Crude costs to dictate impact of Arab unrest

THE ECONOMIC IMPACT of continued unrest in the Arab world can be managed, observers said, particularly if a surge in crude prices is contained.

Amid warnings by multilateral institutions that rising oil prices could significantly affect growth, a Bangko Sentral ng Pilipinas (BSP) official said the 7-8% goal for 2011 remained achievable.

While higher crude prices “could affect economic growth … as long as … [these] remain within our assumptions, we can say [GDP] growth of 7 to 8% may be attained,” BSP Deputy Governor Diwa C. Guinigundo yesterday said in a text message to BusinessWorld.

Economists said migrant worker remittances — a key driver of the economy — would stay robust, adding that inflation will also likely stay within target. Mr. Guinigundo claimed higher oil prices had been factored into the BSP’s current outlook.

“Higher oil prices will induce higher inflation. But we have already considered them,” he said.

Crude prices neared $120 per barrel last week as a revolt against Libyan leader Moamer Kadhafi escalated, although supply assurances from top producer Saudi Arabia have led to an easing.

Dubai crude, which the Philippines uses as a benchmark, averaged $99.53 per barrel for the Feb. 1-25 period, beyond the $80-90 Mr. Guinigundo said had been assumed for 2011 by economic managers.

Andrew Burns, the World Bank’s manager of global economics, on Monday said the oil price surge could dent economic growth in developing countries by somewhere between 0.2 and 0.4 percentage points if it remained high for a year or longer.

The same range was quoted yesterday by University of Asia and the Pacific economist Peter Lee U, who said this would be caused by a 10% increase in crude prices.

“It will affect market prices … But we can do little to address this as the increases come from geopolitical reasons more than anything else,” he said in a telephone interview.

The World Bank in January forecast 2011 growth of 5% for the Philippines, below the government’s 7-8% target, citing, among others, continued risks in export markets. The outlook was issued before an successful uprising in Tunisia spurred Egyptians to overthrow their president. The wave of unrest has since spread to Libya, Yemen, Bahrain and Iran.

Mr. Burns qualified that the rise global oil prices was not a “calamitous event” for developing economies whose economies were growing strongly at around 6% or more, as opposed to low growth in industrialized nations.

The Philippines grew by 7.3% last year, exceeding the government’s 5-6% target.

Asked to comment on the World Bank warning, Socioeconomic planning secretary Cayetano W. Paderanga, Jr. yesterday said the Aquino administration would be looking to reduce the economic impact.

“We can mitigate risk by ensuring that there are no supply disruptions, by arranging alternative sources and placements for our workers, and looking for good substitutes to avoid the price risks,” Mr. Paderanga said in a text message.

“Also try for economic resilience by getting all sectors’ cooperation,” he added.

University of Asia and the Philippines economist Bernardo M. Villegas on Monday said inflation would stay within the central bank’s 3-5% target for 2011 as other oil-producing countries made up for supply disruptions in Libya — the world’s 12th largest producer.

“The Middle East is not critical. Other places like Latin America and US can produce oil,” he claimed.

University of the Philippines economist Benjamin E. Diokno said the BSP’s remittance growth target of 8% could still be achieved but warned that a drop in deployment would put this at risk.

Remittances totalled $18.763 billion last year, slightly exceeding the BSP forecast of $18.7 billion.

Mr. Guinigundo said the central bank was watching for spillover effects, noting that “Libya and Egypt bring in small overseas Filipino remittances”.

“[B]ut if Saudi [Arabia] and UAE (United Arab Emirates) are affected, the impact could raise more concern,” he said.

BSP Governor Amando M. Tetangco, Jr., meanwhile, told reporters yesterday that the central bank was working on allowing the conversion of dinars brought in by workers repatriated from Libya.

“We are just finalizing the working banking arrangements,” he said in an e-mail.

De La Salle University economist Mitzie Irene P. Conchada said worker demand from outside the Middle East would mitigate any impact on remittances.

“Other countries’ demand … would assure the Philippines of steady, long-term demand for our skilled workers,” she said in an e-mail yesterday.

A day earlier, University of the Philippines School of Labor and Industrial Relations director Rene E. Ofreneo warned that deployment could be affected as the unrest in the Arab world was rooted in social issues.

“The effect on us is most likely, there will be a suspension or reduction of hiring along with return migration,” he said.

De La Salle’s Ms. Conchada said the BSP could be forced to raise its inflation forecast anew or even tighten policy if the rise in consumer prices accelerated further.

Inflation rose to 3.5% in January, up from 3% in December. The BSP last month raised its 2011 inflation forecast to 4.4%, but said there was no need for policy tightening as the rise in consumer prices remained within the 3-5% target range.