Mr. Daniel Yu, Editor-in-Chief of The Asset, members of the business and investment community, distinguished guests, ladies and gentlemen. Thank you for this opportunity to speak in this highly regarded forum.
We do find ourselves today amidst much uncertainty. Forecasts for global growth have been cut successively over the recent months. Some economies are threatened with recession. Trade tensions between the world’s two largest economies and the prospect of a chaotic Brexit weigh heavily on near-term growth prospects. The recent attacks on two important Saudi refineries underscored the vulnerability of the world’s oil supplies.
The Philippine economy has been challenged by slower global growth. The Asian Development Bank recently cut our 2019 growth forecast to 6 percent from 6.2 percent. But despite these headwinds, the Philippines’ economy will still be among the fastest-growing in the world.
We will do our utmost to continue on this positive path via a three-fold strategy. First, we will continue to bolster our macroeconomic strength through prudent fiscal management and stable monetary policy. Second, we will focus our accelerated spending program on infrastructure and our people, two investment areas that will provide the highest returns in the short-run and well into the future. Third, our approach is further powered by game-changing reforms that will benefit all law-abiding Filipinos and businesses.
Let me cite a few key indicators of our strong economic performance. Standard and Poor’s recently upgraded the Philippines to a BBB plus from a BBB credit rating. This summarizes all our efforts to maintain fiscal discipline, contain inflation, build a business-friendly market, and achieve the highest international reserves ever. These reserves have risen to a record of 85.6 billion US dollars by the end of August 2019, the equivalent of seven-and-a-half months’ worth of imports. This is significantly above the benchmark and should help keep our currency stable.
The strong remittance inflows from our expatriate workforce sustain domestic consumer demand. Driven by sustained consumption, our economy is less reliant than others on trade. While this might not be ideal, it has served to partially insulate us from the external factors that explain the global economic slowdown.
Next year, the Philippine economy is expected to achieve upper middle-income economy status. This is indicative of the capacity of our domestic market to support more enterprises.
Over the past two years, the Philippine economy has attracted foreign direct investments or FDI of 20.1 billion US dollars. For two consecutive years, our FDI averaged 10 billion US dollars a year, about double the inflows that we received in 2015. We expect these inflows to surge even more dramatically over the next few years given the improved business environment, and competitive advantages created by infrastructure modernization and a staunchly pro-growth monetary policy.
More importantly, we have been able to bring down our unemployment to the lowest it has ever been in 40 years. We’ve seen that our poverty incidence is declining from 27.6 percent in the first half of 2015 to 21 percent in the first half of 2018. With additional investments in our people through education, training, and Universal Health Care, we aim to bring it down to 14 percent by 2022.
The Build, Build, Build program of President Duterte involves a number of select and highly strategic infrastructure projects as well as thousands of infrastructure projects and logistics improvements all over the country that will raise productivity dramatically. These projects include construction of high-capacity commuter service railways, a subway, flood control and management facilities, roads and highways, airports, and new cities. We want to complete as many infrastructure projects as possible by 2022 which is why we are currently reviewing the list of flagship projects to include in the pipeline emerging projects to be rolled out by the private sector.
For the first time in our history, we exceeded 5 percent of GDP in infrastructure spending last year. This is double the average spending over the last 50 years. We expect to bring this up further to 7 percent by 2022.
The infrastructure program likewise opened many investment opportunities. The centerpiece of this program thus far is the New Clark City. This area has attracted new industries and promises to be the center of modern enterprise for the region. Later this year, we will be hosting the Southeast Asian Games in this city. This area is supported by the new and world-class Clark International Airport as well as the Subic Bay Seaport, which will be linked by a railway and expressway.
With improved public revenues and the strong support of our development partners, we are confident the infrastructure program will help out our economy weather the headwinds created by the projected global slowdown.
Game-changing reforms will ensure that the continuous growth we achieve is funded equitably by the Filipino people. The comprehensive tax reform package will modernize policies toward a simpler and fairer tax system while ensuring robust and recurrent revenues for the government. The first package of this program, the Tax Reform for Acceleration and Inclusion or TRAIN law signed by President Duterte in December 2017, involves the reduction in personal income tax rates offset by increased excise taxes. It has worked wonders for the economy. On one hand, it delivered to 99 percent of our taxpayers the equivalent of a month’s take home pay. This certainly helped boost consumer demand. On the other hand, it discouraged consumption of products that are unhealthy such as sweetened beverages, alcohol, and tobacco.
The World Health Organization praised our efforts for simultaneously scoring for public health and for the economy. The implementation of our sweetened-beverage tax has earned praise from our ASEAN neighbors.
