First of all, I want to congratulate you for choosing your theme which is ‘Deep Dive in the Philippines.’ I was very happy to learn from our Secretary of Tourism, Berna Puyat, that we have been named as one of the best diving spots in the world recently. As a former scuba diver, I can confirm that.
Your Excellency Sung Kim, Ambassador of the United States to the Philippines; Mr. Bing and Kathy de Guzman, the hosts of this event; distinguished members of the Chief Executives Organization, ladies and gentlemen:
First of all, let me welcome the participants to this event. This is a good time to visit the Philippines. The climate, as Sung just mentioned earlier, is less severe and the mood today is as upbeat as it has ever been.
I am sure Bing and Kathy have spared no effort to make your stay comfortable and your participation worthwhile. I hope they have not packed your schedule too tightly. There is much to enjoy in this country.
You will also find this country an oasis of optimism in a world burdened with trade wars and uncertainties. While most of the mature economies are expected to grow slower this year, the Philippines stands staunchly as a growth leader in this dynamic region of the world. Against the headwinds of a broad slowdown in the global economy, we expect our economy to grow at around 6 to 7 percent this year.
The country is strong and ready to soar. In the third quarter of this year, our GDP grew by 6.2 percent. Our economy grew at an average of 6.4 percent during the first 13 quarters of the Duterte administration.
Next year, we expect to graduate to upper-middle-income country status way ahead of schedule.
While some of our closest neighbors in this part of the world grapple with aging populations, the Philippines has a very young workforce. We have invested a lot in preparing our youth for the competitive world that lies ahead. There is great talent in our market ready to be unleashed.
Earlier this year, our sovereign credit rating was raised to BBB plus from a BBB grade by Standard and Poor’s, putting the Philippines above countries like Italy and Portugal. That is a tribute to the fiscal discipline our government has been exercising. Our financial system is rapidly modernizing towards greater inclusivity.
Moreover, our international reserves rose to a record level of 85.7 billion US dollars by the end of October 2019, the equivalent of seven-and-a-half months’ worth of imports. This is actually higher than our total debt, our total debt is 81 billion dollars. This is significantly above the benchmark and should keep our currency stable. The strong remittance inflows from our expatriate workforce also sustain domestic consumer demand. This is a source of strength for our economy.
We are currently in the midst of a broad construction boom. A low interest rate environment, a stable currency, and demand for housing and office space sustain this boom. Government has embarked on an ambitious infrastructure program for our logistical system to be at par with our most dynamic neighbors.
The Build, Build, Build program involves 100 highly strategic infrastructure projects that cover transport, mobility, power, water, information and communications technology, and urban development and renewal. It also involves thousands of connectivity and logistics improvements all over the country that will raise productivity dramatically. The program in turn, creates a multiplier effect on domestic economic activity, ensuring continued rapid expansion.
Public spending is at the highest it has ever been. Last year, public spending on infrastructure rose above 5 percent of GDP — the highest it has ever been and double the average spending as a percentage of GDP for the last 50 years. Over the next few years, we expect to reach 7 percent of GDP.
The centerpiece of the infrastructure program, thus far, is the New Clark City in Central Luzon—about a hundred kilometers north of Metro Manila. This has attracted new industries and promises to be a center of modern enterprise for the region. Later this month, we will be hosting the Southeast Asian Games in this city with the completion of our world class sports complex. Here’s a preview of the world class sports complex.
This was completed on time and on budget.
This area is also supported by the new and modern Clark International Airport. The Airport is now 87 percent complete and is targeted to be operational by mid-2020. Here’s a sneak preview of our new international airport in Clark City.
Incidentally, this used to be the home of the US Airforce.
The Build, Build, Build program also includes the most ambitious single infrastructure project yet–the 36-kilometer Metro Manila Subway Phase One which broke ground last February. This is the country’s first ever underground train that will commence from Mindanao Avenue in the north of the city—in Quezon City, to the Ninoy Aquino International Airport where you all landed.
