The Duterte administration’s prudent fiscal strategy has allowed the Philippines to maintain its high creditworthiness, which, in turn, enabled it to access funds for its coronavirus disease 2019 (COVID-19) response from development partners and the commercial markets at the least possible cost, Finance Secretary Carlos Dominguez III said Wednesday.
Dominguez said the Philippines was able to secure these generous rates and longer terms from multilateral lenders and the global bond market at a time when governments across the globe have been competing for scarce financing to keep their economies afloat amid the health and economic crisis triggered by the COVID-19 pandemic.
“When the government can access debt at least cost, so will our private enterprises in need of assistance. The ability to refinance at lower cost will help us recover more quickly and more sustainably (from the crisis),” said Dominguez during the Kapihan sa Manila Bay webinar held this morning via Zoom.
Dominguez said the government’s ability to access highly concessional borrowing rates during this emergency is why credit ratings are crucial in restoring the economy’s health.
“This is precisely the reason why we are guarding (our credit ratings) very well,” he added.
Even amid the pandemic, the Philippines was able to maintain its financially sound status with a ‘BBB+’ rating from S&P Global and the more recent ‘A-‘ grade from the Japan Credit Rating Agency (JCR), both with stable outlooks.
The government has so far raised a total of US$4.83 billion in concessional budgetary support financing from the Asian Development Bank (ADB), World Bank (WB), Asian Infrastructure Investment Bank (AIIB), and the Agence Française de Développement (AFD) of France.
Of the total financing accessed by the Duterte administration from these development partners, US$2.26 billion has been disbursed for government programs.
The government has also recently raised US$2.35 billion from the US dollar market with the lowest coupon rate ever in the country’s history.
From domestic sources, the Bangko Sentral ng Pilipinas (BSP) has provided financing to the national government amounting to P300 billion pesos to help fund COVID-19 response.
To date, he said, the government has raised P1.2 trillion in net domestic borrowings from the beginning of the year to cover the budget deficit, which has widened as revenues fell while state spending has increased to finance programs to beat the unprecedented crisis.
A total of P149.2 billion in dividends were also received from government-owned and controlled corporations (GOCCs) since the start of the year to support the fight against COVID-19.
The Department of Budget and Management has thus far released allotments totaling P355.6 billion for the government’s COVID-response efforts.
Dominguez said the government has contracted more borrowings and allowed for a much larger budget deficit this year to strengthen the healthcare system against the pandemic and finance its social mitigation programs for poor families, workers and other vulnerable sectors hit hardest by this global health crisis.
He, however, made it clear that the government “cannot banish the basics of fiscal discipline at the risk of bringing ourselves to bankruptcy or severe unsustainable indebtedness.”
The government, he said, should remain pragmatic in confronting a global health crisis whose end is still unknown, which is why when presented with a variety of options to reenergize the economy, it can only afford the one that will work best, and not those that will prove unfundable and unsustainable in the end.
“We might have managed the surge in infections so far. But, as epidemiologists warn, we could face a second wave of infections. Prudence dictates that we keep our powder dry. We should be able to finance fighting the second wave should this happen,” Dominguez said.
The “wild card” in the government’s planning and strategizing is COVID-19 itself, which “dictates the timeline for all of us,” he said.
“If this turns out to be a very long battle, we should have all the fiscal tools to outlast the enemy,” Dominguez said. “Be assured that this crisis will neither diminish our capacity for good governance nor our willingness to exercise decisive leadership.”
With President Duterte acting decisively to protect Filipinos from the pandemic through strict community quarantine measures, the economy contracted by 0.2 percent for the first time in over two decades, unemployment rose, and the government’s revenue intake dropped significantly to only P1.1 trillion in the first 5 months of the year.
Dominguez said he expects the deficit in relation to the country’s gross domestic product (GDP) to more than double as tax collections are down because of the economic standstill, and as the government spends more to sustain its COVID-19 response efforts to help the poor and other badly hit sectors and at the same time fund the country’s economic recovery program.
To further support its budgetary requirements, Dominguez said the government will continue to implement reforms in the tax system, which include the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill that aims to immediately reduce the corporate income tax (CIT) rate from 30 to 25 percent and provide a targeted fiscal incentives system; and taxing the digital economy.
The government, for one, is focusing its efforts on collecting the value-added tax (VAT) on both local and cross-border digital transactions, which is similar to what the other Association of Southeast Asian Nations (Asean) economies are already doing, Dominguez said.
Online selling is also covered by the taxation of the digital economy, but Dominguez pointed out that because of the Tax Reform for Acceleration and Inclusion (TRAIN) law, online businesses earning not more than P250,000 a year are tax-exempt and those making less than P3 million a year will not have to pay the VAT.
Thus, small online businesses should not be discouraged from registering with the Bureau of Internal Revenue (BIR) as registration will help ensure that they and their employees are eligible for government assistance, Dominguez said.
Such was the case, he said, with the recent Small Wage Subsidy Program (SWSP) implemented by the Department of Finance (DOF) and the Social Security System (SSS), in which qualified enterprises and their employees registered with the BIR and SSS were able to benefit right away from this lifeline.
While supporting its budgetary requirements, he said the government will maintain fiscal responsibility by working on four legislatives, namely: infusing additional capital to state financial institutions to enable them to extend assistance to the private sector; allowing banks to dispose of non-performing loans and assets; pushing the immediate congressional passage of the CREATE bill; and revitalizing the agriculture sector by giving the banking system the ability to support the whole value chain of agri enterprises.
In presenting the country’s strong fiscal position arising from the Duterte administration’s prudent economic policies, Dominguez underscored the following positive metrics: a debt-to-GDP ratio at a historic low of 39.6 percent; a revenue effort of 16.1 percent in 2019, which was the highest in 22 years; a low inflation rate of 2.1 percent in May; and an unprecedented US$ 93 billion in gross international reserves (GIR) by May, which is more than the external debt of US$81.4 billion as of end-March.