The TRAIN law encouraged compliance and broadened the tax base. In its first year, this first package outperformed expectations. Latest numbers show that in the first half of 2019, TRAIN revenues reached 55.6 billion pesos. This is 65 percent higher than the same period last year. The improved revenues are helping the government fund our ambitious infrastructure modernization and human capital development programs.
The succeeding packages of this comprehensive program are in the legislative pipeline. We expect most of them to become law either later this year or early next year.
In particular, Package 2 of our tax reform program seeks to lower the corporate income tax rate gradually from 30 percent to 20 percent in order to bring the Philippines closer to the ASEAN average. It also seeks to modernize the incentive system to make incentives performance-based, time-bound, targeted, and transparent. We want to adhere to the standards very similar to that of other countries.
The Philippines’ current incentive system is too generous, while also lacking accountability. In 2017, for example, we granted 441 billion pesos or 8.4 billion US dollars worth of tax discounts and exemptions to just 3,150 companies. A number of companies have also been receiving incentives for over 15 years – and this is being done without a proper cost-benefit analysis to determine whether the incentives have yielded real benefits to the economy.
In addition, some of these firms cheat the government of an estimated 63 billion pesos or 1.2 billion US dollars by abusing transfer pricing rules. The total tax expenditure bill for 2017 alone is a staggering 504 billion pesos or 9.7 billion US dollars. That is around 3 percent of GDP, the size of our fiscal deficit. In other words, we have to account for 504 billion pesos that we gave up and ensure that the taxpayers’ hard-earned money is not wasted.
It is ironic that the Commission on Audit reviews relatively small expenditures spent by state agencies. Yet the fiscal incentives we grant to investors–in the billions of dollars–have never been subjected to any kind of systematic review. In our Department, for instance, COA issued a Notice of Disallowance in March 2019 on lapses in the process of distribution of souvenirs and giveaways for an international event we hosted two years ago amounting to a little over 190 thousand pesos or 3,600 US dollars. That was what we were cited for in COA—for 3,600 US dollars. We immediately settled this with COA. In the case of favored companies receiving incentives, we do not have a regulatory body similar to COA that is tasked to review whether these incentives ultimately benefit the Filipino people.
To be clear, we are not anti-incentives and we are not removing incentives. We simply want to make sure that the incentives we give yield a corresponding positive impact on our society. Under the new incentive regime, superior incentives and additional deductions will be given to companies that create high-quality jobs, invest in infrastructure, train their employees, and other positive activities.
Other tax reform packages involve adjustment of excise taxes on alcohol products as well as heated tobacco and nicotine vapor products; reform in our real property valuation; and simplification of the tax system on passive income, financial services, and transactions. Remaining proposals also include adjustments to the Motor Vehicle User Charge and a general amnesty that should incorporate the lifting of bank secrecy laws, and the automatic exchange of tax information.
In addition to tax reform, we have new laws that will cut red tape, simplify government procedures, improve the efficiency of our financial system, and we are taking steps to further expand sectors and industries for foreign investment. We are increasing our own investments in social services, especially in public health and education. Our young work force will have competitive skills to support rapid industrialization.
We are also the only administration that has actually succeeded in passing the Rice Tariffication Law. The importation of rice is no longer limited by volume, but is now subject to a tariff that is earmarked for farmer productivity programs. Rice tariffication is beneficial to all segments of society, including the corporate sector. It has brought down the price of our country’s staple food for more than 100 million Filipinos, it has slowed down the inflation rate, which, in turn, eased the pressure on businesses to raise wages. We expect this key measure to be the main driver in modernizing our farm systems and bringing down rural poverty.
Over the past three years, the Duterte administration has laid the foundations for resilient growth driven by strong domestic demand, while setting the stage for more investments-led growth in the medium term. The strong growth characterizing the Philippine economy is driven by the synergy of our continued macroeconomic strength; public investments in our people and an aggressive infrastructure modernization program; and a game-changing set of reforms that support consumer demand, raise sufficient revenues, and improve the business environment.
The reforms and initiatives we have pursued all have a tangible effect on the lives of every Filipino. Our economic reforms have clearly resulted in more money in the pockets of our people, while reducing inflation, and creating more jobs.
We are doing the things we need to do. We are optimistic in the growth momentum will be sustained beyond the medium term. We seek to make our market more competitive and our economy more inclusive.
I encourage the asset managers and the investment managers in the audience to examine the policy and administrative reforms we have achieved so far. There are many opportunities for investors to participate in this blossoming economy. I hope you will seize these opportunities.
I wish you a productive conference and look forward to further discussions about investment opportunities in a strong, stable and forward-looking Philippine economy.
Thank you and good day.
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