Carlos G. Dominguez
Secretary of Finance
29th North Luzon Area Business Conference
August 20, 2020
Ambassador Benedicto Yujuico, President of the Philippine Chamber of Commerce and Industry; Ms. Maria Alegria Limjoco, Chairperson of the PCCI; Ms. Gregoria Simbulan, Area Vice President of the PCCI for North Luzon; business community of North Luzon; distinguished guests; ladies and gentlemen: Good morning.
Thank you for this opportunity to speak with you today.
We have seen much heroism from all sectors during the five months that the nation has been battling the COVID-19 pandemic. While our medical workers braved the frontlines to save lives and treat the infected—you—our entrepreneurs, worked day and night to shore up businesses and help your employees survive. You have ensured continued access to basic goods and services. The country is grateful for your efforts.
The depth of the economic contraction recorded in the second quarter of this year was a direct consequence of the lockdowns imposed in some parts of the country to save livesand protect our communities. Based on Oxford University’s Government Response Stringency Index, the Philippines has imposed one of the most extensive lockdowns in the world. That decisive move helped us avert an estimated 1.3 to 3.5 million infections according to researchers from our universities.
The lockdown enabled us to reinforce our health system and build up our capacity to do widespread testing in our communities. From just around 1,282 actual PCR tests per day conducted in the last week of March, our capacity has grown to about 32,000 average daily tests this month.
The lockdown also provided us time to significantly expand our capacity to isolate the infected. From around 33,000 beds in our quarantine facilities in mid-April, we were able to expand capacity to 159,000 beds as of August 15. To date, sixty-seven percent of these isolation beds are vacant and available for use.
Without the lockdown, the rate of infections and deaths would have been much worse. The latest data suggest that a little over one percent of all COVID-19 cases in the country are severe or critical. Our mortality ratio, on the other hand, is at 2.5 people per one hundred thousand of our population. The UK is at 70 people per one hundred thousand, Spain at 61, Sweden at 57, and the US at 52 people per hundred thousand.
Every death is still one too many, which is why we will sustain our efforts to expand access to testing, hire more contact tracers, and beef up our treatment capacity to save as many lives as possible.
The strong containment measures, however, was costly for our economy. But despite not having the biggest stimulus package and even with the strictest lockdown, the Philippines performed better than some economies, owing to its fiscal strengths.
This is not the usual economic crisis, where a larger stimulus package translates into a milder recession. For instance, we have seen that there doesn’t seem to be a direct correlation between the size of one’s stimulus package and the drop in GDP. At least for three countries we have looked at, their economies retreated significantly despite massive stimulus packages, which should not be the case.
For instance, Malaysia’s economy contracted by 17.1 percent in the second quarter of this year in spite of a bigger stimulus package, which is equivalent to 18.2 percent of their GDP.
The United Kingdom, on the other hand, had a total stimulus of 23.4 percent of GDP but their economy went down by 21.7 percent.
Sweden’s economy decelerated by 8.2 percent, despite having a bigger stimulus package of between 10.8 to 16.6 percent of GDP.
Only Thailand and the Philippines had stimulus packages lower than the drop in their GDPs. In particular, the Philippines’ stimulus package is between 4.2 to 6.4 percent of GDP, yet our GDP drop is 16.5 percent for the second quarter of this year.
It appears that no matter how much money countries pump into their economies, their GDP would have shrunk massively, anyway. It is not the sheer size of the stimulus package that matters now but also whether it is actually saving the productive parts of the economy. This is because the problem is not a systemic contraction or a cyclical bust. Simply, necessary mobility restrictions hamper aggregate demand.
If we can keep the pandemic at bay so that tough restrictions are not necessary, the economy should recover. In the meantime, we have to make sure we can adequately finance the country’s needs during the protracted struggle with this virus.
In terms of the first semester numbers, our GDP contracted by 9 percent. Among our credit rating peers, first semester numbers show estimated contractions of 11.4 percent in Italy; 10.6 percent in Mexico; and 9.4 percent in Portugal. These countries are our rating peers and rate at BBB plus.
Over the past five months, we have learned much about COVID-19. We know that the first line of defense is everybody’s informed vigilance and consistent adherence to health behaviors.
