Representative Wes Gatchalian from Valenzuela; Trade and Industry Secretary Ramon Lopez; Finance Undersecretary Antonette Tionko; Finance Assistant Secretary Antonio Lambino; friends in the media: good morning.
Thank you for inviting me to this forum. This provides us an opportunity to describe our fiscal situation in the face of the pandemic.
In brief, we are facing an extremely challenging situation. When the contagion hit us, the Duterte administration responded decisively by placing high-risk areas under strict community quarantine measures.
By allowing science to lead our response, we managed to save thousands of Filipino lives that could have been lost if the government did not act swiftly.
Our recent economic indicators show the tradeoffs from President Duterte’s decisive actions to put primacy on protecting our people. In the first quarter of this year, our economy shrank by two-tenths of one percent for the first time in over two decades. Our unemployment rate kicked up.
Our revenue intake dropped significantly due to the strict quarantine measures that slowed down economic activity. The lockdown likewise dealt a blow to our tax base as it prompted the Bureau of Internal Revenue to extend deadlines for the filing and payment of income and other taxes.
For the first five months of the year, revenues reached 1.1 trillion pesos, lagging behind last year’s performance for the same period by 16 percent. Given the economic situation, we expect to collect significantly less taxes than we projected to raise at the start of the year.
Our deficit-to-GDP ratio will more than double as tax collections are down and as government spends more to beef up our healthcare system and provide relief to families, workers and other sectors hardest hit by the pandemic. We also need to fund our economic recovery program.
This will require us to bridge the wider budget gap with additional borrowings. We will do this by accessing loans from our development partners and commercial markets.
Fortunately, the President’s judicious economic management and reform agenda since he took over in 2016 has put our government in a strong financial position ahead of the global health crisis.
When the pandemic struck, we had managed to bring down our debt-to-GDP ratio to a historic low at 39.6 percent. Our revenues had been very robust due to the passage of bold tax reform measures. In 2019, our revenues were at 16.1 percent of GDP, our best performance in 22 years.
Inflation has remained stable and under control. For the month of May, the inflation rate further slowed down to 2.1 percent. Another way to put it is that prices in May have not actually gone up compared to the prices in January of this year.
We have accumulated an unprecedented amount of gross international reserves. It grew even larger to 93 billion Dollars by May of this year, equivalent to 8.4 months of imports. Our foreign reserves are even more than our outstanding external debt, which stood at 81.4 billion US dollars at the end of March this year.
There is much to gain from maintaining our fiscal strength. When the health crisis happened, we had just received a BBB plus credit rating, the highest in our country’s history.
Even amidst the pandemic, international credit rating agencies have affirmed our sovereign ratings and have kept them stable and within a striking distance from the sterling A-grade.
In fact, the Japan Credit Rating Agency has even upgraded us from BBB plus to A minus. This is a vote of confidence which comes amid a wave of credit rating downgrades and negative outlook revisions worldwide. It’s only when the tide goes out that you know who’s been swimming naked, and we have been found to be respectably clothed.
In the depths of the crisis, we also continued to be rated among the most financially sound emerging economies.
At a time when nearly all governments around the world are taking on debt to fight the economic downturn, we will be competing for scarce financing. By maintaining a prudent fiscal program that has allowed us to protect our credit-worthiness, the commercial markets and the development partners continue to lend to us at generous interest rates and longer terms.
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.
This is what makes credit ratings precious to restoring our economy’s health. This is precisely the reason why we are guarding them very well.
To date, the Department of Finance has raised a total of 4.83 billion US dollars in concessionary budgetary support financing from the Asian Development Bank, the World Bank, the Asian Infrastructure Investment Bank, and the development agency of France. Of the total financing accessed, 2.26 billion US dollars has been disbursed for government programs.
Our latest global bond offering of 2.35 billion US dollars fetched our lowest ever coupon in the US dollar market. This is a clear vote of confidence in our future recovery as well as a favorable appraisal of where our prospects stand compared to that of the rest of the world.
