‘Tariff cuts won’t lead to cheaper rice soon’

THE reduction in rice tariffs may not immediately lead to lower prices as international market quotations remain elevated, according to BMI, a Fitch Solutions company.

BMI also said the shortfall in rice production, forecasted by the United States Department of Agriculture (USDA), will contribute to the high cost of rice in the domestic market.

Citing data from the Food and Agriculture Organization (FAO), BMI said the average retail prices for regular- and well-milled rice in the Philippines stood at P51.03 per kilogram and P56.06 per kilogram, respectively, both of which were around 25 percent higher than 12 months earlier.

“In the near term, we expect that the reduction in rice import tariffs could see domestic rice price pressures in the Philippines ease—notwithstanding the widening in the Philippine domestic rice production deficit between 2023/24 and 2024/25 that the USDA forecasts,” BMI said.

“In the immediate term, however, the reduction will not have a noticeable impact on domestic prices due to the feedthrough time lag,” it added.

The reduction in rice tariffs, however, will significantly benefit the country’s largest source of imported rice, Vietnam, particularly its rice traders.

Given the reduction in tariff, this could lead to larger rice import volumes from the Philippines leading to even higher rice prices in the international market.

The Philippines was considered the world’s second-largest rice importer in 2023. The country cornered 5 percent of the global import market in value terms.

“We note, however, that international rice prices remain elevated and that—with India’s rice export restrictions still in place and the negative impact of the recent

El Niño event on rice production in Southeast Asia via below-average rainfall in mind—the international rice market remains tight, which could, therefore, see an increase in Philippine import demand stimulate upward international price pressures,” BMI said.

Citing government data, BMI said total grain imports, including rice as well as corn, wheat, and other grains, in the first quarter of 2024 amounted to $1.173 billion, equivalent to a 27.9-percent increase compared to the first quarter of 2023.

Of this amount, $489 million or 41.7 percent was sourced in Vietnam at $355 million and Thailand at $134 million.

In May 2024, BMI noted that FAO’s All Rice Price Index (FARPI) came in at 137.3, equivalent to a 7.4 percent increase on its level of May 2023.

In August 2023, the FARPI increased 10 percent month on month due to India’s introduction of an export ban on basmati rice and a 20- percent export duty on parboiled rice and has since oscillated around 140.

Interest rates

BMI said given recent developments and expectations that the impact of the lower rice tariffs will be delayed, it expects the Bangko Sentral ng Pilipinas (BSP) to only cut interest rates starting in September.

The BSP is expected to cut rates by 50 basis points, lower than its initial forecast of 75 basis points.

This means the BSP’s next policy meeting in August will see the Monetary Board retaining rates and holding off until the US Federal Reserve begins its loosening cycle.

This is despite BSP Governor Eli M. Remolona Jr. hinting at the possibility of a rate cut in August. “In our view, such an early cut remains out of the question even if price pressures ease substantially,” BMI said.

However, BMI said the largest barrier to the decision of the BSP to loosen monetary policy is currency stability.

The peso, BMI said, is among the “poorest performing currencies in the region,” second only to Japan.

“As such, the BSP will be extremely mindful of a pre-emptive return to monetary loosening, for fear of exacerbating weakness in the already weak peso,” BMI said.

“This feeds into our expectations for the BSP to embark on its first cut only in October at the earliest. The monetary cycles of both the Philippines and the Fed tend to track each other closely,” it added.

Moody’s Analytics

Moody’s Analytics, meanwhile, shares this view. “The Philippine central bank left its policy rate at 6.5 percent. Like many peers in the region, it won’t be looking to cut until the US Federal Reserve makes the first move,” Moody’s Analytics said.

Earlier, the reduction in rice tariffs boosted the optimism of monetary officials that a rate cut could happen in August, according to the BSP.

On Thursday, Remolona said the Monetary Board decided to maintain the BSP’s Target Reverse Repurchase (RRP) rate at 6.5 percent. The interest rates on the overnight deposit and lending facilities will remain 6 percent and 7 percent, respectively.

Remolona said the Monetary Board is now “less hawkish” or “more dovish” than before, as inflation is expected to slow to the midpoint of the 2 to 4 percent target range. (See: https://businessmirror.com.ph/2024/06/28/lower-rice-tariff-fuels-bsp-interest-rate-cut-optimism/).