Carlos G. Dominguez
Secretary of Finance
Management Association of the Philippines
June 7, 2019
First of all, thank you very much to your organizations here for the support you have provided us during various controversies we have had in the past. I’m reminded, though, of a statement — I think it was attributed to Oliver Cromwell. When his troops were crossing a river during a civil war in England, he says, “trust in God and keep your powder dry.” More controversies are going to happen, and we hope that we can count on your support during the controversies that will come up.
I just want to remind you that with regard to the Rice Tariffication Law, in Indonesia in early 2000’s, maybe 2001 or 2002, they passed a rice tariffication law. However, in 2005, it was reversed. The reason, according to my discussion with the secretary of finance of Indonesia, was that this law was imposed on them by the IMF and it wasn’t internally generated. That goes to show you that political winds can shift, and everybody should, as I said, keep your powder dry.
Thank you very much, officers and members of the 22 sponsoring organizations, distinguished guests, members of the diplomatic corps, ladies and gentlemen. Thank you for inviting me to this joint membership meeting.
We have reached the midpoint of the Duterte administration. There is much to celebrate but also much bigger goals that we have yet to accomplish. President Rodrigo Duterte enjoys broad and profound support from our people. That strong support was most recently expressed in the just concluded midterm elections. The landslide vote our people delivered in favor of the candidates endorsed by the President translates into approval for the program of reforms the president has launched at the start. Our people desire the continuation of the pragmatic programs this administration has started, driven by the incomparable political will the President has displayed in these last three years.
Today, the economy is strong and ready to soar. With the government’s quick and decisive steps to tame inflation when it temporarily spiked last year, the inflation rate began to decelerate to 4.4 percent in January and further slowed down to 3.2 percent in May. This is well within our target.
We continue to exercise fiscal discipline in managing the national accounts. Last month, Standard and Poors’, one of the world’s most reputable credit rating agencies, raised our risk rating from triple B to triple B plus. This is the highest rating we have received in our economic history and is just one notch away from the sterling A rating territory. The upgrade also puts the Philippines above countries like Italy and Portugal. More recently, Fitch affirmed the Philippines’ triple B rating with a stable outlook.
These credit rating grades are strong votes of confidence in the Duterte administration’s reform agenda. With these, government is actually borrowing at a lower rate to fund our priority infrastructure and pro-poor programs. Likewise, the private sector should be able to borrow at lower rates to finance expansion. And I hope the banks would pass on their lower rates to the ordinary Filipinos who take out loans and allow them to pay lower interest rates as well. All of these will translate to larger investments and more jobs for Filipino workers. So, as you see, it is not just about getting upgrades or affirmations. It is also about upgrading the ordinary Filipino’s life.
The much-improved inflation outlook, including better anchored inflation expectations, has allowed our monetary authorities to cut policy rates by 25 basis points and to cut the reserve requirement ratio down by 200 basis points. These measures will further enhance our growth prospects for the remainder of the year.
We ran into some difficulty, as you know, when the enactment of this year’s budget was delayed. That reflected immediately in our first quarter growth number. From the expected 6 to 7 percent GDP growth, we slumped to 5.6 percent—a full percentage point below expectation and very likely more than a percentage point of growth lost. That may be chalked up to the cost of politicking.
I was asked earlier why the budget was so important. When we calculate our budget as a percentage of our total GDP, it’s around 19.5 percent. That’s only the national government, that doesn’t count the expenditures of the local government and the GOCCs. So when you figure it all out, it’s probably in the area of 23 percent of the total economy. So when we have a slowdown or we’re not able to spend as we planned, it is certainly going to affect the growth prospects of the country.
The budget impasse resulted in underspending of around 1 billion pesos per day, which could have been spent on social services and infrastructure projects during the first quarter of this year.
Besides the delay in new and ongoing infrastructure projects as well as the improvement of social services, the reenacted budget during the first quarter has led the government to miss the opportunity to create as many as 320,000 more jobs, affecting the construction, public administration and defense, wholesale and retail trade, land transport, and education sectors. It also derailed poverty reduction efforts, where almost half a million more Filipinos could have been taken out of poverty.
