Keynote Speech
Philippine Economic Briefing Manila
September 18, 2018
(Greetings)
Thank you for making time for this briefing. We are trying to reach out to as wide a cross-section of economists and business analysts to gain feedback on our growth performance and the reform policies intended to sustain it.
Our growth performance for the first semester of this year was below expectation, hampered by elevated inflation and supply issues. Like the rest of economies in the world, the Philippines is not exempted from challenges. But what differentiates our economy from many is the decisiveness, the extent, and the pace by which we are implementing policy and infrastructure reforms. We remain one of the best performing economies in the region and our outlook is strong.
We also remain on course towards our goals for the medium term and beyond. These goals are: to reduce poverty incidence from 21.6 percent in 2015 to just 14 percent by 2022, to make our growth more inclusive by addressing the infrastructure deficiencies that stymie productivity and to induce more investments to open up more jobs for the next generation of Filipinos.
The more remarkable aspect of our growth performance this year is that it is increasingly fueled by investments. As a share of GDP, capital formation, which is the most comprehensive measure of investments, rose to 27.4percent during the first half of 2018 compared to the 25.4 percent in the same period last year. This is remarkably higher than the 21.3 percent average share of investments to GDP for the past 16 semesters.
With improvements in the ease of doing business, investments are flowing into the Philippine economy. Net foreign direct investments rose by 42.4 percent to 5.8 billion US dollars in the first half of 2018 from 4 billion US dollars from the same period of last year. This reflects stronger investor confidence in the Duterte administration’s decisiveness in pushing ahead with its economic reform agenda. This also dispels concerns that our tax reform is scaring investors away.
The adept management of our fiscal affairs has also been recognized both by way of improved credit rating outlooks as well as by the tight spreads given the foreign denominated bonds we have floated in the last few months.
Confidence in our fiscal management is reinforced by the successful passage into law of our first tax reform package. This is the first time we are reforming our tax policies without being compelled to do so by some crisis or by some creditors.
The new tax law produced immediate results, with our main revenue agencies exceeding targets significantly. Total revenue collection for the first seven months of this year was 21 percent higher than the same period last year. The healthy revenue collections help us make the necessary economic investments to sustain our growth momentum long into the future.
Meanwhile, 99 percent of individual taxpayers also now enjoy 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.
Apart from improved revenue collection, the Department of Finance also made history in 2017 by collecting from a cigarette manufacturer a total of 600 million US Dollars for its non-payment of excise taxes and use of counterfeit tax stamps on its cigarette packs. This is the biggest sum on record raised by the government from a tax settlement. This was the result of a heightened joint campaign by our revenue agencies against tax cheats. At present, this has increased our collection of excise taxes by an average of 50 million US dollars a month.
Last year, I sent a team to Mexico to study its tax on sweetened beverages. As a result of the team’s consultation, we were able to pass a sweetened beverage tax law. At present, we are now collecting almost 2 Million US dollars a day on excise taxes from these products.
These excise taxes are measures meant to discourage the habit of smoking and encourage consumption of healthier products, while generating incremental revenues for our health programs and services.
This month, the House of Representatives overwhelmingly approved on third reading the second package of the tax reform program. We hope to win the support of the Senate for the remaining packages of reform measures that will bring our revenue system well into the 21st century.
The most important elements of the succeeding tax reform packages are the reduction of corporate income tax rates and the rationalization of our fiscal incentives system.
The reduction of the corporate income tax rate will bring our tax regime closer to the regional average. This will help us attract investments to fuel our economic growth. Even more important, the reduction will benefit tens of thousands of small and medium enterprises that employ the biggest number of Filipinos.
The rationalization of fiscal incentives, in turn, will create a level playing field for our enterprises and attract new players to compete. The accretion of so many incentive schemes through the uncoordinated action of legislators and economic zones has produced chaos. Outside the tax code, we have 123 laws that grant investment incentives and 192 laws that grant non-investment incentives. On top of that, we have 14 investment promotions agencies all authorized by law to grant tax incentives. While other countries give incentives for a limited period, the tax incentives handed out by law in the Philippines is in lieu of all taxes, both national and local, and apply forever, even if the firm does not produce net positive benefits for our country. In 2015 alone, some 5.6 billion US dollars in incentives were given out. On top of this, some 800 million US dollars was possibly lost due to transfer pricing abuse that arise from the complicated incentives regime.
We are seeking the rationalization of incentives to encourage enterprises to hire more workers, improve their competitiveness and deliver on the social benefits for which the incentives were granted in the first place. In the end, only incentives that are performance-based, targeted, time-bound, and transparent will remain.
