Carlos G. Dominguez III
Secretary
Department of Finance
His Excellency Jose Castillo Laurel V, Ambassador of the Philippines to Japan; Mr. Tatsuya Kitamura, Deputy Managing Director of Nikkei Group Asia; Fellow workers in government; distinguished guests; ladies and gentlemen: good afternoon.
First of all, I thank the participants in this online conference for your interest in the Philippines. I hope this meeting will provide you with some insight into the immediate and medium-term prospects of the Philippine economy.
When the pandemic struck, the Philippine government prioritized the health and safety of its people above everything else.
President Duterte decisively imposed a lockdown in March to protect lives, even if it was clear that this would negatively impact the domestic economy. We were fully aware that such a move would impose heavy costs on the government and on our people.
The lockdown gave us time to strengthen our prevention, testing, isolation, and treatment capacities. According to our university researchers, the community quarantines helped us avert an estimated 1.3 to 3.5 million infections.
The Filipino people fully understand the need for restrictions to stem the tide of COVID-19 transmission. In fact, they approve of how our government has been handling this pandemic. In a recent survey conducted by an independent public opinion research firm, President Duterte received a job approval rating of 91 percent.
As we gradually reopen the economy with health interventions, we are beginning to see the green shoots of recovery. The worst seems to be over for the country.
This uptrend is evident in our economic figures. We had a smaller GDP contraction of 11.5 percent in the third quarter from a decline of 16.9 percent in the second quarter of this year. On a quarter-on-quarter basis, the economy grew by 8 percent in the third quarter.
As of the end of October of this year, our gross international reserves hit an all-time high of 104 billion US dollars. Our current buffer is sufficient for 10.3 months’ worth of imports.
Year-to-date, the Philippine peso has appreciated by 5.14 percent against the US dollar, matched only by the Chinese Yuan.
Our trade and manufacturing performance continued to improve for the fifth straight month. This signals rising economic activity.
The Philippines’ total external trade registered a smaller annual decline of 9.2 percent in September from a high of negative 59.5 percent in April, when the lockdown was most severe.
Total export sales even reversed its six-month long decline. It posted a 2.2 percent annual growth in September from a deep contraction of 50 percent in April.
In September, the value of production index continued to drop at a smaller annual rate of 11.9 percent from negative 40 percent in April. The volume, meanwhile, declined by 8.4 percent in September compared to a contraction of 37.5 percent in April.
Net inflows of foreign direct investments, on the other hand, rose for the fourth consecutive month in August by 46.9 percent year-on-year.
For the first nine months of the year, remittances from Filipino overseas workers dropped only by 1.4 percent, below the central bank’s revised forecast of negative 2 percent.
Our total revenue collections exceeded our revised target for the first ten months of the year by 10 percent.
Meanwhile, the unemployment rate in July dropped to 10 percent from 17.7 percent in April.
We expect to see additional improvements in the last quarter of this year as we progressively reopen businesses and mass transportation.
These green shoots indicate that the Philippine economy is on the mend. The path is clearer to a strong bounce back in 2021.
We owe this in large part to President Duterte’s prudent fiscal policy and political will to pursue reforms since the beginning of his term.
Our financial readiness gave us solid footing in our fight against COVID-19.
When President Duterte took office in 2016, he introduced a zero-to-10 point socioeconomic agenda of governance. The President aimed to enact policies that would both grow the economic pie and share it more fairly among our people.
The strategy emphasized the continuation of pro-market macroeconomic policies. It highlighted the need to have a progressive tax reform program and a more transparent government. It also underlined the importance of improving the ease of doing business and enhancing peace and order. Finally, the agenda pushed for increased investments in infrastructure and human capital development.
Over the last four years, the Duterte administration has delivered resoundingly on this program of government.
An important step towards lasting peace in Mindanao was taken in 2018 with the establishment of the Bangsamoro Autonomous Region for Muslim Mindanao. The government has passed numerous game-changing reforms, such as the national ID system; the Ease of Doing Business law; and the Universal Health Care program.
At the beginning of the President’s term in 2016, we had started building up our finances to support our aggressive infrastructure modernization. The Build, Build, Build program has been our main strategy to help Filipinos lift themselves from poverty.
Our infrastructure program is a sound strategy strongly supported by our development partners, especially Japan, through soft project loans and official development assistance.
We passed a series of tax reform measures that improved the equity of our tax system, increased revenue flows, and reduced personal income tax rates for 99 percent of our taxpayers.
As a result, we were able to bring up our revenue effort to 16.1 percent of GDP in 2019 from 15.1 percent in 2015. This was our best performance in more than two decades.
Last year, our spending on infrastructure investments reached 5.4 percent of GDP. This is double the average infrastructure spending to GDP for the past 50 years.
Our financial build-up has served to buttress our defenses against economic shocks.
We also faced COVID-19 with strength on the food security front because we passed the rice tariffication law. It kept food prices affordable and our inflation rate benign during this health emergency.
In October of this year, the inflation rate remained low at 2.5 percent. This is well within our target range of 2 to 4 percent.
Our legislators passed reforms in a timely manner. They gave us the tools needed to fight the pandemic.
These measures, along with our prudent fiscal management policies, have strengthened our fiscal and economic stamina.
In 2019, our debt-to-GDP ratio was at a historic low of 39.6 percent from 42.7 percent in 2015.
In the same year, we posted a 20.2 percent external debt-to-Gross National Income ratio from 22.7 percent in 2015. The Philippines has the lowest external debt position among the ASEAN-5 countries.
Last year, we also achieved the lowest recorded poverty incidence at 16.7 percent from 23.5 percent when the President took over.