The lower first quarter number, however, must be seen as a momentary setback. The President’s economic team has reviewed the spending plan for the year and identified areas where we can speed up public investments to enable us to hit a GDP growth rate above 6 percent for the whole year. A carefully crafted and bold expenditure catch-up plan was formulated.
In 2019, national government disbursements are targeted to reach 3.774 trillion pesos, equivalent to 19.6 percent of GDP. This is 10.7 percent higher than the actual disbursements in 2018. Total infrastructure disbursements would have to reach 1 trillion pesos, equivalent to 5.2 percent of GDP, with the national government accounting for 808.7 billion pesos of targeted infrastructure spending.
For us to achieve this year’s disbursement target, the government must spend a total of around 2.996 trillion pesos from the second to fourth quarters of the year. Infrastructure spending accounts for almost one-third of the amount of disbursements programmed for the said quarters. To reach our total infrastructure disbursement target of 1 trillion pesos for the entire year, the government must disburse around 792.97 billion pesos for the rest of the quarters.
The spending commitment of our two main infrastructure agencies–the Department of Public Works and Highways and the Department of Transportation– with an estimated combined amount of 803.1 billion pesos, is sufficient to cover the national government’s infrastructure target for the rest of the year. Infrastructure disbursements from other agencies can further drive spending growth if they are able to accelerate implementation of their capital outlay programs and projects.
In addition to the public sector, we are hoping private construction will perform as we expect. Private sector construction will help supplement public spending to provide the stimulus for overall growth to pick up. We also need to work with Congress to pass legislation that creates a more business-friendly environment, such as the Public Service Act, Foreign Investments Act, and the Retail Trade Act.
In addition to catching up on infrastructure spending, the government has to double its efforts in the agriculture sector, which should expand by at least 2 percent per annum. In a recent meeting, the Department of Agriculture presented to the Cabinet’s Economic Development Cluster a three-pronged approach that includes distributing certified rice seeds and fertilizers to farmers and importing corn at a lower tariff, to energize the underperforming sector and have it commit significantly to increasing GDP growth this year.
We are confident we can bring our pace of growth back on track in the second half of the year. The majority of our people see a better life for themselves this year. We will not disappoint them.
We are particularly proud of the legislative achievements of the past three years. Before embarking on the ambitious Build, Build, Build infrastructure program, the Duterte administration introduced a comprehensive tax reform program to provide a robust and recurrent revenue base to support public investments.
The first tranche of the tax reform program was passed into law late in 2017. In its first year of implementation, our revenue agencies delivered 108 percent of the targeted revenues. This provided solid footing for our spending program.
With enhanced revenues, we have been able to provide counterpart infrastructure project financing. Last year, actual infrastructure disbursements amounted to 886.2 billion pesos, equivalent to 5.1 percent of GDP. This is the first time in the Philippines’ history that our infrastructure disbursements hit above 5 percent of GDP. This provides solid proof of the better absorptive capacity and disciplined execution by our infrastructure agencies. We plan to raise our infrastructure investments further to 7 percent of GDP by 2022.
The TRAIN Law not only produced a more reliable revenue stream for government but put more money in the pockets of our people. Those of you who work in the retail and real estate sectors should be familiar with this. Last year, most enterprises experienced a strong growth in demand and an impressive rise in profitability. The strong sales performance of most enterprises is explained by one thing, mainly: the increased purchasing power of our consumers because of the hefty reduction in the personal income tax rate. This was foreseen. In 2018, due to the TRAIN Law, the government did not collect a total of 111 billion pesos in personal income taxes, and this was the equivalent of a 14th month pay for 99 percent of our wage workers.