Other packages of our tax reform cover reforms in property valuation to make the system more equitable, efficient and transparent, as well as the rationalization of capital income taxation to address the multiple rates and different tax treatments and exemptions on capital income and other financial instruments. For instance, our reform proposes to reduce the number of capital income and financial tax rates from 80 to just 42. Doing so greatly simplifies the system and would help ensure that financial products are chosen due to its riskiness and reward, and not by the tax treatment that depends on so many factors such as currency, maturity, and type of taxpayer.
On the expenditure side, the national government spending also increased by 23 percent in the first seven months of this year. This represents improved capacity to execute priority projects.
Meanwhile, the deficit-to-GDP ratio for the first half of this year amounted to 2.34 percent. We have planned a deficit of 3 percent of GDP to 2022 to allow enough fiscal space to fund our economic investments.
Our Build, Build, Build program is gathering momentum. From January to July this year, infrastructure spending increased by 47 percent compared to the same period last year. Infrastructure investments is a crucial stimulus for the expansion of our domestic economy and we plan to raise this to 7 percent of GDP by 2022. This compares dramatically with the average 2.6 percent of GDP in infrastructure investments over the last 50 years.
We are fortunate to have the full support from our friends in the region. Both Japan and China have committed about 9 billion US dollars each in investments and official development assistance (ODA), while South Korea has pledged up to 1 billion US dollars in ODA under President Rodrigo Duterte’s term. These commitments complement the support we are getting from multilateral development institutions.
The magnitude of the ODA we are receiving should be credited to President Duterte’s rebalancing of our foreign policy. With strong ODA inflows, we were able to shift to hybrid Public Private Partnership (PPP) models to hasten the delivery of major infrastructure projects.
The traditional PPP model was too tedious, complex and prone to unwarranted delays. The Cavite-Laguna Expressway (Calax) project for instance took all of 50 months to conceptualize and begin implementation. In contrast, the upgrade of the Clark International Airport was approved in the first 18 months of the Duterte administration, and implementation started within that period. Some credit will have to be given to the political will to get things done.
High-level meetings among government agencies and with ODA partners are also held regularly to ensure that there is alignment between government priorities and assistance from development partners, as well as ensuring that projects are on track.
The Metro Manila Subway Project is, by far, the largest single infrastructure project which we will be undertaking. It is also the recipient of the largest ODA we have ever received from Japan. The project was presented to the Japanese government for financing in September 2017 and after just six months, the loan agreement was signed between the two parties. This demonstrates our shared goal with our ODA partners to coordinate and work closely to ensure that people get to benefit from these projects at the soonest possible time.
This is also one of the softest loans we have ever negotiated. The 104.53 billion yen or 935 million US dollar-loan agreement for the first tranche carries an interest rate of 10 basis points per annum for non-consulting services and 1 basis point per annum for consulting services. This will be payable in 40 years, including a 12-year grace period.
Those who say that we are walking into a debt trap ought to look more closely at the actual terms of the loans we contract.
Our economic build-up is supported by a sound financing strategy. Our financing mix continues to be inclined towards the domestic market to avoid vulnerability from external markets.
The debt-to-GDP metric is the more usable ratio to appreciate our public debt. Notwithstanding increased borrowing to finance investments, our debt-to-GDP ratio is expected to fall from 42 percent in 2017 to 38 percent by 2022.
At the moment, the Philippine economy is experiencing elevated inflation rates. We have determined that the sources of inflationary pressure have been the spike in food prices, sharp rise in international oil prices and an adjustment in the peso’s exchange rate.
While part of the problem in the food prices may be attributed to seasonal factors, we do face supply problems with some basic commodities. Our immediate goal is to stabilize supply, which will, in turn, stabilize prices in the retail market. The measures include: ample importation of rice; expediting procedures and removal of administrative constraints and non-tariff barriers for other food items such as fish, sugar and meat; and encouraging barter trade in the south where rice stocks have tightened recently.
This package of measures is expected to mitigate inflationary pressures in the immediate term. Over the medium term, we expect to prevent recurrence of rice supply bottlenecks by shifting the commodity to a tariff regime away from quantitative restrictions. This requires urgent legislative action.
We share the view of many business and investment analysts that inflation should have peaked around the third quarter and should begin moderating thereafter.
In sum, the economy is doing well. The policy reform measures mentioned above are complemented by other pieces of legislation that establish a national identification system and the Ease of Doing Business Act of 2018. Over the next few years, we also expect continued liberalization of foreign ownership in business. A more liberal Foreign Investments Negative List has just been forwarded to President Duterte for his consideration. All these combine to transform our growth towards one that is investments-led.
With these reforms and with the infrastructure program, we expect our economy to create more jobs, improve productivity in all sectors and remove roadblocks to clear the way for more rapid economic expansion.
The role played here by decisive leadership cannot be understated. The road towards sustainable and inclusive growth is now open.
Thank you and good day.
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