72nd Inaugural Meeting
Induction of the 2021 MAP Board of Governors
Carlos G. Dominguez
Secretary of Finance
First of all, let me congratulate the outgoing president, Francis Lim, and the excellent board that he headed. Certainly, the government was very engaged with yourselves and really appreciated your support and your inputs into our policy making.
I also wish to welcome and congratulate Gigi and the new board of the MAP. We certainly look forward to working with you in the very well defined program that you put up and spoke about, Gigi. Really we have a lot of crises and I agree with you that education is probably one of the most serious crises that we face today.
Thank you for that outline and again, we look forward to working with Gigi and the entire board.
Mr. Aurelio Montinola III, President of the Management Association of the Philippines; officers and members of the MAP; members of the diplomatic corps; distinguished guests; friends in media: good afternoon.
Again, let me congratulate the MAP’s new set of Board of Governors inducted today. The new officers have the challenging task of continuing the MAP’s remarkable mission during these most difficult times.
The year we just brought to a close was a punishing one. For nearly the whole of 2020, the government had to impose restrictions on movement to save lives from COVID-19, while building up our health system capacity. We prioritized the health and safety of our people above everything else.
We were fully aware, however, that such a move would impose heavy costs on the government, on the economy, and on our people.
When we restricted the economy in the second quarter of last year, GDP fell by 16.9 percent and the unemployment rate rose to 17.7 percent. The strict community quarantine measures cost the National Capital Region and its adjacent provinces some 2.1 billion pesos in wages everyday.
However, improvements were seen with the gradual easing of the restrictions. In the third quarter, we had a much slower GDP contraction of 11.5 percent. On a quarter-on-quarter basis, the economy actually grew by 8 percent. Unemployment rate also dropped quickly to 8.7 percent. Nevertheless, we were still losing 700 million pesos in wages each day in the NCR and nearby provinces due to the general community quarantine.
We expect to see additional improvements in the last quarter of 2020 as we have been progressively reopening businesses and accessibility to mass transportation.
We recognize and appreciate the business community for their resilience, cooperation, and support—especially in keeping our workers and the economy afloat during these challenging times.
To be completely honest, some of the jobs lost may never return. The pandemic, however, provided us with the opportunity to accelerate our shift to digitalization in order to meet the demands of the emerging new economy. This will create new jobs that will require new skills.
We recognize the need to pursue more policy reforms as we rebuild our domestic economy. The private sector plays a crucial role in this undertaking.
The depth of the pandemic’s economic impact must be matched with bold initiatives on the part of our enterprises and the government. We need to reinvent ourselves in order to recover. Be assured that we will continue to consult and engage with you as we move to boldly reopen the economy as safely as we can.
Over the past ten months, the Duterte administration acted quickly to provide immediate relief to the most vulnerable sectors and to rescue enterprises put under extreme distress. We responded not only to address the public health crisis but also to contain the economic fallout caused by it.
The government’s direct response to the pandemic amounts to 2.66 trillion pesos or 14.7 percent of GDP. This includes the largest social protection program in history that provided emergency cash grants to low-income families and wage subsidies to workers in small businesses. We expanded medical resources to fight COVID-19 and ensured the safety of our frontliners. Fiscal and monetary actions were undertaken to keep the economy afloat and support recovery initiatives.
Funds were made available to provide cash-for-work programs, and assist affected industries. We infused additional capital into government financial institutions for them to lend more money to productive sectors of the economy.
The Philippine Guarantee Corporation expanded its coverage to encourage mobilization of private sector funds for housing. The corporation’s facilities provided coverage against credit losses to home lending.
With the sovereign guarantee that the corporation carries, loans are zero-risk rated and therefore exempt from the provision of risk capital. Banks are also enjoying other benefits such as income tax incentives, exemptions from real estate loan lending limits, and capital relief.
Notwithstanding investments made over the past few years in this sector, we continue to have a housing backlog of 1.2 million houses each year. In 2019, the outstanding guarantee of the corporation to 48 banks was 201 billion pesos covering housing loans to 125,000 borrowers. These lending banks enjoyed fiscal incentives amounting to 3 billion pesos.
We urge banks to share the incentives granted to them by providing more loans to home buyers at lower rates. This should help create jobs in the construction sector.
Funding our social protection and economic stimulus measures was a challenge. It was fortunate, however, that when COVID-19 struck, the Philippines was financially ready. 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.
Before the pandemic hit us, we were able to reduce our debt load to a historic low and boost revenue collections to levels we have not seen in more than two decades. We earned an unprecedented upgrade in our credit rating, which resulted in tighter spreads and concessional rates for our borrowings.
Understandably, we expected our revenue collections last year to be lower than projected due to the slowdown of economic activity. Nonetheless, our solid financial footing allowed us to afford a responsible level of deficit spending to cover our COVID-19 response, while continuing to implement the priority programs under the 2020 national budget.