In terms of domestic sources, the Bangko Sentral ng Pilipinas has provided financing to the National Government amounting to 300 billion pesos to help fund our COVID-19 response measures. To date, we have raised 1.2 trillion pesos in net domestic borrowings from the beginning of the year to cover our budget deficit.
Moreover, we have received a total of 149.2 billion pesos in remittances from government-owned and controlled corporations since the start of the year. The President has been granted special powers to reallocate these remittances for programs to address the COVID-19 emergency.
The Department of Budget and Management has thus far released allotments totaling 355.6 billion pesos for the government’s COVID-19 response programs. The allotments were charged from the realignment of existing projects, activities, and programs as well as pooled savings from the discontinued programs under the 2019 and 2020 budgets. It also includes the unprogrammed appropriations for the current fiscal year.
The said releases cover funding for our emergency subsidies and other forms of assistance to poor and low-income households; wage subsidies for small businesses; assistance to displaced employees and repatriated Filipino workers; procurement of test kits as well as other critical medical supplies to combat the virus; and other COVID-19 related programs.
The sources used to finance these releases come from tax collections, income from dividend collections from GOCCs, and borrowings.
We will also continue to implement reforms in our tax system to help support our budgetary requirements.
Among these reforms is the taxation of the digital economy to generate more revenues, while establishing more clarity in what will be the inevitable future of the global economy.
This crisis has underscored the need for our economy to be in step with the new way of doing business.
As more and more transactions move online, so must our revenue measures. For now, we are focusing on efforts on collecting VAT or value-added tax on both local and cross-border digital transactions, which is similar to what other ASEAN countries are doing.
Recently, the BIR issued a circular reminding everyone in the country who are engaged in online selling of goods and services to register with the Bureau. Whether or not they will be subject to tax depends on their specific circumstances.
Because of the TRAIN Law, online businesses making no more than 250,000 pesos in profit per year will be tax exempt. The sellers selling less than 3 million pesos a year will be exempted from the VAT. The rules as they stand were legislated by Congress and are reasonable and fair.
Registering with the BIR not only helps the government generate additional revenues for its COVID-19 response measures and various projects. Joining the formal economy also ensures that these businesses and their employees are eligible for government assistance.
Through this difficult episode, the Duterte administration has maintained full transparency. We have kept our people informed not only of the strategy to defeat the virus but also of the limitations of what we might realistically be able to do.
We have allowed for a much larger budget deficit because it is what public health requires. But we cannot banish the basics of fiscal discipline at the risk of bringing ourselves to bankruptcy or severe unsustainable indebtedness.
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.
We have to be very pragmatic as we confront a health crisis whose end we yet do not see. Presented with a variety of options for stimulus programs, we can only afford to finance those that will work best. A generous stimulus package may be ideal. But if it is unfundable and unsustainable, then it is just wishful thinking.
Keeping in mind the need to be fiscally responsible, we are working on four legislative imperatives to help the economy recover at the soonest possible time in a strong, sustainable, and resilient manner.
These priorities include infusing additional capital to our government financial institutions to strengthen their capacity and allow them to provide assistance to micro, small and medium enterprises, as well as strategically important companies adversely affected by the pandemic.
Second is to allow the banks to dispose of their 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 Corporate Recovery and Tax Incentives for Enterprises Act that will bring down our country’s current corporate income tax rate of 30 percent to 25 percent 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 wild card in all our planning and strategizing is the virus itself. We have no vaccine for it and no medicine to cure the infected as of this time. The virus dictates the timeline for all of us.
With all the uncertainty about the progress of this pandemic, we need to maintain utmost prudence. Prudence is within our powers to exercise. It will allow us some degree of certainty in this very uncertain world.
If this turns out to be a very long battle, we should have all the fiscal tools to outlast the enemy.
Be assured that this crisis will neither diminish our capacity for good governance nor our willingness to exercise decisive leadership.