Carlos G. Dominguez
Secretary of Finance
September 4, 2020
Chairperson Eric Yap, members of the House Committee on Appropriations, fellow workers in government: good afternoon.
Thank you for this opportunity to brief the House of Representatives about the national government’s fiscal position, the impact of policy reforms undertaken, and the financial aspect of our comprehensive response to the COVID-19 pandemic.
Before proceeding, allow me to thank our legislators for the passage of the Bayanihan 2 Act. This is a fiscally responsible piece of legislation that allows the country to meet the challenges of economic recovery without imposing a heavy burden on future generations.
The strong fiscal position with which we entered 2020 has made us better prepared than at any point in recent history for difficult times, such as the COVID-19 pandemic that has put lives and livelihoods at serious risk.
The bold tax reform measures passed by Congress, combined with improved tax administration, enabled us to raise revenues totaling 3.14 trillion pesos last year. This is 10 percent higher than the 2018 level and represents a revenue effort of 16.1 percent of GDP—the highest in more than two decades.
Tax collections, which account for 90 percent of total revenues, reached 2.8 trillion pesos in 2019. This is 10 percent higher than the preceding year. The double-digit growth propelled our tax effort to 14.5 percent of GDP in 2019— the best performance in 22 years.
Revenue collections attributable to the TRAIN Law amounted to 130.7 billion pesos last year, exceeding the 2018 level by 91 percent and the 2019 full-year estimate by 21 percent.
Notwithstanding the delay in the passage of the 2019 national budget, our catch-up spending plan in the latter half of that year resulted in total expenditures of 3.8 trillion pesos—11 percent higher than in 2018. This robust spending produced a deficit-to-GDP ratio of 3.4 percent.
Last year, we brought down our debt-to-GDP ratio to a historic low of 39.6 percent. The improvement was a result of prudent cash and debt management backed by steady economic growth.
You will recall, Mr. Chairman, how we were aiming for a 7 percent growth rate for 2020. Unfortunately, the pandemic struck and it has thrown the entire global economy off-balance. We had to impose necessary lockdowns to save lives and protect our communities. We were fully aware that protecting the lives of our people would come at a heavy price.
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.
We thank Congress for swiftly passing the first Bayanihan Act within a week after the imposition of the enhanced community quarantine in March. This cushioned the public from the worst of the initial shock of the lockdowns through emergency cash grants and wage subsidies.
The restriction on movement, however, curtailed economic activities and muted the government’s revenue generation capacity. Given all that has happened in the past months, we expect to collect significantly less revenue than projected at the start of the year, even as we spend more for our people.
In the first seven months of 2020, total revenue collection reached 1.7 trillion pesos. This is 7 percent lower than the same period last year. Eighty-five percent of the revenues came from tax collections, which registered a negative growth of 12 percent.
On the upside, non-tax revenues from January to July of this year posted double-digit growth. This was driven mainly by the Bureau of the Treasury’s cumulative revenue for the seven-month period, which grew by 87 percent year-on-year to 190.9 billion pesos. The growth was largely due to higher dividends and other remittances from our government-owned and –controlled corporations as well as other government service income. Our additional income and savings from prudent debt management will enable us to fund Bayanihan 2.
Lower revenue collection and increased government spending to meet the challenges posed by the pandemic pushed the fiscal deficit to 700.6 billion pesos in the first seven months of the year. This is six times higher compared to the same period in 2019.
We project our revenue collection in 2020 to reach 2.5 trillion pesos or 13.4 percent of GDP. We expect our revenue collection to slightly recover and reach 2.7 trillion pesos in 2021 to 3 trillion pesos in 2022.
Meanwhile, our deficit-to-GDP ratio is projected to reach 9.6 percent at the end of 2020 as the government spends more to beef up our health system and to provide relief to individuals and sectors hardest hit by the pandemic.
The deficit-to-GDP ratio will decline to 8.5 percent in 2021 and 7.2 percent in 2022. We aim to keep our deficit below or at the median of our ASEAN neighbors and credit rating peers so that we can continue to access financing at highly concessional terms on behalf of the Filipino people.
We are bridging the budget gap with additional borrowings.
