October 14, 2022
Ambassador Romualdez, friends, ladies and gentlemen. Before I begin, I would like to thank the Embassy of the Philippines in Washington D.C. and the Philippine Trade and Investment Center for organizing this roundtable discussion with investors. It is my pleasure to share with you today our economic outlook and investment opportunities in the Philippines.
The Philippines’ high economic activity and rising investor confidence signal a rapid recovery and robust economic growth.
For the second quarter of the year, the Philippine economy grew by 7.4 percent, bringing our average growth for the first half of the year to a robust 7.8 percent. This growth suggests that our full-year target growth of 6.5 to 7.5 percent is doable.
From next year to 2028, the economy is expected to grow by 6.5 to 8 percent. This is one of the highest projections among the ASEAN+3 countries, which include Japan, South Korea, and China.
Our second quarter growth was broad-based, with positive contributions from all three major sectors – agriculture, industry, and services.
Foreign direct investment inflows are on a steady climb.
Last year, we reached record-high FDI inflows at 12.4 billion US dollars. From January to July of this year, FDI inflows reached 5.1 billion US dollars. While slightly lower than the inflows recorded in the same period last year, we are still on track to reaching our FDI targets for 2022.
Our latest revenue collections reflect higher economic activity. This is bolstered by the digitalization of the Bureau of Internal Revenue and the Bureau of Customs, which has significantly improved the efficiency of our tax administration.
From January to August 2022, total revenue collection reached 2.4 trillion pesos. That’s 18.1 percent higher compared to the same period in 2021. This year, we expect revenue collection to already exceed its pre-pandemic level.
On employment, we are seeing continued improvements in the labor market. The labor force participation rate in August of this year stood at 66.1 percent, much higher than the 63.6 recorded in the same period last year. This means that more workers are encouraged to join the labor force as the level of economic activity normalizes.
Meanwhile, the employment rate reached 94.7 percent, higher than the 91.9 percent employment rate recorded in the same period last year.
Unemployment also dropped to 5.3 percent from the 8.1 percent recorded in the same period last year.
But while our prospects are bright, the Philippines is employing the necessary policy levers to address ongoing risks.
Inflation has continued to remain elevated among both emerging and developed markets. Most countries have already breached their targets, mainly due to a combination of high global commodity prices and the broad strengthening of the US dollar.
Furthermore, the scarring effects of the pandemic on the economy linger.
And lastly, geopolitical tensions have kept the global political economy unpredictable.
Year-to-date inflation in the first nine months of 2022 reached 5.1 percent.
This is higher than the 2 to 4 percent target of the government, but still within the 4.5 to 5.5 percent assumption of the Development Budget Coordination Committee for 2022. Food items are the main drivers of inflation, particularly meat, fish, rice, and sugar resulting from limited supply, some of which were due to reduced domestic production while others were linked to weather-related disturbances. Fuel-related items, particularly transport and electricity, gas and other fuels, continue to add pressures to inflation due to elevated global oil prices.
Now, to manage inflation, the continued timely implementation of government measures is crucial in mitigating the impact of persistent supply-side pressures on food and other commodity prices. The government has intensified measures to help increase the domestic supply by ramping up local production, ensuring timely importation of goods, fertilizers, and raw materials, and improving distribution efficiency.
The government is already reviewing the volume of required commodity imports in the near term and address the operational issues. Measures are also being considered to improve logistics particularly on the supply of basic commodities.
Our government is also increasing its efforts to ensure that we have adequate power supply to enable our economy to continually function. There is a need to carefully consider any wage and transport fare hike petitions, including those on public utility and rail transportation, in the next three months given that international oil prices are moderating and the possibility that granting these petitions could themselves trigger further acceleration of inflation.
The peso has continued to depreciate, reaching 58.6 pesos to 1 US Dollar on October 7, 2022. This is mainly attributed to the US Fed’s hawkish monetary policy and market expectations that it will continue to tighten monetary policy aggressively, fears of a global recession, and negative sentiment over the agricultural damage caused by the recent Super Typhoon Karding.