By the end of 2019, unemployment significantly dropped to 4.5 percent from 6.3 percent in 2015. Underemployment also fell from 18.5 percent in 2015 to 13 percent last year.
In other words, before the pandemic struck, we had realized better economic outcomes for our people. Our economy was ready to roar.
Last year, we also received a BBB plus credit rating—the highest in our country’s history. It has endured a global tide of downgrades and has been affirmed at the same investment grade. The Japan Credit Rating Agency even upgraded us from BBB plus to A minus in June of this year.
Overall, our strong financial position gave us enough fiscal space to reallocate budget items to fight the pandemic.
One week after the imposition of the lockdown in March, our Congress swiftly passed a COVID relief package called Bayanihan One. This cushioned the public from the initial economic shock of the lockdown.
We urgently delivered an emergency cash grant to 18 million low-income families for two months. We distributed wage subsidies to more than 3 million small business workers, also for two months. These interventions cost us about 5 billion US dollars. This is the largest social protection program in Philippine history.
Fighting the pandemic is costly, as you very well know. Fortunately, the Philippines quickly accessed financing from our development partners and the commercial markets at very low rates, tight spreads, and longer repayment periods. The people and Government of Japan have been very generous at providing much-needed support for the Philippines. With our enduring financial strength, we will meet these obligations.
This year, we expect to collect less in taxes even as we increase spending in healthcare and relief measures. The borrowings we have secured at concessional rates will help cover our revenue shortfall.
No one really knows how long this public health crisis will persist. The best case scenario is a widespread availability of a safe and effective vaccine by next year. Even then, we are not sure how quickly this will contain infections.
The public health effort will be a marathon. There is no magic wand to wave away this virus. We must be prepared for a long battle.
We appreciate the importance of continuing our fiscal discipline to ensure the resilience of our economy.
Despite the many populist excuses to blow up the deficit and bury future generations in debt, the Philippines has chosen the path of fiscal prudence.
Our goal is to land our deficit-to-GDP ratio in the middle range of our ASEAN neighbors and credit rating peers around the world. This conservative approach will allow us to continue accessing the financing we need at favorable terms for the Filipino people.
We are thankful that Congress adhered to our prudent approach by passing a fiscally responsible economic stimulus package called Bayanihan Two.
Bayanihan Two puts our health response front and center. We will purchase safe and effective vaccines when they become available.
In addition, Bayanihan Two makes possible several streams of support for individuals and enterprises to restart their operations.
We are infusing more capital into government financial institutions to dramatically expand their lending to micro, small and medium enterprises. This will have a large multiplier effect in economic activity.
Every peso infused into our government financial institutions will generate around 10 times its value in credit. The additional capital will be used to protect the productive parts of our economy.
The increased lending capacity will also enable our government banks to serve as wholesale banks and rediscounting agents for rural banks and microfinance institutions.
The Duterte administration is also maintaining its commitment to ramp up infrastructure spending. With its high multiplier effect, the Build, Build, Build program will play a pivotal role in our economic recovery.
As we continue to battle COVID-19, it is important to rebuild our economy. We are working closely with our legislators for the complete passage of our key economic recovery measures.
The Corporate Recovery and Tax Incentives for Enterprises or CREATE bill was approved by the Senate.
The bill aims to provide an outright ten percentage points cut, from 30 percent to 20 percent, in corporate income tax rates of domestic corporations with taxable income equivalent to 5 million pesos or about 104 thousand US dollars and below. Those earning above it will be provided a 5-percentage point reduction.
Meanwhile, foreign corporations would have a fixed reduced tax rate at 25 percent.
This will be the biggest stimulus package ever for businesses. It will benefit mostly MSMEs that comprise more than 99 percent of enterprises and employ over 60 percent of Filipino workers.
CREATE will also enhance the flexibility of our incentives system so that we can proactively attract investments that will bring exceptional benefits to the Filipino people. It will also end the uncertainty that has kept investors from finalizing investment decisions.
Our legislators have also passed a measure allowing banks to dispose of non-performing loans and assets through asset management companies. This bill is an improved version 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 sectors in need.
We support a legislative measure that will enable government banks to form a special holding company. That institution will infuse equity, with strict conditions, into strategically important companies facing solvency issues. We intend to invite multilateral agencies as well as foreign and domestic investment companies to participate in this joint venture.
We also seek to provide greater support to agriculture by increasing credit access to the entire agricultural value chain.
The most important and largest stimulus measure is the 2021 national budget, which demonstrates our sustained commitment to public spending towards economic recovery.
While strengthening our health system, we intend to continue finding more ways to revive the domestic economy. We are turning this crisis into an opportunity to boost the competitiveness of our manufacturing and agriculture sectors. We are also accelerating our move to a digital economy.
Recent events have shown that the climate crisis remains a formidable threat to the country—one that can undermine our efforts towards gradual recovery. We are therefore investing heavily in disaster preparedness and response. We see many areas of cooperation between Japan and the Philippines on these initiatives.
As we navigate very difficult circumstances, we intend to maintain fiscal discipline and make our financial sector more inclusive. We are introducing additional reforms that will help us consolidate a pro-business environment.
We remain committed to pursuing legislative approval of the last two packages of our tax reform program. These include improvements in our property valuation system and in the taxation of passive income and financial intermediaries.
We are also considering measures to fairly tax the digital economy, a sector that we expect to grow dramatically over the coming years.
We will push for the passage of complementary bills that will open up the country to more direct investments from abroad.
Next year, we expect our economy to post a strong rebound. The challenges are immense, but we are determined to build back a better economy that our people deserve.
We hope that the Philippines’ strong fundamentals, fiscal stamina, and effective governance will continue to make us a promising investment destination and a growing market for Japanese investors.
Thank you!
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