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PHL, other Asian economies to miss inflation goals as El Niño bites – HSBC Flashnote


The Philippines is danger of overshooting its inflation target by 2016, because of a disruption in the supply chain as a result of El Niño, HSBC Global Research said in its latest "Flashnote" emailed to media outlets.
 
"A significant El Niño would put headline CPI well over the 2-4 percent inflation target by 2016, ostensibly putting the BSP (Bangko Sentral ng Pilipinas) in a difficult position that could force it to hike rates sooner than expected," according to the Flashnote written by Frederic Neumann, HSBC co-head of Asian Economics Research, and Joseph Incalcaterra, HSBC economist.
 
The rate increase will happen in the Philippines during the first half of 2016, but food inflation may start in the late 2015. 
 
"At particular risk from an inflation perspective are India, Indonesia and the Philippines. However, we note that this is not a “positive” inflation shock, with rising prices likely to depress demand, especially among consumers," Neumann and Incalcaterra noted.
 
The supply-side constraints and self-sufficiency agricultural policies in the Philippines could worsen the impact of a mild increase in food inflation, they added. 
 
"The Philippines is no stranger to food price disruptions due to natural considerations. In this season alone, the country has already been hit by a few. Moreover, the Philippines had to deal with the sizeable impact of Typhoon Haiyan well into 2014, due to widespread damage to food supply chains," the report read.
 
El Niño across Asia
 
As of May 14, the National Oceanic and Atmospheric Administration noted a 90 percent chance that El Niño would continue through the summer and an 80 percent chance of lasting through 2015. 
 
The phenomenon occurs when warm water heats up around the Equatorial Pacific in conjunction with a change in trade winds. Meteorological agencies usually declare El Niño conditions when the criteria such as above-average sea-surface temperatures are met for three consecutive months, and an “episode” when the conditions persist for seven consecutive months. 
 
El Niño's direct and most important impact on Asia is that most of Equatorial Asia or the ASEAN member countries and Australia will receive less rain, cutting into agriculture output, and yields. 
 
In extreme cases, the lack of rainfall may cause widespread crop damage. For example, it could turn Indonesian land-clearing forest fires into massive conflagrations with smog clouds that could affect the citizens of Singapore and Kuala Lumpur, according to the Flashnote.
 
The Bank Indonesia, the country's central bank, may be faced with pressure to undo some fuel subsidy reforms from last year amid higher food inflation. 
 
"According to our calculations, the impact of a moderate El Niño on agricultural prices could make this target hard to achieve," Neumann and Incalcaterra. 

India and China
 
El Niño will impact on India's monsoon season, which is essential to its summer crop or Kharif. Weak monsoons could worsen inflationary pressure "given the country’s relatively poor agricultural infrastructure and supply bottlenecks," they said.  
 
Although China is not directly affected by the impact of El Niño, it may experience a spike in inflation of pork and vegetables. 
 
"While it may be strange that Chinese pork prices are rising while globally prices are at multiyear lows (especially as Chinese pork companies expand abroad), it remains a fact that China’s agriculture is relatively impervious to outside influences (the country is self-sufficient in most key commodities although it is starting to import more in recent years)," according to HSBC Global. 
 
It seems that an inflationary cycle in pork and vegetables is on an upswing in China. 
 
"We tend to see such cyclicality in food prices because of a government subsidy policy that operates with a lag (with farmers paid to take supply from the market when there is too much, so prices will rise)," HSBC Global said. – Trisha Macas/VS, GMA News
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