The Philippine peso movements are in line with other currencies in the region, driven mainly by the monetary tightening of Advanced Economies.
While we continue to subscribe to a flexible foreign exchange rate regime, we are looking closely at the implications of the foreign exchange rate movement on inflation.
The Central Bank has initiated actions to moderate sudden movements in the peso including participation in the foreign exchange market as well as looking at possible cases of speculative activities.
The Central Bank encourages the use of organized and accessible formal market for all transactions and is taking steps to manage any disruption in the Philippine financial market.
Now, the Marcos administration has crafted a comprehensive eight-point socioeconomic agenda to address these immediate challenges and chart a clear path to recovery and growth.
In the near term, we will address the impact of inflation on vulnerable sectors, reduce economic scarring from the pandemic, and ensure sound macroeconomic fundamentals.
Over the medium term, the goal is to create high quality and green jobs. We will achieve this goal through higher investments in productivity-enhancing sectors.
Our strategy aims to bring down poverty incidence to 9 percent by 2028 and elevate the Philippines to upper middle-income status by 2024.
Now, the economic team has formulated the government’s first-ever Medium-Term Fiscal Framework to align our financing program for the next six years with the President’s socioeconomic agenda.
The Framework promotes transparency and credible commitment to pursue our socio-macroeconomic goals while ensuring that the fiscal deficit will return to pre-pandemic levels and the debt ratios to more sustainable levels.
The Framework sharpens our focus on improving tax administration, enhancing the fairness and efficiency of our tax system, and promoting environmental sustainability to address climate change.
To show our commitment to policy continuity, we will also pursue the remaining tax reform packages of the previous administration.
All of these efforts will help us bring down our debt-to-GDP ratio to less than 60 percent by 2025, then further down to 51 percent in 2028. It will cut the deficit-to-GDP ratio to 3.0 percent by the end of the President’s term.
Our increased fiscal space will allow us to maintain high investments in infrastructure equivalent to 5 to 6 percent of our GDP annually.
We will take advantage of the structural reforms we have in place to attract domestic and foreign investments and create high-value jobs.
Let me mention some of these reforms.
First, the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE, and the amendments to the Public Service Act, Retail Trade Liberalization Act, and Foreign Investments Act.
The CREATE Law has transformed the corporate tax regime and structure of our tax incentive system.
The law cut our corporate income tax rate by 10 percentage points for domestic micro, small, and medium enterprises and 5 percentage points for all other corporations, which include foreign enterprises.
The CREATE Law also rationalized the country’s fiscal incentives system to make it performance-based, targeted, time-bound, and transparent. It offers a superior menu of incentives for businesses and activities that are aligned with the Philippines’ strategic priorities.
The Fiscal Incentives Review Board serves as the primary gatekeeper of fiscal incentives. Investors can now rely on the Fiscal Incentives Review Board for a fair, objective, and evidence-based assessment of their projects as they apply for fiscal incentives.
We have also enacted amendments to our investment laws to open our doors wider for international firms to participate in previously protected sectors.
The amendments to the Retail Trade Liberalization Act has simplified the requirements for foreign retailers. It lowered the minimum paid-up capital from 2.5 million US dollars to half a million US dollars.
Meanwhile, the amendments to the Foreign Investments Act provides flexibility and transparency in the review of Foreign Investment Negative List.
The law also liberalizes the practice of professions, making it easier for foreign investors that require foreign talent to do business in the Philippines.
Lastly, we have also amended our nearly 90-year-old Public Service Act. This opened up public services to full foreign ownership while retaining the public utilities as majority Filipino-owned.
Foreign investors are now welcome to bring their capital into the country, especially in the fields of telecommunications, airports, toll roads, and shipping.
With decisive leadership, a well-calibrated plan for fiscal sustainability, and a more investment-friendly environment, the Philippines is primed for a bright economic future.
Thank you for your interest in the Philippines and we look forward to answering your questions.