Good morning, everyone, and welcome to Sulong Pilipinas: Partners for Progress. This is the second series of online consultative conferences this year.
First of all, I commend the effort put in by the Philippine Chamber of Commerce and Industry, led by Ambassador Benedicto Yujuico and George Barcelon, in realizing this online forum. The PCCI has been a reliable partner in the conduct of our Sulong consultations since the series started in 2016.
You will recall that the comprehensive tax reform program, the national ID system, the Ease of Doing Business Act, and the Build, Build, Build program are examples of government responses to excellent actionable recommendations you have made and voted for during previous workshops.
Along with the liberalization of our rice trade, these reforms have strengthened our growing middle class, kept prices stable for Filipino consumers, and made our financial position strong and steady.
Even amidst the pandemic, the markets and investors have viewed the Philippines favorably. Recently, we successfully offered our lowest ever coupon in the US dollar market with an issuance of a 2.35 Billion US dollar double tranche 10-year and 25-year global bonds. The 10-year and 25-year bonds fetched coupon rates of 2.45 percent and 2.95 percent, respectively.
At today’s level, the 10-year bond is currently priced at a premium of 104.82 percent while the 25-year bond is at 104.11 percent. This means investors value our bonds and they are confident that the country will meet its obligations.
Moreover, at the start of 2020, the Philippine Peso has appreciated 1.6 percent versus its year-end 2019 closing rate. It closed at 49.80 pesos on June 5, the highest in three years.
With the enhanced community quarantine, when it was declared last March 17, the peso hardly budged from its 50 peso levels. In the past, any crisis would have pushed the Peso to depreciate along with the rest of the Emerging Markets currencies. Not this time. The market has de-coupled the Philippine Peso as it recognized its strong fundamentals.
This is affirmed by the credit rating agencies who have also kept our sovereign credit ratings stable and within striking distance from the sterling A-grade. We are bucking the trend of rating downgrades that many of our peers are undergoing. Recent reports show that a total of 37 rating downgrades and 84 negative outlook revisions have been made by Fitch, S&P, and Moody’s among countries across the globe.
Even the Economist magazine has recently ranked us sixth among 66 emerging economies in terms of financial strength. This favorable assessment is validated by the international investors and our development partners, who continue to invest in us at generous and concessional terms.
For the month of May, inflation rate further slowed down to 2.1 percent. So far, inflation has remained stable and under control. Another way to put it is that prices in May are only three tenths of one percent higher than those in January.
Our strong macroeconomic fundamentals—the products of President Duterte’s hard-won policy battles—make us hopeful that the pain brought about by this crisis will be short and our recovery will be strong.
As we begin transitioning from the lockdowns, we are happy to see you ready to engage with us once more and tackle the many challenges of the “new normal.”
Our recent economic indicators show the tradeoffs from the Duterte administration’s decisive actions to save lives and protect communities from COVID-19.
In the first quarter of this year, our economy contracted by two tenths of one percent for the first time in over two decades. This is precisely because we were the first country in ASEAN to impose strong lockdown measures to prioritize the health of our people.
In April of this year, preliminary results of the Monthly Integrated Survey of Selected Industries show that the overall volume and value of production index for the manufacturing sector plummeted to an annual rate of 59.8 percent and 61.4 percent, respectively. Although we expect some improvements as we begin to lift the restrictions on economic activities, we will continue to keep watch of these numbers.
In the same month, our unemployment rate clocked in at 17.7 percent against 5.1 percent in the same period last year. This represents 7.3 million jobless Filipinos, a number that we are closely monitoring and seeking to bring down.
We expect the full results of the second quarter’s economic performance to be worse. To be sure, there will be many challenges standing in the way of our rebound. Nevertheless, be assured that the economic managers are dealing with these setbacks with decisiveness, adeptness, and determination.
When the threat of the contagion became clear, the Duterte administration quickly put together a four-pillar strategy to protect our people and shield our economy as best possible. This strategy has a combined value of 1.7 trillion pesos or about 9.1 percent of our GDP.
At this point, the strategy has provided targeted assistance to Filipino families and business sectors adversely affected by the pandemic, as well as facilitated access to credit for enterprises. This will help keep our economy afloat and allow us to implement an economic recovery plan that will bring us back to the path of high growth.
Even with a strong and resilient economy, our funds are not limitless. What we constantly underscore with various stakeholders, including Congress, is the need to have a realistic economic recovery program that is fiscally sustainable because we do not know how long this pandemic will last. Support from the government must be targeted and focused on efforts that will yield the highest multiplier effect on the economy.
Keeping in mind the need to be fiscally responsible, the economic managers are proposing four legislative imperatives to help the economy recover at the soonest possible time in a strong, sustainable, and resilient manner.
First is the proposal to infuse additional capital to government financial institutions, such as the Land Bank of the Philippines, the Development Bank of the Philippines, and the Philippine Guarantee Corporation. This will allow them to provide assistance to micro, small and medium enterprises, as well as strategically important companies adversely affected by the pandemic. The multiplier effect of every one-peso capital released by banks is 8 and a half times, while a bigger 20 times is generated by guarantees.
