THE onset of El Niño in the country is set to be a major risk to the country’s growth and inflation prospects for the year, ING Bank Manila economist Nicholas Mapa warned.
In a review note released on Thursday, Mapa wrote that “El Niño not only plagues the country with drought and dry spells, but it can induce even more virulent typhoon activity, a bane to the already decelerating inflation and the ailing agricultural sector of the country.”
Mapa added: “El Niño will undoubtedly hamper our agricultural production, which in itself is coming off a lackluster performance in 2018. Crop damage, as well as poor harvest for fisheries, will likely see the agricultural sector challenged for a second year.”
Earlier reports show that initial estimates peg crop damage at P464 million in the first month of the “moderate” El Niño onset.
Mapa said the expected drought will also sap some momentum from the local manufacturing sector, given the heavy weight of “food manufacturers” in the overall sector at 24 percent.
The drought’s effect on the country’s overall growth via the agricultural sector is likely to be aggravated by the government’s inability to pass a budget, according to Mapa.
“Against the backdrop of slowing growth due to the harsh and extreme weather conditions, the budget impasse simmers. Government officials paint a dour outlook should the budget be delayed further. We hope that the budget can and will be passed at the soonest,” Mapa said.
“Passage of the 2019 budget will indeed help cushion the impact of El Niño on growth, which is already expected to hit a speed bump in the first half due to slowing capital formation and now likely challenged government spending,” it added.
Although inflation risks look to be averted for now, the economist also noted that El Niño could push inflationary pressures to resurface in 2019. “With the projected shortage of agricultural produce, we could see an episode where inflation remains within target but likely at or above the 3 percent handle given the primacy of the food basket in the overall CPI,” Mapa said, as the ability to import rice, however, will mitigate the ill effects of El Niño on rice price inflation to some extent, but the damage to domestic rice production will be felt in lower incomes for farmers.
“Consumption, which we are counting on for the heavy lifting this year, will need to overcome the slight blip in inflation due to the dry spell,” he added. Inflation fell to 3.8 percent in February this year, going back to the target range sent by the government for 2019 at 2 to 4 percent.
Inflation quickly accelerated in 2018 and has been a problem for the economy during the year. This spurred monetary and nonmonetary action from the national government. It peaked at 6.7 percent in September and October 2018 before doing down to within target as of latest data.