In the past, emergency spending and urgent borrowing would have been tough to carry out at the concessional levels that creditors have been providing now. The Duterte administration’s prudent approach to fiscal and economic management–an approach that you have bolstered with tax policy reforms–has made us one of the most robust, resilient, and credit-worthy economies in the region.
Our high investment grade 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 commercial markets at lower interest rates and longer repayment periods.
As of the end of August, the Department of Finance has secured a total of 8.83 billion US dollars in financing for our COVID-19 response efforts from our development partners and commercial markets.
Of the total amount, 5.98 billion US dollars is budget support financing from the Asian Development Bank, the World Bank, the Asian Infrastructure Investment Bank, a development agency of France, and the Japan International Cooperation Agency.
Meanwhile, we raised 2.35 billion US dollars from our latest global bond offering that fetched our lowest ever coupon in the US dollar market.
The remaining 496.36 million US dollars is composed of grant and loan financing from our development partners for various COVID-19 specific projects.
Total borrowings for 2020 and 2021 are projected to reach 3 trillion pesos to support priority expenditures necessary for the country’s swift recovery from the COVID-19 crisis and public investments in infrastructure and social services. Borrowings are expected to settle at 2.3 trillion in 2022. Funding will still be predominantly sourced domestically.
The debt-to-GDP ratio is projected to settle at 54 percent this year and reach 58 percent in 2021, and 60 percent in 2022. The projections are still lower when compared to the country’s all-time high debt level of 71.6 percent of GDP in 2004.
Crises in the past could often be remedied with legislation and spending that restores confidence in the economic sector where the crisis started. This is not the case for the COVID-19 pandemic and the economic crisis it has caused. There is no knock-out punch for the situation until a safe and effective vaccine is ready for mass distribution.
This will be a test of fiscal stamina. How a country’s economy performs during COVID-19 and how quickly it can bounce back once the crisis is over will depend on its economic resilience. This is why we have been consistent with our approach: we will do what is necessary, but we will not be wasteful.
The Executive Branch is doing its utmost to help the economy recover at the earliest possible time. We will continue to work with Congress on our economic priority bills to help us bounce back quickly in a sustainable and resilient manner. These measures will make more support available to businesses, workers, and families and will come on line as soon as Congress is able to pass them.
We are pushing for the swift passage of the CREATE bill or Corporate Recovery and Tax Incentives for Enterprises Act. This will provide an outright 5 percentage point reduction in the corporate income tax rate, from 30 to 25 percent, as soon as it is made effective. This will help businesses continue operations and retain jobs. CREATE will also enhance the flexibility of our incentives system so that we can aggressively go after investments that will greatly benefit the Filipino people.
The availability of financing for businesses and the continued strength of our banks will also be critical in our economic recovery.
We are seeking Congressional approval for banks to dispose of non-performing loans and assets through asset management companies. This will be done through the FIST Act or Financial Institutions’ Strategic Transfer.
FIST proposes improved versions of the special purpose vehicles created in the early 2000s in response to the Asian Financial Crisis. We hope to enable banks to offload souring loans and assets, clean up their balance sheets, and extend more credit to more sectors in need. We thank the House for passing this bill on final reading last June 2.
We also support the GUIDE Bill or the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery. This will enable government banks to form a special holding company that will infuse equity, with strict conditions, into strategically important companies facing insolvency rather than illiquidity.
The 2021 budget will provide us with the tools necessary to rebuild our economy and decisively defeat COVID-19.
Likewise, we will continue to be engaged with the legislature in passing the remaining tax reform packages that will allow a simpler, fairer and more efficient tax system while providing additional revenue streams for the government.
Our strategy for recovery rests on sustaining the Build, Build, Build program. Investing in sound infrastructure has the largest multiplier effect to the economy. It creates jobs, fires up consumption, and spurs productive activities.
We will fully recover from this crisis once a safe and effective vaccine becomes available, on the strength of our enduring macroeconomic fundamentals. The swift enactment of CREATE, FIST, GUIDE, and the 2021 budget will serve to accelerate our economic recovery. We should not delay providing urgent and necessary relief to our people.
We are committed to working closely with you on the recovery measures so that these can be enacted in a timely, decisive, and responsible manner.
Be assured, the Duterte administration will not rest until we have prevailed over this extraordinary challenge.
Thank you.
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