On the island of Mindanao, we have a 100-kilometer Mindanao Railway Project Phase One that will connect Tagum, Davao and Digos. This will help dramatically enhance regional connectivity, reduce the cost of moving goods and people across distances and spur economic activity for this part of the country. The project has been approved by the Investment Coordination Committee and procurement of the contractor is about to begin.
By 2022, the Duterte administration expects to complete 1,900 kilometers of rail lines both in Luzon and Mindanao. For your information, we only have 77-kilometers of operational railways at the moment and they are all located in Luzon.
Let me describe how we consider financing our projects. First, improved economic investments are made possible by the dramatic reforms in our tax system. The reforms already instituted as well as those in the legislative pipeline ensure recurrent revenues to fund our development projects. In fact, we fund our projects through ourselves first—we figure we will fund about 20 percent of our project cost by our own funds and borrow the rest. This is the source of confidence in our ability to fund modernization and drastically bring down poverty incidence in the medium term. It helps that we have a leadership characterized by decisiveness and strong political will. We estimate, as I said, that we can finance 20 percent of our infrastructure projects through improved revenue flows from the tax reform.
The first package of this program, involving the reduction in personal income tax rate offset by increased excise taxes worked wonders for our economy. On the one hand, it delivered to 99 percent of our taxpayers the equivalent of one 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.
Official figures show that revenues are very robust, growing at 10.25 percent for the first nine months of the year compared to the same period of last year. Tax collection is also on the rise, growing by 10.3 percent. Meanwhile, revenues from the first package of tax reform are up by 65 percent in the first half of this year.
Apart from the increase in our revenues, we have been relentless in improving our tax administration. In 2017, one year after we took office, we cleaned up the cigarette business. We collected the highest amount of tax settlement from a single company totaling 600 million US dollars due to its non-payment of the correct taxes, and we forced the shareholders to sell their business to another company. We had the business sold to a foreign company, and now that company pays on the same volume of cigarettes about 50 million US dollars more per month in the excise taxes.
Secondly, the Build, Build, Build program is supported by our development partners in the region as well as the multilateral financial institutions. It has become a showcase of coordinated international cooperation. For instance, both Japan and China have committed 9 billion US dollars in official development assistance over the next few years to fund our infrastructure program. South Korea has committed an additional 1 billion US dollars.
Since the start of our administration, the Department of Finance has sealed 17 highly concessional loan agreements with our bilateral and multilateral partners for big-ticket infrastructure projects.
Third is through the Public-Private Partnerships provided that PPP projects promote public interest by avoiding contracts that are disadvantageous to the government and a burden to the people with very high fees. In other words, PPP must stand for PPPP–Public-Private Partnerships for the PEOPLE.
The vibrant participation so far from international and local companies in our Build, Build, Build program is proof that they have trust in the Duterte administration and in the transparent, fair and corruption-free bidding process implemented by the government.
The fourth approach is through the commercial markets. We have been successful in diversifying our bond issuances with tight spreads as low as 32 basis points over the benchmark. The country has tighter spreads relative to other observed countries such as Indonesia, Mexico and Colombia across currencies.
For instance, our return to the Euro market after more than a decade proved to be successful as we priced the lowest-ever Euro yield for a sovereign issuer outside the European Economic Area. We likewise returned to the Samurai market last year and this year after an eight-year break. We are now also in the Panda market. We continue to monitor these various markets for opportunities to raise funding for our Build, Build, Build program.
Apart from the tax reform and massive infrastructure program, the Duterte administration has also vigorously pursued governance reforms intently over the last three years. These reforms cut red tape, brought down the volume of corruption and modernized bureaucratic procedures. In the latest Ease of Doing Business Report issued last month, the Philippines jumped 29 places. That best sums up the results of the governance reforms we have undertaken.
We are also the only administration that has actually succeeded in passing the Rice Tariffication Law after around three decades of failed attempts. 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, and 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.
Just to put some numbers in our rice tariffication program, on the average we used to spend about 150 milion dollars a year supporting our — supporting the National Food Authority which was supposed to keep the price of palay, of paddy rice, high to the farmers and low to the consumers. That costs us around 150 million US dollars a year. By tariffication, we no longer control the import of rice and it’s now a free market, and we have actually collected 300 million US dollars in tariffs which we are going to use to support the farming sector. Now that is a 450 million-dollar swing in our finances.
