Philippine Day Forum Washington DC
His Excellency Jose Manuel Romualdez, Ambassador of the Philippines to the United States; Socioeconomic Planning Secretary Ernesto Pernia, Central Bank Governor Benjamin Diokno, Central Bank Monetary Board Member Bruce Tolentino, National Treasurer Lea de Leon, Deputy Governor Diwa Guinigundo, my fellow workers in government; our friends from the World Bank—Ms. Victoria Kwakwa, Vice President for East Asia and the Pacific, Mara Warwick, Country Director for Brunei, Malaysia, Philippines and Thailand; Fiscal Policy Agency Chairman Suahasil Nazara from the Ministry of Finance of Indonesia; our partner banks—Standard Chartered, Citibank, UBS; panelists and moderators, market investors, analysts, representatives from the multilateral agencies and major infrastructure players present here, distinguished guests, ladies and gentlemen:
Thank you very much for investing your time for this briefing. We are eager to share with you the Philippines’ growth story and progress through transformative reforms.
For many decades, the World Bank helped many emerging economies achieve sustainable development. This year, as the Bank celebrates its 75th year, we are proud to announce that the Philippines will achieve the status of an “upper middle-income” nation ahead of schedule. The Bank shares much credit for this achievement.
Today, the Philippines is one of the fastest growing economies in the world. Reaching this milestone in our development story is attributable to many years of hard work—especially in building a strong fiscal position and a bureaucracy honed to the task of catalyzing growth.
In 2018, notwithstanding the uncertainties of a looming trade war, a sharp spike in oil prices, and an elevated domestic inflation rate, we posted a GDP growth rate of 6.2 percent. This demonstrates the resilience of the inclusive economy we are building. Our economy has been growing at an average of 6.5 percent during the first 10 quarters of President Rodrigo Duterte’s administration.
The results of the last three years have clearly demonstrated our resolve and success. In 2016, our people chose a leader of proven political will, a record of pragmatic leadership and a commitment to sweeping reforms. President Rodrigo Duterte presented a 10-point socioeconomic agenda of governance that emphasized continuation of pro-market macroeconomic policies, a progressive tax reform program, improvements in the ease of doing business, a more transparent and responsive government, increased investments in our human capital, and enhancement of peace and order.
Over the last three years, the Duterte Administration delivered resoundingly on its program of government. Crime volumes decreased across the board. An important step towards lasting peace in Mindanao was completed this year with the establishment of a Bangsamoro Autonomous Region for Muslim Mindanao. A comprehensive tax reform program—the first one to be undertaken by the Philippine government without the compulsion of an economic crisis—is well on its way to full enactment. A massive Build, Build, Build infrastructure program is well under way.
Moreover, the government has passed numerous sectoral and administrative reforms. The reforms include institutional strengthening such as the new law further empowering our central bank. They also include rapid adoption of new digital technologies to improve governance through real-time payments systems, the introduction of a national ID system, and new platforms to minimize the cost of doing business.
We are particularly proud of the passage early this year of the rice tariffication law. This was, understandably a politically difficult reform measure to pass. The liberalization of rice trading, through this law, was finally achieved under the current government after more than thirty years of attempting to do so under various administrations, including that which I served under–of Cory Aquino. I failed thirty years ago, I promised I would not fail again. This policy reform measure will bring down the cost of rice, the staple food of Filipinos and a major contributory factor to inflation, and make quality rice more affordable and accessible to Filipino consumers. It greatly adds to the flexibility of our economy and opens the door to dramatic changes in our agriculture.
These reforms should translate into even stronger resilience as we face the challenges of this year. Those challenges include the projected slowdown in global economic growth and rising fears of recession in the major industrial economies. By striving to make our economy more inclusive and our governance more responsive to the waves of technological change, we strive to continue building on our growth momentum.
The comprehensive tax reform law, in particular, is a game-changer. In less than 90 days since we assumed office in July of 2016, the Department of Finance was able to introduce to Congress the first tax reform package known as the Tax Reform for Acceleration and Inclusion or TRAIN which President Rodrigo Duterte signed into law in December 2017. The first full year of its implementation succeeded in accomplishing both its revenue and economic goals.
