disproportionate impacts on Europe compared to Asia, given about three times more containers are brought from Asia into Europe than the other way around,” Mr. Tsuchiya said.
Meanwhile, Pantheon Chief Emerging Asia Economist Miguel Chanco said the rate cut in the Philippines could be an outcome of the Red Sea conflict.
“For now, we’re only seeing the crisis as a risk to our forecasts, which see average inflation in the Philippines softening to 3.2% from 6.0% last year, allowing the BSP (Bangko Sentral ng Pilipinas), in our view, to eventually cut rates by 100 basis points in total this year,” Mr. Chanco said in an e-mail.
The central bank last month kept its key rate at 6.5% — the highest in nearly 17 years — for a third straight meeting. The BSP has raised policy rates by 450 basis points (bps) between May 2022 and October 2023 to tame inflation.
Headline inflation accelerated to 3.4% in February from 2.8% in January, mainly due to increasing food, transport, and oil costs.
Mr. Chanco said the Red Sea disruptions would have minimal impact on the Philippines’ economic growth, which relies more on domestic demand than external trade.
Last year, The Development Budget Coordination Committee (DBCC) narrowed its gross domestic product growth target range to 6.5-7.5% from 6.5-8% previously.
The economy grew 5.6% in 2023, falling short of the DBCC’s 6-7% goal for the year and slower than the 7.6% expansion in 2022. — Beatriz Marie D. Cruz