In addition, we are also going to pursue economic reforms, such as amendments to the Public Service Act, the Foreign Investments Act, and the Retail Trade to further liberalize the economy.
The policy and administrative reforms undertaken over the past three years under the leadership of President Rodrigo Duterte has reflected in the increased investment inflows into our economy. Over the past two years, the Philippine economy has attracted foreign direct investments of 20 billion US dollars. For two consecutive years, our FDI averaged 10 billion US dollars a year, double the inflows that we received in 2015.
We look forward to more investments as the means to make our growth more inclusive. The reforms are broadly supported, ensuring both continuity and stability deep into the future.
Package two of our tax reform program will encourage even more competitive investments to enter our economy. The reduction in corporate income tax rate from 30 percent down to 20 percent over time will bring our tax regime closer to the regional averages.
The rationalization of fiscal incentives, on the other hand, will create a level playing field for our enterprises and attract new players to compete. To be clear, we are not eliminating fiscal incentives. We want to keep granting incentives for the right reasons and for the right investments. We want these incentives to be performance-based, time-bound, specifically targeted and fully transparent. We want to adhere to standards very similar to those of other countries.
In Singapore for instance, while the maximum years to avail of incentives is 40 years, incentives are given initially for five years and are renewed for another five years at a time only after a thorough review of performance, based on the quantitative and qualitative criteria. Under its investment regulation, the firm must regularly submit progress reports and any breach of the performance contract is subjected to revocation of the incentive. This is what time-bound and performance-based means.
Thailand has a good system to target industries by giving more tax incentives and longer availment of incentives to high priority sectors that are pre-identified in its investment priority plan. It also publishes the names of recipients in its Board of Investment website. This is what targeted and transparent mean.
One of our key reforms is to strengthen the governance of incentives so that they are more judiciously given and in line with national priorities. We will do this by expanding the mandate of the Fiscal Incentives Review Board, which is an existing body that I chair and that currently grants tax incentives to government entities.
Under our proposed reform, the mandate of this board will be expanded to grant incentives to all firms, as well as to oversee the 13 investment promotion agencies in the country. This oversight function is badly needed today because all 13 investment promotion agencies grant incentives left and right and the national government has little or no say in the approval process.
The FIRB reform is similar to what Malaysia has done and is considered a best practice. In Malaysia, there are 32 investment promotion agencies representing various sectors, states, and regions, but approval of incentives is centralized in the National Committee on Investment and that is co-chaired by the minister of finance and the minister of international trade and industry. Like the Philippine’s FIRB, the National Committee on Investment has always existed, but Malaysia recently reformed it to ensure that all incentive approval come under this group. So you see, we are not alone in this effort to rationalize the grant of incentives and to make them more accountable.
The succeeding packages of our comprehensive tax reform program are in the legislative pipeline. We expect most of them to become law either later this year or early next year.
Our people are beginning to reap the rewards of a well-managed economy. Unemployment is at its lowest in 40 years. The drop in unemployment rate goes hand-in-hand with a reduction in our poverty incidence. From 27.6 percent in the first half of 2015, poverty incidence has significantly declined to 21 percent in the first half of 2018. The economic team and the Build, Build, Build team stand by our commitment and ultimate goal to bring down poverty incidence to just 14 percent by 2022, helping one million Filipinos lift themselves from poverty every year.
Into the foreseeable future, we are confident of sustaining a 6 percent or better growth rate in our GDP despite the headwinds buffeting the global economy.
The massive infrastructure modernization program we are undertaking will open many investment opportunities and create numerous jobs for our people. It will support the diversification of our economic activities in the domestic economy and improve our competitiveness.
You might wish, in the course of your stay here, to look at opportunities for companies you lead to participate in what is one of Asia’s powerhouse economies. There are many areas where joint ventures and business partnerships will be fruitful. Today, it is much easier for joint ventures to quickly commence because of our comprehensive effort to improve the ease of doing business in our economy.
Meanwhile, I wish you a productive and enjoyable conference. Thank you very much.
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