A demand for something to be done can morph into a demand for anything to be done. Faced with a series of supposed crises and epidemics – the binge-drinking crisis, the obesity epidemic, etc. – the government is told to take action at all costs. But taking action at all costs is a terrible way to make policy—Christopher Snowdon
In this issue
Kaboom! Transport Sector Squeeze: Fuel Subsidies, a Demand-Side Fix against the BSP’s Supply-Side Predicament?
I. Kaboom! Authorities Compelled to Respond to the Income Squeeze of the Transport Sector! Controls Beget Controls
II. Fuel Subsidies: Demand-Side Fix against a Supply-Side Dilemma? The Impact of Fiscal Balance Sheet on the CPI
III. Bigger Oil Price Spikes!
Kaboom! Transport Sector Squeeze: Fuel Subsidies, a Demand-Side Fix against the BSP’s Supply-Side Predicament?
I. Kaboom! Authorities Compelled to Respond to the Income Squeeze of the Transport Sector! Controls Beget Controls
Last week, we observed that the "risks of policy error" continue to mount from the BSP recalcitrance to maintain its present policy stance. For instance, because the Transport sector has borne the brunt of the imbalance from price caps and rocketing oil prices, it recently urged authorities to raise fare prices.
Though the housing and utility CPI (housing, electricity, gas, & water) managed to adjust along with spiking in oil prices, the transport CPI has lagged substantially. (Figure 2, second to the lowest and lowest windows)
It means that the price caps in the face of surging input costs must have been squeezing margins and earnings of the industry.
…
No wonder a public transport group demanded authorities to allow a Php 6 or a 66.67% hike in passenger fare last week.
Such maladjustments are barely indicators of growth.
Instead, it represents the depreciation of the standards of living of the sector. Again, the CPI reveals none of these ramifications on the individual.
Such also shows that price changes are hardly reflected accurately in the CPI because of regulatory measures such as Suggested Retail Pricing SRPs and direct price controls.
See Will Street Inflation Spike? Global Wheat Prices Go Ballistic! Oil Prices Rockets to 8-Year Highs! Gold in Peso Hits All-Time Highs! March 6, 2022
Kaboom! Instead of fare hikes, authorities responded with a massive subsidy to "targeted" sectors.
From the Inquirer, March 11: The Department of Budget and Management (DBM) on Thursday released a total of P3 billion in subsidies to public utility vehicle (PUV) drivers and funding to cover fuel discounts for agricultural producers to ease the burden inflicted by skyrocketing oil prices. In a statement, the DBM said the P2.5 billion for the Department of Transportation’s fuel subsidy program plus P500 million for the Department of Agriculture’s (DA) fuel discount program would “provide targeted assistance to affected sectors and cushion the impact of the consecutive oil price hikes in the past three months.”
Yet, fare hikes are still price caps, but it may help bridge the earnings gap of the affected sectors, which would come at the expense of a higher CPI.
The general idea is to keep the CPI within the targets of the BSP while providing a lifeline to the sectors bleeding from rocketing oil & commodity prices.
But according to the BSP, the domestic CPI issue signifies mainly a supply-side problem to justify its low rates policies: "We expect the ongoing conflict to continue to exert upward pressures on key international commodity prices, particularly oil and wheat," the BSP said. (Inquirer, March 12)
Should international oil prices continue to surge, would this imbalance not cause a downscaling of the transport sector?
For instance, in Italy, truckers have declared a "force majeure" from rocketing prices to suspend its services. From Anta.it, March 10: "Starting from next Monday, March 14, the trucking companies will suspend their services nationwide 'due to force majeure' "and that is the explosion of fuel costs."
Yet, how much of these subsidies will be sufficient to forestall any disruption?
Are authorities aware of the actual losses suffered by every economic agent of the industry?
If not, why the one-size-fits-all approach?
If inadequate, wouldn't such political band-aid remedy magnify the risks from a build-up of more imbalances from the current responses?
In any case, people of the transport sector are consumers too. The compression of earnings translates to diminished standards of living.
Is the transit sector, mainly catering to the commuting public, meant to endure the politics of redistribution to maintain the low CPI regime of the BSP?
Would it not create a class of dependency too?
The objective of the subsidies is to narrow or alleviate the earnings deficit of the affected sector.
Why the preference for controls when market prices should guide the incentives of energy consumers to conserve and allocate accordingly to their needs?
The popular predilections for controls have also prompted authorities to consider substantial hikes in minimum wages. Controls beget controls. So what's next? Nationalizations of enterprises?
II. Fuel Subsidies: Demand-Side Fix against a Supply-Side Dilemma? The Impact of Fiscal Balance Sheet on the CPI
Paradoxically, this temporary patch represents a demand-side approach on what the BSP stubbornly sells to the public as a supply-side problem.
Why so?
Figure 1
Aside from providing dole-outs, should we discount the contribution of bank credit expansion of the other sectors on demand?
Even if international oil prices spike, marketplace demand would adjust accordingly to offset this.
And how about the balance sheet of the public sector?
Are authorities hoping for a windfall in revenues from a surge in street inflation?
The nominal price levels serve as the basis for taxes. Therefore, the higher the price level, the higher the revenues.
But this applies to the micro-levels only. Statisticians can fabricate macro-conditions to show what political leaders desire.
And of course, nor should we forget, political spending affects the prices of the real economy.
Most importantly, how will such subsidies be funded?
Figure 2
Will record debt-financed historic deficit spending swell further because of it?
Or, are these measures also designed to lower debt repayments by inflating away, record public debt away?
The takeaway. Competition for scarce resources should pressure prices of goods and services higher.
It is the political response to the oil shock that matters. The consequences of band-aid remedies will surface over time.
III. Bigger Oil Price Spikes!
Oil prices are bound to spike this week.
From the Inquirer, March 13: "Filipinos can expect an epic spike in local fuel pump prices in a few days as fears of a major petroleum supply crunch sent prices to a global high of $139 a barrel. This is expected to translate to an increase of between P11.75 and P11.95 per liter for diesel, P6.90 to P7.20 per liter for gasoline, and P9.70 to P9.80 per liter of kerosene."
If oil prices continue to surge, demand for either fare increases or subsidies will mount. The dilemma presented by the above will escalate.
Lastly, how will the unfolding events be bullish to the economy and financial markets structured on perpetually low-interest rates?
Yours in liberty,
The Prudent Investor Newsletters
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