Philippine Inflation: The Effects of a War Half a World Away

How does a war half a world away contribute to Philippine inflation? See the full effect of Ukraine-Russia war on Philippine Inflation

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What Is Happening Between Russia And Ukraine?

Ukraine and the Russian Federation are in a state of war. This means there are no diplomatic ties between these two countries at present. While this is devastating news in the middle of a health crisis, it is not exactly a surprise.

Back in 2014, Ukraine and Russia’s relations were already delicate. It was 2014 when the Russian Federation, under the leadership of Vladimir Putin, annexed Crimea from Ukraine. This year, Russia went even more aggressive and started a broad invasion of Ukraine, including its populated capital, Kyiv. As a result, Ukraine is now forced to defend its sovereignty and independence.

How Does This Affect Global Relations?

With the world still reeling from the effects of the pandemic, we cannot afford a third World War between nuclear countries. That said, Ukraine and Russia’s neighbors and members of the European Union (EU) call for the de-escalation of the situation.

While the rest of the world cannot engage in military combat against Russia, economic sanctions could hurt the Federation just as badly. The United States, a Ukraine ally, imposed dramatic sanctions against Russia to make Putin change his course of action.

Why Were The Multilateral Economic Sanctions Imposed On Russia?

The sanctions imposed on Russia are meant to de-escalate the ongoing war between the Federation and Ukraine. They are intended to pressure Russia into withdrawing their troops from Ukraine by freezing their economy to avoid bloody conflict.

After Putin announced and welcomed the breakaway territories of Donetsk and Luhansk from Ukraine, President Biden issued an executive order that limits trade and financial transactions from these two regions. The following day, another executive order decreed the blocking of assets of Russian financial institutions.

The most notable sanction among others is the one on the Central Bank of Russia (CBR), which controls the domestic and foreign market. This means that Russia can no longer access its dollar reserves to fund the war or support its local currency.

What Are The Effects Of These Sanctions On the Global Economy?

The immediate effect of the sanctions is the uncertainty it brings to the world economy. Nobody knows what will happen next in the Russia-Ukraine conflict, and there is anxiety over the cost of capital going up. As a result, investors are more likely to become risk-averse. For instance, there is no existing sanction on oil, but prices have already shot up in the market. This is because the market expects a disruption from Russia, one of Europe’s biggest oil and natural gas suppliers.

What Are The Effects Of The Sanctions Against Russia In The Philippines?

We know by now that the Russia-Ukraine crisis exacerbates Philippine inflation. But how do we actually measure its impact on our economy?

Record-High Oil Prices

With the Russian-Ukraine tension escalating, oil prices are also at their all-time high in the past seven years. As a result, economists warn that this will drive the prices of goods up to unprecedented levels. In fact, current predictions also see this driving up transportation and utility costs. Another result of higher oil prices is elevated energy prices.

Now, the Philippines is a few oil price hike away from seeing oil products rise to Php 100 per liter. These values may hurt the pockets of public utility drivers and car owners even with fuel subsidies.

Another domino effect of higher prices of oil is higher prices for basic commodities. While we may have cushions in the short term, the prolonged conflict leaves the future of our economy and consumer confidence in uncertain territories.

Weakened Peso Against US Dollar

The high oil prices hurt more than direct oil consumers’ pockets. With high oil prices and costlier imports, the Philippine peso is also weakened against the US dollar. When the price of oil shoots up, and the cost of borrowing is equally high, the Philippine peso’s purchasing power is significantly lesser.

Falling Philippine Shares

Next, the Ukraine-Russia crisis indirectly affects the Philippine Stock Exchange (PSE). In fact, Philippine shares dropped by 2% last February 24. In addition, the shares index also fell by 1.9%. On top of these, the US Federal Reserve may increase interest rates, which causes more anxiety for investors.

What Do All Of These Mean For The Philippine Economy?

In simple terms, the collective indirect impact of the Ukraine-Russia war would slow down the Philippine economic recovery. While we are not directly trading with Russia and Ukraine, spillover impacts can still affect us. 

The worst-case scenario for our country is an economic fallout. Finance Secretary Carlos Dominguez describes the impact of the war as a “ricocheting bullet,” and the Philippine economy is “collateral damage.” But despite this possibility, Dominguez remains optimistic that the Philippines has enough economic tools to get through the crisis.

What Are The Effects Of The War On Ordinary Filipino Citizens?

Aside from the rising oil prices, Filipinos will also see a price increase in many commodities. For one, food prices are likely to shoot up. In line with this, the government plans to increase local food production by rolling out subsidies to farmers to offset its effects. In addition, the government is also expanding the rice stock buffer by at least 30 days. 

What Investment Is The Best Buffer For Inflation?

As a result of the war’s uncertainty, investors are becoming more cautious in their investments. On the other hand, money cannot remain static, or it loses more than it gains. However, many people may wonder where they may invest their money and still profit despite the economy’s instability.

Real estate is a buffer against inflation. This is due to the intrinsic value of these properties. While these assets are not immune to inflation, they can help mitigate its consequences. In addition, property values rise in tandem with commodity prices. Real estate has a unique combination of increasing revenue, growing value, and declining debt to keep up with rising prices.

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