Philippine Economic Briefing Beijing, China
Executive Secretary Salvador Medialdea, Transportation Secretary Arthur Tugade, Public Works and Highways Secretary Mark Villar, Budget Officer-in-Charge Janet Abuel, Energy Secretary Alfonso Cusi, Central Bank Deputy Governor Diwa Guinigundo, National Treasurer Rosalia de Leon, National Economic and Development Authority Assistant Secretary Carlos Abad Santos, Bases Conversion and Development Authority President and CEO Vivencio Dizon, Bank of China Executive Vice President Sun Yu, members of the Philippine and Chinese business community, distinguished guests, ladies and gentlemen:
Thank you for making time to attend this briefing. The quality of the audience we have today speaks well of the growing interest among China’s investors, bankers, economists and analysts in the rapidly improving outlook for the Philippine economy.
The economies of our two countries are leading the region in growth. Both our economies demonstrated resiliency in the face of global challenges. With our increased cooperation, we can better defy the adverse developments at the global level and continue our rapid expansion to benefit our peoples.
China is gearing up to meet the forecast of slower global growth this year by a policy mix that includes boosting domestic consumer demand and expansionary monetary policy. The rest of the region depends much on China’s impressive growth. We are confident this great nation will continue its remarkable economic transformation.
Like China, the Philippines is well positioned to sustain its economic expansion long into the future. Despite the adverse trends in the global economy, we are confident our internal growth engines will continue driving the economy to support a GDP expansion of 7 percent—this is our fighting target.
We ended 2018 with a GDP growth rate of 6.2 percent, making us one of the fastest growing Asian economies. Our economy has been growing at an average of 6.5 percent since the first 10 quarters of President Rodrigo Duterte’s administration.
There are several factors working in our favor as we embark on this great enterprise of building a domestic economy that is both competitive and inclusive.
Our growth is now shifting from consumption- to investments-led. The shift will be supported by a growing domestic market as well as more intensive regional integration of the Southeast Asian economies.
The robust investment flows and capital formation rates tell us that the growth in investments will be sustained into the foreseeable future. In 2018, our foreign direct investments reached 9.8 billion US dollars, this is almost as high as what was recorded in 2017, for a total of 20.1 billion US dollars two years in a row. For two consecutive years, our foreign direct investments are double the inflows we received in 2015. This is unprecedented.
Over the past two years, we have set up the conditions for much higher and more inclusive growth. In 2017, we were able to pass the first package of the tax reform program and the first full year of its implementation succeeded in accomplishing both its revenue and economic goals.
Ninety-nine percent of individual taxpayers enjoy hefty reductions in their personal income tax rates. Filipinos earning below 4,500 US dollars annually are now exempted from paying personal income taxes while workers earning above it now receive about a month’s extra take-home pay each year. To emphasize that point, by correcting the tax rate for our average wage earners, we have basically given out a 14th month pay annually.
Last year, most domestic publicly-listed retail giants and real estate enterprises in the Philippines experienced a strong growth in demand and an impressive rise in profitability. Their total sales and profits have dramatically increased at an average of 17 percent. The strong sales and profit performance of most enterprises is explained by one thing, mainly: the increased purchasing power of our consumers because of the tax reform law.
Moreover, the aggressive expansion of the retail and real estate industries in areas outside of the Metro Manila account for a large part of their earnings in 2018. This demonstrates how a fast-growing economy complemented by business-friendly reforms can become a potent tool in creating wealth across the country.
At the same time, the implementation of our tax reform law improved revenue flows to government. In 2018, national government revenues rose by 15 percent while tax revenues grew by 14 percent. Our tax effort, which reached 14.7 percent last year, is now significantly better than the regional benchmark. This is the highest tax effort we have ever achieved in the past 20 years.
Expenditures also posted its fastest rate of expansion since the beginning of the Duterte Administration. With its continued growth, spending in 2018 was 21 percent higher than the 2017 level. Our expenditure effort in 2018 reached 19.6 percent, the highest we have ever achieved in the past 28 years.
The strong revenue flows enabled us to invest in an ambitious infrastructure program and expand our social services.
Note that this is the first time the Philippines is undertaking such a sweeping tax reform without being compelled to do so by an economic crisis. We did this to further strengthen our fiscal position and modernize our revenue system. We are also the first country in the region who first embarked on the tax reform program before moving deliberately on our massive Build, Build, Build infrastructure program.
For 50 years, the Philippines invested only around 2.6 percent of GDP for public infrastructure. This caused our infrastructure backbone to fall behind those of our neighbors. We are correcting this rapidly. Over the past two years, we have brought up infrastructure investments to about double the percentage of GDP invested in the infrastructure for the past five decades. We plan to raise this further to 7 percent by 2022. This will make possible the economic efficiencies to be competitive for many years to come.