The reduction in individual income tax rates by the TRAIN law put more money in the pockets of 99 percent of our wage earners. This reflects in the rising demand and improved profitability of our domestic enterprises across the board. At the same time, our tax reform law attained 108 percent of its revenue target and improved revenue flows to the government. Our tax effort is now at 14.7 percent of GDP — the best number we have achieved in two decades.
Apart from improved revenue collection, the Department of Finance also made history in 2017 by collecting from a cigarette manufacturer a total of 600 million US dollars for its non-payment of excise taxes and use of counterfeit tax stamps on its cigarette packs. This is the biggest sum on record raised by the government from a tax settlement from an individual company. This was the result of a heightened joint campaign by our revenue agencies against tax cheats. At present, this has increased our collection of excise taxes on cigarettes by an average of 50 million US dollars a month.
In the same year, I sent a team to Mexico to study its tax on sweetened beverages. As a result of the team’s consultation, we were able to pass a sweetened beverage tax as part of the TRAIN law. At present, we are now collecting almost 2 Million US dollars a day from excise taxes on sweetened beverages.
These excise taxes are measures meant to discourage the habit of smoking and encourage consumption of healthier products, while generating incremental revenues to fund our Universal Health Care Program, another recently enacted vital piece of legislation that shows our commitment to investing in our human capital development.
Later this year, we hope to see enacted into law the remaining packages of the comprehensive tax reform program. By 2020, we are confident that all tax reform packages will be in place. Among the measures we propose are the reduction of the corporate income tax rates to be 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 to help power the economy. To be clear, we are not eliminating fiscal incentives. But we want to keep granting incentives for the right reasons — and we want these incentives to be performance-based, time-bound, specifically targeted and fully transparent. This will encourage truly competitive investments to enter our economy.
Other packages of tax reform 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 tax rates and different tax treatments and exemptions on capital income and other financial instruments. For instance, our tax reform proposes to reduce the number of capital income and financial tax rates from 82 to just 42. Doing so greatly simplifies the system and would help ensure that financial products are chosen due to risk and reward, and not by the tax treatment that depends on so many factors such as currency, maturity, and type of taxpayer.
The Philippines is the first country in the region that first embarked upon a tax reform program before moving deliberately on a massive infrastructure program. With the tax reform program creating a robust and recurrent flow of revenues, we now have the means to invest in upgrading our logistics backbone.
For years, the Philippines underinvested in public infrastructure. This caused our infrastructure backbone to fall behind those of our neighbors. We are correcting this rapidly. Last year, infrastructure disbursements amounted to 16.9 billion US dollars, 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 demonstrates that the lead infrastructure agencies in our massive Build, Build, Build, program are moving faster than expected. The old problem of absorptive capacity has been solved. We plan to raise our infrastructure investments further to 7 percent of GDP by 2022. This will make possible the economic efficiencies to be competitive for many, many years to come.
Our Build, Build, Build program involves 75 highly strategic infrastructure projects as well as thousands of infrastructure and logistics improvements all over the country that will raise productivity dramatically. These projects include construction of high-capacity commuter service railways, flood control and management systems, roads and highways, bridges and airports. Our government expects to invest about 170 billion US dollars in this program over the next few years.
Investment in infrastructure has the highest multiplier effects. Immediately, it creates jobs for many currently unemployed and underemployed. It will open new areas for joint ventures. It will improve property prices, create new manufacturing zones and bring down the costs of transporting people and goods. In a word, it creates a virtuous cycle propelling domestic economic expansion.
We are fortunate to have the full support of our friends in the region. Both China and Japan have committed 9 billion US dollars each in investments and official development assistance. South Korea has pledged 1 billion US dollars in official development assistance through the remaining years of President Duterte’s term. These commitments complement the support we are getting from multilateral development institutions such as the World Bank and Asian Development Bank.
We have taken great care to ensure the economic returns on our projects, choose the most highly concessional financing available as well as diversify our sources of project funding. There is no basis for the speculation that our ambitious infrastructure program will cause us to fall into a debt trap.
The Metro Manila Subway Project is, by far, the single largest infrastructure project we will be undertaking. It is also the recipient of the largest official development assistance we have ever received from Japan. The project is set for construction this year. What was once considered a lofty dream is now becoming a reality for the Philippines.
