Philippine Economic Briefing
Tokyo, Japan
June 19, 2018
His Excellency Koji Haneda, Ambassador of Japan to the Republic of the Philippines; His Excellency Jose Laurel, Ambassador of the Republic of the Philippines to Japan; Dr. Yuri Sato from JETRO; Mr. Shinya Ejima from JICA; my fellow cabinet members; representatives from our partner banks: Mitsubishi UFJ Financial Group, Nomura, Mizuho, Daiwa and Sumitomo Mitsui Banking Corporation; friends in the private sector and business community; distinguished guests; ladies and gentlemen:
Thank you for making time to attend this briefing.
Through this economic briefing, we hope to inform you of the progress of the work to sustain a faster pace of economic expansion. We will try to deliver an accurate picture of the reforms we have accomplished and the projects we have completed.
In the first quarter of this year, the Philippine economy grew by 6.8 percent. We hope to achieve a faster rate for the rest of the year to bring us closer to the 7 percent target that we set.
Our first quarter growth figure caps 77 consecutive quarters of sustained economic expansion. Over the last 10 quarters, our growth rate was 6.5 percent or better. We are clearly building a strong economic momentum.
The biggest contributors to our GDP expansion are manufacturing, growing by 8 percent, and industry, growing by 7.9 percent. The sector with the highest growth rate has been construction, growing at 9.3 percent. The dynamism of these sectors has also been due to more robust investment flows.
Last December, the Philippine Congress enacted the first package of our comprehensive tax reform program. We are pursuing this reform to make our tax system simpler, fairer and more efficient.
While benefitting 99 percent of Filipinos through a reduction in personal income tax rates, revenues in the first quarter exceeded expectations when this tax reform law took effect at the start of the year. Our tax effort rose from 13.4 percent of GDP to 14.3 percent. This is the highest first quarter tax effort we have ever achieved in the past 25 years. We are ready to match the tax effort of the best-managed economies in the region.
To give you the latest preliminary figures, from January to May of this year, the national government revenues rose by 20 percent year-on-year. Tax revenues grew by 19 percent, and collections of the Bureau of Internal Revenue improved by 16 percent, and the Bureau of Customs’ collections grew by 31 percent over the same period last year. We credit both the tax reform and improvements in revenue administration for this dramatic increase.
The impressive increase in revenues, as a result of the effective implementation of the tax reform law, enabled the government to sustain its aggressive spending policy without breaching the programmed budget deficit.
We hope to consolidate this trend with the enactment of the second tax reform package. Among its salient features are the modernization of fiscal incentives extended to certain businesses, reduction in corporate income tax rates to match regional norms and other measures that will simplify the conduct of business in our economy.
The tax reform will help us efficiently fund the ambitious infrastructure program President Rodrigo Duterte has embarked on to enable a high rate of economic expansion and a more inclusive pattern of development.
Over the next five years, we will invest around 170 billion US dollars for this administration’s infrastructure modernization program known as Build, Build, Build. This year, 25.4 percent of the national budget has been allocated to infrastructure spending. This is equivalent to 6.3 percent of GDP, more than double the average rate of public investments during the past thirty years. By 2022, we will increase infrastructure investments to 7.3 percent of GDP. Much of this will go to the 75 strategic projects we have identified that will have a lasting impact on our economic performance. Of these, 35 projects have passed the approval process and are now shovel-ready.
In addition to our budgetary allocations, we are using official development assistance to more efficiently fund the projects and to complete them at the soonest possible time.
At the moment, the Philippine economy is experiencing elevated inflation rates. This is due to the inflationary trend normal for a high-growth economy. That trend has been exacerbated by a sharp rise in international oil prices and an adjustment in the peso’s exchange rate due to the increases in interest rates in the US. Economists assure us that the inflation rate is manageable and it should begin deescalating towards the second half of the year. We do not expect the elevated inflation rate to become permanent.
With our prudent fiscal management program, our manageable debt service load and the more robust revenues we now enjoy, we expect an improvement in our sovereign credit ratings. That will further improve our ability to finance the growth well into the medium term.
The tight spreads of our bond issuances indicate confidence in the fiscal and debt management of the Duterte administration. When we issued a 2 billion US dollars 10-year global bonds last January, we received a spreadof 37.8 basis points over the US Treasuries. This is lower than the 67 basis points we received in the issuance in 2017, and much lower than the spread of the last Aquino administration bond issuance of 107 basis points.
Last March, when we floated our 1.46 billion renminbi Panda bonds, China’s Lianhe Credit Rating Company rated them triple A. As a result, the Panda bonds fetched a spread of only 35 basis points over the benchmark. This year, we are also planning to issue around 1 billion US dollars worth of Samurai bonds.