Despite the many populist excuses to blow up the deficit and bury future generations in debt, we chose to take the path of fiscal prudence. We did not abandon the judicious fiscal management set by President Duterte when he assumed office, which got us in our strong financial position ahead of the crisis.
We had set our deficit spending in 2020 to reach 1.38 trillion pesos or 7.6 percent of our GDP. This is more than double our pre-pandemic deficit-to-GDP ratio target of 3.2 percent and the 2019 level of 3.4 percent.
Despite the large increase, we expect our deficit-to-GDP ratio to remain within the median of our neighbors and credit-rating peers around the world. We have made sure that the size of our deficit still takes into consideration our adherence to long-term debt sustainability.
Notwithstanding the challenging circumstances, we managed to collect revenues amounting to 2.8 trillion pesos in 2020. This is just four tenths of one percent short of our total collection outlook for the year. However, this is lower by 9 percent from the 2019 level and by 19 percent from our original target before the crisis struck.
Meanwhile, the government’s total expenditure requirement last year reached 4.205 trillion pesos. This includes the spending mandated under Bayanihan 1 and 2 as well as the continuation of the key infrastructure projects we are banking on to support economic recovery. The total expenditure is 11 percent higher compared to the 2019 level.
As of the end of 2020, our emerging deficit spending amounted to 1.36 trillion pesos or equivalent to 7.5 percent of our projected GDP for the year. This is slightly below our target in 2020.
Because none of the emergency spending for the health crisis was programmed, we needed to bridge the budget gap with additional borrowings.
We projected our debt-to-GDP ratio to reach 53.5 percent in 2020 from our pre-pandemic target of 40.2 percent and 2019’s historic low of 39.6 percent. Nevertheless, this level kept us well within the prescribed bounds of fiscal viability.
Last year, our gross borrowings were programmed to increase to 3 trillion pesos. This is around double our pre-pandemic requirement and triple the 2019 level.
We have set out a clear strategy for financing our deficit. We prioritized domestic borrowings followed by official development assistance and the international capital markets. We determined this plan as the most prudent approach, ensuring sustainability in our debt service.
With our credit ratings at historic highs, we quickly accessed emergency financing from our development partners and the commercial markets at very low rates, tight spreads, and longer repayment periods. Our average interest rate has gone down substantially from 5.5 percent in 2019 to 4.7 percent in November of 2020 for domestic debt; and from 4 percent to 3.2 percent for external debt.
The total gross financing we raised last year amounted to 2.63 trillion pesos. This excludes the 540 billion peso-emergency short-term loan from the Bangko Sentral ng Pilipinas, which was already repaid in full in December and re-availed this month.
Of the total borrowings, 1.91 trillion pesos or 73 percent was raised from the domestic market. This includes the 488 billion pesos obtained from our largest ever retail treasury bond issuance in August.
The remaining 721.1 billion pesos in financing or 27 percent was sourced from our development partners and the global bond market.
Program loans for budgetary support from multilateral and bilateral lending institutions, including emergency funding for the COVID-19 response, amounted to 369.7 billion pesos. Project loans secured for the continuation of our infrastructure modernization and other priority programs reached 33.3 billion pesos.
Our issuance of Euro and US dollar denominated bonds last year allowed us to raise 318.1 billion pesos more. The Philippines was among only a few emerging economies to have successfully tapped the global bond markets during the pandemic. At the height of the crisis, we entered twice with our 2.35 billion US dollar bond transaction in April and our 2.75 billion US dollar bond offering in December.
In both issuances, we were able to achieve very low coupon rates as our issue spreads outperformed those of similarly-rated emerging markets. The strong demand for Philippine credit in the international market reflects confidence in our economy to quickly transition from this abrupt downturn.
We appreciate the importance of continuing fiscal discipline to ensure the resilience of our economy. The public health emergency could last for months or possibly years. The battle against COVID-19 is going to be a marathon, not a sprint. While we hope for the best, we must be prepared for the worst.
Let me assure you that the Duterte administration has ample ammunition to outlast this enemy.
This year, the Philippines will maintain an elevated but manageable deficit program of 8.9 percent behind the need for strong government fiscal support in restarting the economy. Our gross borrowings will reach 3.03 trillion pesos in 2021, roughly equivalent to our funding outturn in 2020.
We expect the national government’s debt to settle at 57 percent of GDP this year. Even with the upscaling of our borrowing plan, we will still be able to keep our debt ratio within a sustainable threshold. This gives us the advantage over economies who were already saddled with heavy debt prior to the crisis.
We remain confident that we can easily fulfill our funding requirement for this year.
