Finance Secretary Carlos Dominguez III has assured economists and members of the regional financial community that the Philippines remains “on course” towards the government’s medium-term goals of reducing poverty and achieving inclusive growth, driven by stronger investor confidence arising from the rollout of “Build, Build, Build” infrastructure projects and the initial gains from the Comprehensive Tax Reform Program (CTRP).
Notwithstanding the elevated inflation and food supply issues in the first semester, Dominguez said the government’s accelerated pace of policy and infrastructure reforms has kept the Philippines among the region’s fastest-growing economies, thereby boosting investor sentiment as reflected in the surge in foreign direct investments (FDIs) by almost half to $5.8 billion in the year’s first semester.
Dominguez pointed out that the most remarkable aspect of the country’s economic performance so far this year is its turn into an increasingly investment-led growth, following a 27.4-percent jump in capital formation—the most comprehensive gauge of investments—as President Duterte’s “Build, Build, Build” initiative continued to gain momentum.
Confidence in fiscal management has been reinforced further, he said, by the successful passage into law of the first package of the CTRP, which has led to a 21-percent increase in total revenue collections over the past seven months while putting more money into the pockets of 99 percent of Filipino taxpayers via hefty cuts in their personal income tax (PIT) payments.
He added that the adept management of the country’s fiscal affairs has also been recognized both by way of improved credit rating outlooks as well as by the tight spreads given the foreign denominated bonds that had been floated the past few months, particularly the respective “Panda” and “Samurai” bonds in China and Japan.
A new law that will further improve the ease of doing business in the country, a national identification system that is now being put in place, and continuing efforts to liberalize foreign ownership in business complement the other policy reforms being implemented on the Duterte watch, Dominguez said.
“With these reforms and with the infrastructure program, we expect our economy to create more jobs, improve productivity in all sectors and remove roadblocks to clear the way for more rapid economic expansion,” Dominguez said during the Philippine Economic Briefing (PEB) for economists and business analysts belonging to the regional financial community, which was held Tuesday at the Bangko Sentral ng Pilipinas Complex (BSP) in Manila.
“The role played here by decisive leadership cannot be understated,” he added. “The road towards sustainable and inclusive growth is now open.”
Dominguez said the bigger FDI inflows and the successful bond floats overseas following the implementation of CTRP’s first package—the Tax Reform for Acceleration and Inclusion Act (TRAIN) Law—”dispels concerns that our tax reform is scaring investors away.”
“Our growth performance for the first semester of this year was below expectation, hampered by elevated inflation and supply issues. Like the rest of economies in the world, the Philippines is not exempted from challenges,” Dominguez said. “But what differentiates our economy from many is the decisiveness, the extent, and the pace by which we are implementing policy and infrastructure reforms. We remain one of the best performing economies in the region and our outlook is strong.”
He added that, “We also remain on course towards our goals for the medium term and beyond. These goals are: to reduce poverty incidence from 21.6 percent in 2015 to just 14 percent by 2022, to make our growth more inclusive by addressing the infrastructure deficiencies that stymie productivity and to induce more investments to open up more jobs for the next generation of Filipinos.”
Dominguez said the Japan-supported Metro Manila Subway Project, which is the largest single infrastructure project that the Duterte administration will undertake, is one example of how the government is making sure its infrastructure investments are sound and are rolled out to benefit Filipinos at the soonest possible time.
This Metro subway is one of the softest ever negotiated by the government, given that the $934.75 million loan agreement with Japan for the first tranche carries an interest rate of 10 basis points per annum for non-consulting services and 1 basis point per annum for consulting services, which are payable in 40 years inclusive of a 12-year grace period, he said.
“Those who say that we are walking into a debt trap ought to look more closely at the actual terms of the loans we contract,” Dominguez said.
“The more remarkable aspect of our growth performance this year is that it is increasingly fueled by investments,” he said. “As a share of GDP (gross domestic product), capital formation, which is the most comprehensive measure of investments, rose to 27.4 percent during the first half of 2018 compared to the 25.4 percent in the same period last year. This is remarkably higher than the 21.3-percent average share of investments to GDP for the past 16 semesters.
He said that, “With improvements in the ease of doing business, investments are flowing into the Philippine economy. Net foreign direct investments rose by 42.4 percent to 5.8 billion US dollars in the first half of 2018 from 4 billion US dollars from the same period of last year. This reflects stronger investor confidence in the Duterte administration’s decisiveness in pushing ahead with its economic reform agenda.”
On his watch, Dominguez said the Department of Finance (DOF) made history by collecting from a local cigarette manufacturer—Mighty Corp.—a total of $600 million for its non-payment of excise taxes and use of counterfeit tax stamps on its cigarette packs, which is the biggest sum on record raised by the government from a tax settlement.
He said the lasting result of this heightened joint campaign against tax cheats is the increased collection of excise taxes on cigarettes by an average of $50 million a month.
The excise tax on sugar-sweetened beverages (SSBs), which is meant to encourage healthier lifestyles among Filipinos, is providing the government additional revenues of almost $2 million a day.
A second tax reform package that aims to reduce the corporate income tax (CIT) and rationalize fiscal incentives, aims to create a level playing field for enterprises and attract new players to compete, along with benefiting thousands of micro, small and medium enterprises (MSMEs) that employ the biggest number of Filipinos, Dominguez said.
This second package—dubbed the Tax Reform for Attracting Better and High Quality Opportunities (TRABAHO) bill—has already been approved on final reading in the House of Representatives.
Other CTRP packages cover reforms in property valuation to make the system more equitable, efficient and transparent, as well as the rationalization of capital income taxation to address the multiple rates and different tax treatments and exemptions on capital income and other financial instruments, Dominguez said.
“We hope to win the support of the Senate for the remaining packages of reform measures that will bring our revenue system well into the 21st century,” he said.
Dominguez also cited the following factors that show a more comprehensive picture of a well-managed economy on the Duterte watch:
· Improved capacity to execute priority projects as shown by national government expenditures increasing by 23 percent in the first seven months of this year;
· A deficit-to-GDP ratio for the first half of this year amounting to 2.34 percent, which is within the planned deficit ceiling of 3 percent of GDP up to 2022 to allow enough fiscal space to fund economic investments;
· From January to July this year, infrastructure spending increased by 47 percent compared to the same period last year. The government aims to raise this level to about 7 percent of GDP by 2022. This compares dramatically with the average 2.6 percent of GDP in infrastructure investments over the last 50 years; and
· Notwithstanding increased borrowing to finance investments, the debt-to-GDP ratio is expected to fall from 42 percent in 2017 to 38 percent by 2022.
Complementing these factors is President Duterte’s adept rebalancing of the country’s foreign policy, which has led to increased official development assistance (ODA) from the Philippines’ friends in the region, Dominguez said.
These include investment pledges and ODA from both Japan and China of about $9 billion each, and South Korea of up to $1 billion—which are supplemented by the support the Philippines is getting from multilateral development institutions.
“With strong ODA inflows, we were able to shift to hybrid Public Private Partnership (PPP) models to hasten the delivery of major infrastructure projects,” Dominguez said.