Limited ties to Russia, Ukraine may minimize war impact on PHL

A motorist gets his tank filled at a gas station in Marikina, March 14. — PHILIPPINE STAR/ WALTER BOLLOZOS

THE RUSSIA-UKRAINE crisis may have a less severe impact on the local economy due to the country’s limited exposure to both countries, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said.

“The Philippines’ geographic distance and limited economic link to both Russia and Ukraine, as well as its strong macroeconomic fundamentals, could insulate the domestic economy during the current risk-off episode,” he said in a Viber message to reporters.

He noted that exports to Russia and Ukraine stood at $120 million and $5 million last year, saying these are “negligible.”

Based on data from the BSP, cash remittances from Russia and Ukraine in 2021 amounted to $2.261 million and $121,000, respectively. Both are relatively small compared with the $3.745 billion worth of inflows that come from Europe and the $31.417-billion total from all over the world.

However, Mr. Diokno acknowledged the conflict could hit global growth prospects through the spike in commodity prices.

“I think the impact of this Russian invasion of Ukraine is number one, it will slow global growth. It will raise the price of oil and other commodities, like for example, wheat and metals. And of course, it will shake a little bit financial confidence,” he said in a separate interview with ANC on Monday.

Russia is a major exporter of crude, metals, wheat as well as fertilizer. Meanwhile, Ukraine’s top exports include corn, wheat and some metals.

Since the conflict started, oil prices have surged to multi-year highs, raising inflation concerns.

Last month, the central bank said the assumed Dubai crude average price for this year is at $83 a barrel. The inflation forecast was raised to 3.7% from 3.4% previously, mainly due to rising oil and commodity prices.

“Doing sensitivity analysis, we arrived at the following forecasts: if average world price of oil is $95 per barrel, domestic inflation will be 4%; if $120 per barrel, it will be 4.4 %; and if $140 per barrel, it will be 4.7%,” Mr. Diokno said.

He noted their assumptions did not include the second-round effect of inflation on transport fares and wage increases. Transport groups have filed a petition to raise minimum fares, while a major labor group is seeking to increase the daily wage in the National Capital Region by as much as P470.

Dubai crude was priced at $113.25 a barrel on Monday, based on Bloomberg data. Its two-week average is at $110.72.

Mr. Diokno said they will consider the impact of longer-term price movements for possible adjustments in its monetary policy settings.

“We don’t decide on the basis of one or two weeks’ movement. We look at futures because monetary policy is supposed to be long term or medium term not based on past events,” he added.

He said price increases are considered “sustained” if they remain elevated for three months.

Mr. Diokno said that initial inflation situation in economies prior to the war in Ukraine will determine how central banks may respond to the crisis.

“For example, US inflation is at 7.9%, UK at 5.5%, and Euro area at 5.1%. The Philippine [February] inflation is at 3%, well-within the forecast range of 2% to 4.0%. The highest inflation is Argentina’s 50.7%. There is greater sense of urgency to act for countries with high inflation,” he said.

The US Federal Reserve is meeting from Tuesday to Wednesday and is expected to raise its benchmark overnight interest rate to quell a four-decade high inflation. Meanwhile, the BSP will have its policy review on March 24.

The BSP kept rates at record lows for the 10th straight meeting on Feb. 17. Mr. Diokno last week said they will continue to prioritize supporting economic recovery, but assured they are ready to respond when needed to address inflation risks.

DIGITAL CURRENCYMeanwhile, Mr. Diokno said the BSP is now open to looking into prospects of a central bank digital currency (CBDC), particularly on a wholesale basis.

However, he also noted they do not see it as an “urgent” matter, saying its implementation will depend on the outcome of their study.

“There’s no urgency for this. Our settlement and payment systems are working very well. So, I think we will maximize the benefits from our existing payment system,” he said.

The governor said the BSP is talking with regional counterparts to assess the prospects for a CBDC, most likely on a wholesale basis.

“This [wholesale CBDC] means maybe we’ll deal with government agencies and specific banks, not down to the individuals,” he said.

Based on the BSP’s exploratory assessment, benefits of CBDCs include the facilitation of financial inclusion and a possible decline in cash usage, an additional option for monetary policy tools, as well as boosting competition and innovation in the payments system.

However, they also recognize the possible threats from financial crimes, cybersecurity issues, and a loss of privacy for consumers that can be brought about by CBDCs. — Luz Wendy T. Noble