The magnitude of the official development assistance we are receiving should be credited to President Duterte’s rebalancing of our foreign policy. With strong official development assistance inflows, we were able to shift to hybrid Public-Private Partnership or PPP model to hasten the delivery of major infrastructure projects. 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 new terminal building, which is considered as the next premier gateway of the nation, is the first of the Duterte administration’s hybrid PPP infrastructure projects under the Build, Build, Build Program. This is also the fastest to be implemented by the national government, setting the template for all the other projects of our strategic infrastructure program. The project was approved and began construction in the first 18 months of the Duterte administration. Some credit will have to be given to the political will to get things done. We must remember that when projects are delayed, the ones who suffer are the people. So it is not just PPP, it should be PPPP–Public-Private Partnership for the People.
The Build, Build, Build program is our secret weapon to offset the effects of the expected global economic slowdown. The key to the success of this ambitious program is rapid execution. The positive repercussions of our investments in strategic infrastructure will be wide-ranging and long lasting.
Even as we are pursuing expansionary economic strategies and investing massively in modernizing our infrastructure, we remain committed to maintaining fiscal discipline. It is this discipline that made it possible to invest in large projects to begin with. It is this discipline that will carry us through towards building an economy our people deserve.
We are managing our obligations with utmost prudence. Currently, our debt-to-GDP ratio is down to 41.9 percent compared to the all time high of 74.4 percent in 2004. We expect to bring that even lower even as we accelerate the completion of large infrastructure projects.
Meanwhile, we will slightly raise 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.
So far, the increased investment flows over the past year strengthen our faith that we have the right economic strategy for this time. In 2017 and 2018, we received a total of 20 billion US dollars in foreign direct investments. For two consecutive years, our foreign direct investments averaged 10 billion US dollars a year, double the inflows that we received in 2015. This is unprecedented. The tight spread of our bond offerings also demonstrates the confidence of the investment community in our commitment to fiscal discipline.
The strong growth momentum we have now offers many opportunities for new businesses. We look forward to many cooperative ventures in the coming years.
There is one more, largely unspoken, factor that makes us even more confident in our economy’s long-term outlook: our very young and very well-educated population. The median age of our population is 24 years old. This is what economists call a “demographic sweet spot.” This contrasts sharply with the aging populations of our more mature industrial neighbors.
We are looking at every opportunity for economic complementation that will ensure ample opportunities for our very young labor force. Our law ensures free basic education for all Filipinos. We have extended this privilege of free education to students enrolled in state colleges and universities.
While we rank as among the best performing economies in this dynamic part of the world, growth is not the final goal of all our efforts. We seek a more dynamic and competitive economy to bring down poverty rates and create more opportunities for our people. The economic team stands by its goal of bringing down poverty incidence from 21.6 percent in 2015 to just 14 percent by the end of President Duterte’s term.
Our people will always be our main asset in the journey towards full development of our country. We work hard at getting projects running at the soonest possible time for we know that the reward for all these work we do now is a better future for the next generation of Filipinos.
We are grateful for all the support the World Bank has been extending to the Philippines. Through the years, the Bank supported our government’s development efforts across a wide area of concerns from human capital development, disaster risk management, education, transport, environment and energy. Support for the Philippine government’s peace and development efforts in the conflict-ridden island of Mindanao has been a major component of the Bank’s program in the country.
On the other hand, the Philippine government supported the Bank’s recent structural reforms and endorsed the recent general and selective capital increase. With its stronger financial capacity, we are confident the Bank will be even more effective in delivering development services to its diverse membership. As the Bank institutes reforms to respond to the changing needs of its membership, we look forward to new forms of cooperation.
The world is rapidly changing. The center of gravity of the global economy is quickly shifting to Asia. All the changes require reconfiguration and rebalancing. They will not diminish, however, the sense of partnership we developed over the past decades. I am confident that we will continue working together in earnest for many years to come.
These are exciting times for our economic development. We invite you all to take a closer look at how things have improved in the Philippines and examine the many opportunities for investment. Join us in building a strong and resilient economy.
With sustained fiscal discipline, adept policy reforms and a decisive political leadership, we expect our economy to flourish in the coming years. We know what we have to do at this vital juncture and we are determined to get those things done.
Thank you and good day.
@@@