Land Bank and DBP will also serve as rediscounting agents for small and medium-sized banks and microfinance organizations. This is the most efficient way of getting money out to the countryside to revive the economy.
In addition, we propose to authorize Land Bank and DBP, through a holding company structure, to make equity investments in companies critical to national interest that are experiencing solvency problems. Once this joint venture investment company is organized, we intend to invite multilateral agencies, foreign and domestic investment companies to participate in this company.
Companies that intend to tap this window will have to abide by certain conditions. The conditionalities will spell out the standards of governance for companies that will receive assistance under this window. Among the conditions are: limits to dividends; non-dilution of equity; limits on bonuses and allowances, retention and incentives of senior executives; clawbacks on bonuses; and no golden parachutes. Luxury expenditures related to entertainment or events, office and facility renovations, private aviation and transportation services as well as other expenses not related to the normal course of business will have to be curtailed.
The second priority addresses the weak economic activity during the enhanced community quarantine that increases the likelihood of businesses being unable to meet their debt obligations to banks and other financial institutions. We propose to allow banks to dispose of non-performing loans and assets through asset management companies that are similar to special purpose vehicles.
Third, we are still waiting for the Senate to pass the bill that you all know as CREATE or the Corporate Recovery and Tax Incentives for Enterprises Act. This will bring down our country’s current corporate income tax rate of 30 percent to 25 percent as soon as possible. This will be followed by a one percentage point reduction every year from 2023 until it reaches 20 percent by 2027.
Let me emphasize that this reform measure is about trusting the private sector. Instead of increasing the government’s budget and passing funds through what tend to be less efficient government programs, we will leave the money in the private sector’s hands to revitalize their businesses, retain their employees, and create even more jobs for Filipino workers. This is a simple yet effective measure to fire up our economy.
We have also included an expanded net operating loss carryover for five years so that businesses can use losses incurred in 2020 to lower their tax burdens until 2025. Ninety-nine percent of corporate taxpayers are eligible for this benefit.
In addition to reducing corporate income tax rates, we are extending by two years the transition period to a new, highly-targeted, performance-based, and time-bound incentives system. This should reduce the uncertainty and encourage new investments in our economy.
We are also making our tax incentives system more agile, by allowing the President to grant longer tax and non-tax incentives for investments with exceptional benefits to the public interest.
At this point, I thank the PCCI leadership for expressing its full support for the immediate passage of the CREATE bill as a much-needed boost to the recovery of the Philippine economy. Thank you for speaking out in the media and for publishing a print ad in support of the reform.
The benefits of the 5 percent tax break and the net operating loss carryover extension will only become available to you if they are legislated. Let me underscore that had this bill been passed before the sine die adjournment, you would have enjoyed a significantly lower tax rate starting next month. As the delays pile up, the benefits get pushed down the road. We hope that each of you here today will tell your legislators that this is a reform that you want, that you need it as soon as possible.
Finally, the fourth priority seeks to provide greater support to the agriculture sector, where the demand for its products are inelastic. We will do this by giving the banking system the ability to support the whole value chain of agri-enterprises. The amendments to the Agri-Agra law will revise the rules to reduce friction costs and make it easier and more feasible for banks to comply with the law’s requirement of lending to the agriculture sector.
You have also seen other economic stimulus measures being debated in the Legislature. We remain cognizant of the Constitutional parameters that determine how we can fund various initiatives, well intentioned as they may be.
The Constitution specifically requires the certification of excess funds and new revenue sources to support the passage of any supplemental budget. In running a business or a company, we know that borrowings or loans are not revenues. We appreciate the wisdom behind the Constitutional provision for in the absence of additional revenues or income, we jeopardize our fiscal sustainability.
However, multiple stimulus bills filed by the legislators from both Houses include a slew of additional provisions that make the proposals fiscally unsustainable. We have shared our comments with the proponents, and let me take this opportunity to articulate some of the key concerns.
For instance, the decisions for the provision of credit should not only be coursed through, but be determined and managed solely by, government financial institutions, which possess the expertise on such functions rather than the various executive agencies with different mandates.
We support cash-for-work and propose that this be redirected towards pressing needs related to managing the pandemic, such as the hiring of contact tracers.
We recommend wage subsidies that are fiscally viable. Therefore, beneficiaries should be from areas that remain under the enhanced community quarantine and distribution should be done via digital payout technologies.
I am confident that any of these proposals I have enumerated can be enhanced by your insights. As local and national business leaders, you have a great handle on the situation at various levels of Filipino life. This is precisely the point of Sulong Pilipinas, which seeks to involve Filipinos from different sectors in determining policy priorities and crafting reforms accordingly.
We are already getting good ideas from the public. Last month, the e-Sulong workshop focused on youth participants produced insightful recommendations. We were inspired to see young people participate actively in crafting solutions to help the country recover.
We have no doubt that, as in the past Sulong workshops, the actionable recommendations and insights from business leaders like yourselves will also be inspiring and informative.
We are ready to listen to your voices once more. By putting our minds together, we can find the best path to come out of this crisis stronger and more resilient than before.
Thank you very much.
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