Our friends in the region such as China, Japan and South Korea have strongly supported our infrastructure development efforts and appreciated the fiscal prudence demonstrated by the Duterte government. I would like to mention here that of all these countries, Japan has been most forward in their support for our infrastructure program. But that takes eight meetings with the office of the prime minister since January of 2017 so believe me, it takes a lot to get these things done. These commitments complement the support we are getting from multilateral development institutions.
We have adopted a fast and sure approach to rolling out the strategic infrastructure projects included in the Build, Build, Build program. Each project has been rigorously studied and its economic returns carefully assessed. This is to ensure the program does not lead us into a debt trap even as we maintain a sense of urgency in improving conditions to boost career opportunities for millions of young Filipinos entering the workforce.
For instance, the Metro Manila Subway Project, the largest single infrastructure project ever undertaken by the government, is financed through a very concessional yen loan package. The project was presented to the Japanese government for financing in September 2017 and after only six months, the loan agreement was signed between the two parties. The construction of the Philippines’ first subway has officially started in February of this year. It is scheduled to be partially operational by 2022, and fully operational by 2025.
With expanded official development assistance and revenue flows, we have been able to shift to a hybrid Public Private Partnership model. This is where, in the initial projects, we use official development assistance or the government’s own money instead of waiting for the private sector to raise the financing commercially. The hybrid model enables us to use cheaper money and move more quickly to get the projects done.
The Clark International Airport’s new terminal is the first among the projects under the Build, Build, Build Program to be implemented through the hybrid PPP mode and the fastest to be executed by the government.
The expansion of the airport has been on the government’s drawing board for 20 years. Somehow, every reason was found to prevent the project’s execution. It took a former mayor from Davao to finally make things happen and benefit Central Luzon. This new terminal building won approval from the NEDA Board in June 2017 and after six months, the project broke ground. Now, it is 66.5 percent complete. We are looking forward to this project’s completion ahead of schedule by 2020.
On top of this, in January of this year, the government has successfully signed its operations and maintenance contract with North Luzon Airport Consortium, which includes Changi Airport Group, the operator of the world’s best airport—the Singapore Changi Airport. Let me now show you a video of what is going on now in Clark International Airport.
The speed by which we have processed and implemented the long-overdue Clark International Airport expansion project exemplifies this administration’s commitment to ensure that our people reap the benefits of the Build, Build Build program at the soonest possible time. We must remember that when projects are delayed, the ones who suffer are the people. Therefore, it should not just be PPP, it should be PPPP–Public-Private Partnership for the People.
In the interim, given the tremendous multiplier effects of infrastructure investments, the Build, Build, Build program provides strong stimulus for expanded domestic economic activity.
Underpinning all the hectic effort to modernize our economy’s logistics backbone is our strong commitment to the highest standard of fiscal discipline.
We are managing our obligations with utmost prudence, including obligations that are potential liabilities from PPP contracts. At the end of 2018, our debt-to-GDP ratio was down to 41.9 percent compared to the all-time high of 74.4 percent in 2004. We expect to bring this even lower even as we accelerate the completion of large infrastructure projects.
We have slightly raised the fiscal deficit target to 3.2 percent of GDP this year to sustain the accelerated pace of investments in infrastructure and human capital development. The fiscal deficit will revert to the 3 percent level in 2020 to 2022. This will ensure that our debt-to-GDP ratio will continue its downward trend.
The tight spread of our bond offerings also demonstrates the confidence of the investment community in our commitment to sound macroeconomic policies and fiscal discipline in the face of domestic and external challenges.
Last month, the Philippines successfully issued its Renminbi-denominated Panda Bonds of 2.5 billion RMB with a tenor of three years. It achieved a tight spread of 32 basis points above the benchmark. This is the second Panda Bonds issuance for the Philippines since the first issuance in March last year.
Also last month, the Philippines successfully returned to the international capital markets with a 750 million euro offering of eight-year Global Bonds. This issuance marks the Philippines’ return to the European capital markets after a hiatus of more than a decade. The overwhelming reception from the market allowed the pricing of these newly issued bonds to tighten at 70 basis points above EURO Midswaps.