The large structural liquidity in our financial system will enable us to continue prioritizing domestic financing to mitigate the build-up of foreign exchange risks. The BSP’s relaxation of reserve requirements further enhances the structural liquidity of our system.
Should it become necessary, we also have the option of reaccessing the BSP’s emergency lending facility due to the additional borrowing space granted by Bayanihan 2.
As our sovereign credit performed better than our peers, we continue to have good access to external commercial borrowings and to official development assistance.
In fact, Fitch Ratings recently kept the Philippines’ investment grade credit rating of triple B with a stable outlook. The credit rating agency believes that our fiscal situation is manageable despite the crisis. Fitch also cited favorable growth prospects for the country.
This affirmation is recognition of the soundness of our COVID-19 response measures and our strong fundamentals going into the pandemic. By keeping our credit rating, the Philippines continues to stand out in the international financial community amid a wave of negative credit rating actions. Since last year, Fitch has downgraded the ratings of 33 sovereigns. These include countries that previously had the same rating as the Philippines, such as Colombia, Mexico, and Italy.
The recent passage of the majority of our economic recovery bills bodes well for the economic prospects of our country.
The 4.506 trillion-peso 2021 national budget was already enacted into law. This, along with the extended validity of the Bayanihan 2 appropriations and the 2020 national budget, will provide us with sufficient means to hasten the recovery of ourdomestic economy.
This year’s budget will sustain and strengthen our efforts to bolster the health care system, ensure food security, invest in physical and digital infrastructure, and provide support for the most vulnerable and affected sectors of our society.
Where we invest our people’s money is important. The economic services sector, which includes the Build, Build, Build program, received the second highest allocation of the national budget. Increased spending on infrastructure has the largest multiplier effect on the economy as it immediately creates jobs, encourages investments, and spurs domestic demand.
Meanwhile, FIST or the Financial Institutions Strategic Transfer bill, has been ratified by both chambers of Congress and is on its way to the President for signature.
FIST will allow banks to offload their souring loans and assets through asset management companies so that they could extend more credit to pandemic-hit businesses in need of assistance. This is an improved version of the Special Purpose Vehicle law that was enacted in the early 2000s in response to the Asian financial crisis. The advantage this time is that we are acting much earlier so banks can respond quickly to cushion the economic impact of COVID-19 and support our recovery.
We expect both Houses of Congress to swiftly ratify the CREATE or the Corporate Recovery and Tax Incentives for Enterprises Act. CREATE is the largest economic stimulus package for private enterprises in our country’s history. It will support the government’s efforts to restore and create hundreds of thousands of jobs and keep our businesses operating.
CREATE proposes more flexibility in granting fiscal and non-fiscal incentives, which will be critical as the Philippines competes internationally for high-value investments. Increased foreign investors will mean more job opportunities and economic progress for our country.
We want to thank the MAP for its strong support of our program and especially for CREATE.
We appreciate the MAP’s consistent support for CREATE. The association’s voice holds weight among policymakers and the general public. It is an independent and enlightened voice that validates the timeliness and relevance of our policy measures.
We are seeking your support for the GUIDE bill or the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery. The measure proposes to form a special holding company to enable our government financial institutions to infuse equity, under strict conditions, to strategically important companies facing solvency issues. The government plans to invite multilateral agencies and other investment companies to participate in this joint venture.
There are also many hopeful signs that our economy will quickly rebound beginning this year. Our international reserves have reached a historic high of 104 billion US dollars as of end-November, equivalent to 11.2 months’ worth of imports.
The Philippine peso demonstrated strength and resilience throughout this most difficult period. Last year, it appreciated by 5.4 percent against the US dollar. This will strengthen our ability to import the goods that we need to support economic recovery.
Our inflation rate remained low throughout the year and stood at 2.6 percent. This is well within our target band of 2 to 4 percent.
We have managed to keep our COVID-19 infections moderate. We do not expect the sort of surges we now see in many countries.
COVID-19 vaccine development is also making headway. Procuring and rolling out these life-saving doses will restore jobs and incomes of our people.
The Department of Finance has secured the funding needed to inoculate a majority of Filipinos. Our first priority is to vaccinate our health frontliners and the operators of public utilities so that commuters will feel safe. This will allow us to reopen more of our economy. Among other priority sectors are the poor and vulnerable elderly citizens, so they will have less risk of getting infected.
A safe and effective vaccine will no doubt be a game-changer when it becomes available to us. Until then, we will continue in our evidence-based approach towards reopening the economy as safely as possible. It also remains essential for everyone to cooperate with government regulations and comply with the minimum health standards.
The Duterte administration is doing its utmost to avoid the costly reversal of our hard-fought gains in 2020 and the previous years. We will continue to exercise discipline and prudence in managing our fiscal affairs. This, I believe, is the key to a strong and sustainable recovery.
Thank you.
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