Experts tell us that the risk of contracting COVID-19 is largely under our own personal control. The risk of infection is much lower when we religiously wear face masks and shields, frequently wash our hands, keep our distance, and avoid crowds. Each one of us must follow the minimum health protocols diligently. Preventing outbreaks in the workplace is as much a lifesaving responsibility as it is good business practice.
We do not expect this virus to disappear anytime soon. The reality is that it will not go away until a safe and effective vaccine is developed and made widely available.
The government has been focused not on just saving lives from the virus, but saving lives from other factors, such as hunger and other diseases. Even while we fight COVID-19, we have to rebuild our economy. Unemployment and reduced incomes due to the lockdowns have public health consequences.
We cannot fight a pandemic with a weak economy; nor can we restore economic vigor without solving the public health crisis. We need a healthy people and a strong economy.
Because this is likely going to be a drawn-out series of battles, we should be judicious in our use of fiscal and financial resources. There is no knock-out punch for COVID-19 and its economic fallout. We are therefore conserving our fiscal stamina for a full, 12-round fight. Our capacity to fight can and will outlast this health challenge.
The effects of this pandemic would have been much worse had it caught us in a weak fiscal position. Fortunately, when it hit us, we had sufficient means to fight the battle and ramp up public spending. This is due to President Duterte’s prudent approach to fiscal and economic management.
Last year, we brought down our debt-to-GDP ratio to a historic low at 39.6 percent. With bold tax reform measures and improved tax administration, our revenue effort rose to 16.1 percent of GDP—the highest in two decades.
Despite the delayed passage of last year’s national budget, we managed to increase our infrastructure investments to 5.4 percent of GDP, or double the average infrastructure spending to GDP for the last 50 years.
With the rice tariffication law, inflation has remained stable and under control, averaging 3 percent from 2016 to 2019. For the month of July this year, the inflation rate of 2.7 percent stayed below the midpoint of our target range of 2 to 4 percent. This reflects stable prices for Filipino families.
Our gross international reserves were at an unprecedented amount of 98 billion US dollars in July, sufficient for 8.9 months’ worth of imports. In fact, our foreign reserves are more than our outstanding external debt, which stood at 81.4 billion US dollars as of the end of March of this year.
Our country’s hefty foreign exchange reserves as well as continued international confidence in our strong economic fundamentals are supporting the Philippine peso, making it one of the best-performing currencies in the region amidst the pandemic. Year-to-date, the Philippine peso has appreciated by 3.9 percent against the US dollar, matched only by the Japanese yen. In a time where the Build, Build, Build program and external financing are key elements of economic recovery, this is a positive development.
Our high investment grade credit ratings have been affirmed by Fitch, Moody’s, and S&P despite the present economic challenges. These credit ratings have allowed us to access financing from our development partners and the commercial markets at lower interest rates and longer repayment periods. With more affordable financing, we expanded government expenditures in the first semester by 27 percent, compared to the same period last year.
Without continued and increased public sector spending, especially on infrastructure, public health, and social protection, our economy would have performed much worse. The first semester GDP would have shrunk by 2.5 percentage points more than it did, or a total of 11.5 percent versus the actual 9 percent.
We have reason to believe, however, that the worst part of this calamitous episode is now behind us. Signs of recovery are emerging in our manufacturing sector and merchandise trade.
For instance, the value of the production index for the month of June showed a slower annual decline of 22.5 percent compared to the 31.2 percent decrease in May and 41.2 percent in April.
While the volume of production index in June shrank by 19.3 percent year-on-year, the decline was slower compared to May’s drop of 28.5 percent and 38.8 percent in April.
In addition, the overall manufacturing capacity reached 73 percent in June, up from 72.4 percent in May and 70.5 percent in April.
The country’s total merchandise trade further eased its negative trajectory in June with a slower decline of 19.9 percent, after a steep 35.3 percent contraction in May and 59.5 percent in April. This slower decline in the country’s trade performance signals the resumption of economic activities.
These improvements are reflected in increases in tax collections by our main revenue-generating agencies. Both the Bureau of Customs and the Bureau of Internal Revenue surpassed their July collection targets by 5 percent and 2 percent, respectively.
Even as the virus continues to circulate, we are setting the foundations for a strong recovery. Pragmatism guides us as we put together an effective bounce back plan that we can afford and can fully execute. This plan includes the passage of key legislative imperatives.
If we can pass these critical reforms on time, we can help businesses in need sooner, and further improve the post-COVID-19 business climate.