Our ambitious infrastructure buildup is a set of 75 strategic infrastructure projects that will bring dramatic effects to the economy. Our government expects to invest about 170 billion US dollars in this program over the next five years.
This is our secret weapon to offset the effects of the expected global economic slowdown.
We have to thank China for its generous support for our Build, Build, Build program over the past two years. This has greatly helped push our infrastructure projects forward.
Investment in infrastructure has the highest multiplier effects. Immediately, it creates jobs for many currently unemployed and underemployed. It will open up 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.
Many decades of fiscal discipline improved the manageability of our debt, raised our international reserves and won us investment grade credit ratings. The most important thing, however, is our strong fiscal position provided us a platform to launch an ambitious infrastructure buildup to close the gap with our most dynamic neighbors.
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.
Our Build, Build, Build program works in concert with China’s much larger and broader Belt-and-Road initiative. Improved interconnections between the economies in this part of the world will raise all ships. We look forward to a seamless network for the flow of goods, the exchange of best practices and boundless cooperation in the coming years.
Today, trade and tourism between the Philippines and China has grown at a breathtaking pace. Last year, China, including its special administrative regions, Hong Kong and Macau was our biggest trading partner, with a total trade of about 43 billion US dollars, 13 percent higher than in 2017.
We likewise benefit from larger tourist flows from China. Chinese tourists have reached 1.38 million arrivals, 27 percent higher in 2017.
The Philippine economy also benefits from numerous investments by Chinese enterprises. China, including its special administrative regions, Hong Kong and Macau, was our second largest source of investments in the Philippines with net foreign direct investments growing 244 percent to 479 million US dollars in 2018.
The strengthening economic ties between our two countries is best illustrated by the recent substantial progress that we have made in terms of our regional financial cooperation.
Last year, the Philippines’ maiden issue of 1.46 billion renminbi-Panda bonds received a tight spread of 35 basis points. I understand that the BOC [Bank of China] is promising a lower spread than that this year. We were the first ASEAN sovereign to issue these bonds. The issuance was warmly received by the Chinese and other offshore markets with oversubscription hitting about 6.32 times, the all-time largest coverage for any Panda sovereign issuer. The bonds were also rated triple A by China’s Lianhe Credit Rating. With this overwhelming response, the Philippines is likely to return to the Panda market every 12 or 18 months to establish a regular presence. The Panda bond market helps diversify the Philippines’ borrowing portfolio.
Also last year, thirteen local mainstream commercial banks, and a local branch of the Bank of China entered into a memorandum of agreement for the creation of the Philippine Renminbi Trading Community. The volume of business between our two economies justifies establishing this. We anticipate a significant reduction in the cost of doing business across our two economies as a result of this.
The auspicious investment climate of the Philippines is due to the landmark and game-changing policy reforms the Duterte administration has been undertaking assiduously.
Over the past two years, the Philippine government passed numerous reform laws to make doing business easier, eliminate red tape, enable freer trade and raise efficiencies in all sections of the economy. These include the Ease of doing Business Act of 2018 and the creation of the National ID System. Last month, President Duterte signed several laws including an act upgrading our Corporation Code, an act strengthening the Central Bank of the Philippines, a law providing for universal health care, and a law shifting rice trading to a tariff regime. All of these pieces of legislation add up to reinforce our market-enhancing institutions.
The Rice Tariffication Law is a game-changer. It promotes food security by lowering the price of rice for every Filipino family, thereby further easing inflation. The law also promotes competition by opening up the rice market to both imports and domestic production.
Later this year, we hope to see enacted into law the remaining packages of the comprehensive tax reform program. These include the second package which covers the reduction of corporate income tax rates from the current 30 percent to 25 percent, and eventually down to 20 percent; as well as the rationalization of fiscal incentives. To be clear, we are not eliminating fiscal incentives. We want to keep granting incentives for businesses for the right reasons — they should be performance-based, time-bound, specifically targeted and fully transparent. This will encourage truly competitive investments to enter our economy.
As a whole, the tax reform program will bring us a more modern tax system conducive to investments.
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.
Our median age is 24. This is significantly lower than the median ages in the more mature economies of Northeast Asia. A large wave of skilled workers enters the workforce over the next few years. We have invested heavily in our education system to prepare young Filipinos to be globally competitive. Last year, we passed a law granting free tuition fee in state-owned colleges and universities.
Our young, talented workforce is our most important asset. They will help shape our country’s economic emergence. They will benefit most from a more abundant economy. It is for this next generation that we labor hard today.
I invite all our friends here in Beijing and [across] China to take a closer look at how things have improved in the Philippines. Examine the many opportunities for investment.
The Philippines is currently one of the fastest growing economies in Asia. Our resilience has been tested and proven strong. Our country is among the most hospitable economies for business. Our young population of quick learners is eager to work with forward-looking enterprises. Our people are most welcoming to our closest friends in this region.
I invite you to be part of this remarkable economic unfolding.
Thank you and good day.
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