In 2017, foreign businessmen also brought a record amount of investments into the country. The foreign direct investment (FDI) inflows reached a record high of 10 billion US dollars, up 21.5 percent from the previous year.
For the first quarter of 2018, FDI totaled 2.2 billion US dollars in net inflows, an increase of 43.5 percent compared to the same period last year. This is indicative of the broader and sustained increase of investment inflows into our economy.
The higher volume of foreign direct investments supports our efforts to shift our economy to investments-led growth. By achieving this shift, we aspire to provide meaningful employment to the young, well-trained Filipinos entering the workforce in the coming years. As of April of this year, the Philippines’ unemployment rate has dropped to 5.5 percent, down 0.2 percent from the same period last year. About 625,000 new jobs were created.
We understand that our young workforce will be our economy’s comparative advantage long into the future. This young and talented workforce produces complementarities with other economies in the region, particularly Japan.
Reforms in other areas also support our economic strategy. We are reviewing our foreign investments negative list to open more areas for joint and direct investments. We are constantly reviewing our procedures to reduce red tape and shorten approval time for business start-ups. In fact, just a few weeks ago, President Duterte signed into law the Ease of Doing Business Act of 2018. The new law creates a unified business application form to make it easier to establish or renew business licenses in the Philippines. It features the establishment of a central business portal that will receive all business applications and a zero-contact policy to reduce corruption.
We have also looked into the possibilities opened up for expanded e-governance and we are enthusiastic about them. We hope to incorporate as much of the new digital technologies that many economies are utilizing now for the administrative reforms we are undertaking. This would require fresh investments and opening up the market for a third player in our telecommunications industry.
President Duterte’s constant focus on fighting corruption and criminality reflects in the declining crime incidence. Overall, crime volume decreased by 21.86 percent since the start of the administration. Better training and management of our law enforcement agencies help in ensuring a safer environment for the economy to grow. The President believes a more law-abiding society is indispensable to achieving economic growth.
Our measure of success is achieving zero absolute poverty rates and becoming a high-income society by 2040. All our reforms are geared towards that long-term goal.
The Philippines’ relationship with Japan has become closer and stronger in the past few years as the Philippine economy emerges to join the ranks of Asia’s tiger economies.
To date, Japan is the Philippines’ major source of official development assistance, our main source of infrastructure support from the period of reconstruction. Japan has pledged to the Philippines 1 Trillion yen in assistance. Of this amount, approximately 137.3 Billion yen has already been formalized through loan agreements and grants.
Since convening for the first time in March 2017 in Tokyo, the Philippines-Japan Joint Committee on Infrastructure Development and Economic Cooperation has made substantial progress in terms of expediting the approval processes on both sides to facilitate Japanese financing of ourbig-ticket infrastructure projects. Specifically, three (3) loans for infrastructure projects have recently been signed with the Japan International Cooperation Agency (JICA).
These projects are the Cavite Industrial Area Flood Risk Management Project that will control and mitigate flooding in several areas in Cavite that host economic zones and residential communities; the Arterial Road Bypass Project Phase III which will ease traffic congestion in Bulacan and spur economic growth in the province’s rural areas; and the first phase of the Metro Manila Subway Project, the Philippines’ first-ever underground rail system. With the generous support of Japan, what was once considered a dream subway has now become a reality.
As we respond to the immediate needs for the relief and rehabilitation of Marawi City in Mindanao, we also thank Japan for its immediate response. Just recently, we signed with JICA the 2 billion-yen grant agreement to support the ongoing efforts for the reconstruction and rehabilitation of the devastated city of Marawi. This grant is the fourth aid package provided by Japan to the Philippines. Japan has so far provided us an estimated 36 million US dollars in assistance for Marawi’s relief and rehabilitation operations.
Aside from the development assistance, Japan has been the Philippines’ second major trading partner. In 2017, our total bilateral trade with Japan amounted to 20.8 billion US dollars.
Meanwhile, Japan also has been our 4th largest source of tourists for the past three years. In 2017, about 584,000 Japanese visited the Philippines. Last year’s arrivals grew by 9 percent over the previous year. We hope that this trend continues well into the future.
As we modernize our infrastructure and accelerate our growth, we look forward to increased investment flows from Japanese companies. We are impressed with the commitment to excellence that imbues your corporate culture. We hope to benefit from the transfers of technology that invariably tracks investment flows.
On our part, we commit to further improve the ease of doing business, respect the sanctity of contracts, and promote a more conducive climate for investments. We look forward to forging new partnerships with enterprises throughout the region. It is, after all, a shared future we are crafting today.
We thank Japan, and especially its taxpayers, for continuing to support us in our economic emergence.
Thank you and good day to you all.
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