First, we support a fiscally-responsible Bayanihan to Recover as One Act or Bayanihan 2, which will provide another round of fiscal measures to stimulate consumer demand and support businesses and individuals critically impacted by COVID-19.
Second, we are seeking Congressional approval for infusing additional capital to our government financial institutions for them to be able to act as wholesale banks and fund substantial portions of loans that other commercial banks will provide to businesses affected by the pandemic.
Our government banks will also set up a company to deal with the problems involving solvency issues as opposed to liquidity issues. We will be inviting other multilateral agencies and foreign investment companies to participate in this venture.
Third, we seek to allow banks to dispose of non-performing loans and assets through asset management companies similar to special purpose vehicles created in the early 2000s to deal with the effects of the Asian crisis.
Fourth, we are working with the Senate for the swift passage of the CREATE bill or the Corporate Recovery and Tax Incentives for Enterprises Act. This reform measure will reduce corporate income taxes for the majority of small- and medium-sized businesses by 5 percentage points immediately. The tax rate will be reduced further by one percentage point every year from 2023 to 2027.
This is the first-ever revenue-eroding tax reform package proposed by the Philippine Department of Finance, and the largest fiscal stimulus program for enterprises in the country’s history.
The accelerated reduction of the corporate income tax rate boosts the country’s bid to attract multinational firms seeking to diversify their production chains, especially those interested in accessing what no doubt will once again be a very attractive domestic market.
The outright corporate income tax cut is complemented by an enhanced NOLCO or net operating loss carryover. This will extend the carry-over period of net losses in 2020 by two more years, from three to five years.
We have also extended by 2 years the proposed transition period to a new, highly-targeted, performance-based, transparent, and time-bound incentive system. This is to account for the unanticipated challenges brought about by COVID-19. After the transition period, registered businesses are still allowed to apply for incentives under the new regime.
The CREATE bill will modernize our incentives system. On top of a standard menu of more modern incentives, it will allow us to offer tailor-fitted fiscal and non-fiscal incentives for investments that we want to invite. To be clear, the customized incentives are in addition to the standard menu available for eligible enterprises.
At this point, I thank many of our business leaders for expressing their full support for the immediate passage of the CREATE bill.
Finally, the fifth legislative imperative seeks to provide greater support to agriculture by giving the banking system the ability to support the whole value chain of agri-enterprises.
The cornerstone of our economic recovery is the Build, Build, Build program. Investments in infrastructure have the highest multiplier effect in the economy. We have to continue to prioritize the infrastructure program to immediately create jobs, encourage investments, and increase economic activity.
Northern Luzon stands to benefit from many of these projects. The area is one of the centerpieces of the Build, Build, Build program.
For instance, the first phase of the New Clark City was completed towards the end of 2019. The project brought us immense national pride when it served as the main hub for the 30th South East Asian Games last year. World-class sports facilities and an athlete’s village will serve as the national training center for Filipino athletes for many years to come.
Even amidst the pandemic, the final segment of the Tarlac-Pangasinan-La Union Expressway opened on July 15. This reduces the travel time from Manila to Baguio from 6 hours to only 3 hours.
The Clark International Airport is 99.8 percent complete. This will help clear the congestion that plagues the Manila airport. This facility will anchor the rapid development of Central and Northern Luzon and other districts of Clark, which we expect to become the next investment center in Asia.
The Central Luzon Link Expressway is scheduled for completion by the end of this year. This 30-kilometer expressway from Tarlac to Cabanatuan City in Nueva Ecija will reduce travel time between these points from one hour and ten minutes to just 20 minutes.
The Phase 1 of the North South Commuter Railway, which connects Tutuban in Manila to Malolos in Bulacan is at 40 percent completion as of July this year. This line cuts travel time between these two points from one and a half hours to just 35 minutes.
These developments underpin the commitment of the Duterte administration to move ahead with our Build, Build, Build program even amidst the global health and economic crisis brought about by this contagion. These investments will primarily fuel our plan to quickly and smoothly get back to our growth trajectory upon the defeat of COVID-19.
When the pandemic finally recedes, we expect our economy to resurge. I am hopeful that the business community of Northern Luzon will continue to partner with us at the frontlines of our economic revival.
Together, we will beat this pandemic and come out of it even stronger than before.
Thank you.
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