Amando Doronila
Philippine Daily Inquirer

The biggest threat to political stability in the Philippines in the next six months is the rising inflation affecting the prices of oil, other commodities, and essential services.

Businessman Raul Concepcion has warned that the prices of basic commodities are expected to post the biggest increase this month, driven by rising oil prices which on June 7 reached a record high of $138.50 a barrel from $135 a barrel two weeks ago. The investment bank Goldman Sachs forecasts an average price of $141 this second quarter, with prices rising to $200 a barrel by 2010.

According to a special report of the Philippine Daily Inquirer, oil industry executives in the Philippines said that a crude price of $135 a barrel would drive up the price of gasoline to P65 a liter and that of diesel to P58 a liter. A $1-a-barrel increase in international crude prices translates to an increase of about 35 centavos at the pump. At $200 a barrel, pump prices of gasoline are expected to rise to about P88 a liter and those of diesel to about P71 a liter. This flow-on soaks the ground of unrest—from petrol consumers, transport operators and workers, public transport commuters—with combustible material for a flare-up.

Historically, the transport sector is the most volatile area for unrest, often sparked by transport strikes, affecting other sectors of productive activity. Augusto Santos, director general of the National Economic and Development Authority, said that in the worst-case scenario of $200 a barrel, this would mean a substantial cut in economic growth. “Definitely, higher oil prices will accelerate inflation and pull down the gross domestic product,” he said. When the price of oil hits $130 a barrel, the government’s gross domestic product growth target of 6.3 to 7 percent is no longer attainable. A slowdown of the economy has eroded the thin layer of President Gloria Macapagal-Arroyo administration’s legitimacy.

The grim news about inflation is coming from the banking sector. The Bank of the Philippine Islands (BPI) predicts that inflation in June would break into the double-digit barrier for the first time since 1999. A BPI study of June 5 projected a 10.2-percent year-on-year increase in consumer prices in June, assuming that crude oil would stay below $150 a barrel and that rice prices remain steady.

This report came as the central bank, Bangko Sentral ng Pilipinas, reported that food and energy prices continued to rise in May at 9.6 percent, pushing inflation to its highest level since January 1999 when the rate was 10.5 percent. Frederic Neumann, an economist at HSBC, said, “Unless oil falls dramatically, the inflation pull will be higher in the Philippines. Inflation is driven not just by oil but food, primarily, and other items such as services as indicated by core inflation at 6.2 percent.

Cayetano Paderanga, an economist at the University of the Philippines, points out the psychological impact of double-digit inflation. “Ten percent is an important threshold. Beyond this level, the psychology of the people changes and it becomes more difficult to control their expectations of price increase.” Where economic growth slows, but inflation stays high, he said, these pose a severe test for policymakers.

The spiraling prices of food and fuel have driven inflation rate past the safety zone of social stability. Metaphorically speaking, fuel prices, in particular, have poured oil on live coal. Only a few weeks ago, queues started to build up on outlets of cheap, government-subsidized rice amid rioting in several parts of the world by the poor protesting against the rise of food prices. Tensions on the queues for cheap rice may have eased after the government increased the supply of rice from the National Food Authority, but the government’s responses to inflation have been inadequate. The first type of response has included a one-off P500-subsidy to help the poor pay electricity bills and fertilizer subsidies for farmers to increase rice production. The fertilizer subsidies came too late and too little to be of any help to fill up rice production shortfalls.

Already the spiraling prices of food and fuel have claimed political casualties in Malaysia and Pakistan. Last March, the ruling coalition of Malaysia suffered electoral setbacks over its inability to roll back the rising cost of living. In Pakistan, President Pervez Musharaf’s government was trounced in last February’s election. Political commentators blamed his election losses to high food prices and shortage of flour and oil, more than the political turmoil over the assassination of former Prime Minister Benazir Bhutto. “In any country that has elections coming up within the next two years, inflation and how the government wrestles with the problem will be important,” said the Political and Economic Risk Consultancy.

Bridget Welsh, a Southeast Asian expert from Johns Hopkins University, said even when oppositions cannot offer viable alternative, inflation is protest against flawed governments. She said the threat of inflation as the fuel of unrest encouraged administrations to adopt short-term policies to appease voters instead of introducing painful and necessary reforms. Now with inflation being really significant, you have a situation where the (the region’s governments) are going to the polls, and their decision-making space will be much more narrow.

The Philippines will not have elections until 2010. But the rising inflation rate fuels public pressure for regime change. The space for the administration to deflect the pressure also narrows. And as the pressure mounts, the discontented people’s patience to endure the high cost of living could snap before the next election.