These transactions have allowed us to diversify our funding program to support productive spending for infrastructure and social services.
Aside from the tax reform law and modernization of our infrastructure backbone, we were also able to pass the Rice Tariffication Law after three decades of trying to overcome entrenched interests. We expect this to have a game-changing effect on our agricultural modernization. In fact, during the last elections, nobody mentioned the price of rice as a political issue. That is because rice business is now an ordinary business not controlled by the NFA or any government agency. This policy reform measure has helped make quality rice more affordable and accessible to Filipino consumers, thereby bringing down inflation. In fact, rice prices are now around ten pesos per kilo cheaper than what they were at their peak last year.
Other game-changing initiatives include the process of consolidating a Bangsamoro Autonomous Region for Muslim Mindanao that will create the best prospects for peace and development in the region. After two decades, we have finally managed to pass a national ID law. This will have many beneficial effects on making government services more accessible and automating our financial system for greater efficiency. The ease of doing business law will create a unified business application form to make it easier to put up or renew business licenses in the Philippines.
And while the president signed these measures into law, he also vetoed several measures not aligned with our public investment priorities or detrimental to our fiscal position.
While some bills seek to benefit some sectors, like farmers or a province, they take away resources from millions of other poor and jobless people who also deserve our help. In the last three years, the 17th Congress proposed 147 bills that collectively would either erode revenues by 178 billion pesos or mandatorily add to the budget 799 billion pesos, or a total of 977 billion pesos—all of which we cannot afford. So this is why they say, keep your powder dry.
Moreover, 31 bills propose to create more tax-free freeports or ecozones. As of 2017, we already had 546 of them, all contributing to massive leakages. We do not think this is how we should do policy—that is create more tax-free zones or sectors, and ask other Filipinos to pay for these incentives. Surely there is a better way to help everyone.
For this reason, the President rejected several of these bills. These actions underscore this administration’s commitment to maintaining the highest standards of fiscal discipline, which in turn helped us get our credit rating upgrade. This commitment has been demonstrated all throughout the past three years.
We hope to build on the achievements of the past three years. We look forward to the passage of the remaining tranches of the comprehensive tax reform program to further secure our fiscal stability.
We are aspiring to deliver the mandate of the universal health care law by substantially raising sin taxes to fully fund this program. The measure will limit the youth’s access to such dangerous products while generating more funds to make quality health care services accessible to and affordable for every Filipino family. By the way, the Universal Health Care law, we estimate, will cost us P1.4 trillion over a five-year period. We have P1 trillion set aside for that, and that’s why we need aound P400 billion to make sure that we’ll actually deliver universal health care. We thank the Senate for passing on third and final reading Senate Bill 2233, which aims to impose substantial excise tax increases on tobacco products. We also thank the House of Representatives for concurring with this version. We also recognize the Senate’s progressive proposal to introduce taxes on e-cigarettes, such as vapor and heated tobacco products. But increasing taxes on cigarettes should be accompanied by increases in alcohol taxes.
This new round of sin tax reforms has wide public support. The Pulse Asia Survey of March 2019 shows that three out of four Filipinos support the reform to raise taxes on cigarettes and alcohol products.
Among the other measures we propose are the reduction of the corporate income tax rate to make it closer to the regional average and the rationalization of the fiscal incentives regime to create an even playing field, especially for new businesses bringing in investments that will help power our economy.
Continuing our fiscal reforms will give us a good chance of reaching single A rating within the next two years.
We will also proceed on a faster pace with the infrastructure program to bring down the costs of moving people and goods across our archipelago and contribute to our competitiveness.
Later this year, notwithstanding the adverse effects of the budget delay, the country is expected to ascend to the “upper middle-income” country status ahead of schedule.
Disciplined management brought us to where we are now. It will secure for us a progressive and stable future.
I seek your help as professional managers to help explain the importance of fiscal discipline and market reforms to our people. Our economic success must not be derailed by populist demagoguery that sometimes erupts in politics.