February 28, 2023
Chairperson of the House Committee on Appropriations, Representative Elizaldy Co; honorable members of the House Committee; fellow workers in government, magandang umaga po sa inyong lahat.
Let me first introduce the members of the DBCC: the Chairperson is Amenah Pangandaman, and then Arsi Balisacan, Governor Medalla, myself, and Treasurer Lea. We are here in full force, Mr. Speaker.
The Department of Finance, Department of Budget and Management, and National Economic and Development Authority, in coordination with the Bangko Sentral ng Pilipinas, are closely monitoring the risks and threats of inflation to the country’s macroeconomic stability.
On this note, an aggressive and focused campaign to fight high inflation continues to be a top priority of the government.
The Philippines’ sound macroeconomic fundamentals, reinforced by structural reforms, enabled us to withstand the harsh effects of the pandemic and chart a clear path to recovery.
The Philippine economy grew by 7.6 percent in 2022 — the highest recorded full-year growth in 46 years. It exceeded DBCC’s growth assumption of 6.5 to 7.5 percent for 2022. The strong domestic demand drove the robust growth allowing the country’s continued recovery.
The labor market has recovered strongly from the pandemic. In December 2022, the unemployment rate stood at 4.3 percent, much lower than the 6.6 percent outturn in December 2021. This is the second lowest we have seen since April 2005 and is lower than the pre-pandemic rate of 4.5 percent.
For the full-year 2022, around 2.9 million Filipinos were added to total employment. The unemployment rate improved to 5.4 percent from 7.8 percent in 2021, while the underemployment rate declined to 14.2 percent from 15.9 percent in the previous year.
The generally improved unemployment rate and lower underemployment rate in 2022 helped preserve the country’s economic momentum in early 2023.
Despite the high inflation environment, continued improvement in the jobs market could help keep the domestic economy afloat.
The strong macroeconomic performance of the country is also supported by sound and stable financial system.
Domestic liquidity grew by 6.4 percent year-on-year to about 16.3 trillion pesos in December, up from the 5.5-percent in November.
Credit growth is stable. The banking sector remains resilient with strong capitalization and liquidity position. Bank lending grew by 11.4 percent to 11.7 trillion pesos in December 2022, driven largely by credit growth in real estate, manufacturing, and utilities.
Moreover, the banking sector’s loan portfolio remains manageable. Its gross non-performing loans or NPL ratio was recorded at 3.2 percent as of December 2022, matched by an ample NPL coverage ratio of 106.8 percent.
Universal and commercial banks posted a consolidated capital adequacy ratio of 16.2 percent as of end-June 2022. This is well-above the minimum thresholds of 10 percent set by the BSP and 8 percent set by the Bank for International Settlements.
The current account balance stood at a deficit of 17.8 billion US dollars or 6.1 percent of GDP for January-September 2022. This is higher than the 2.3 billion US-dollar deficit or 0.8 percent of GDP recorded in the same period last year.
But the wider current account deficit is financeable. The widened trade gap is due mainly to higher global commodity prices and strong import demand due to improved domestic conditions. It can be supported by the continuously growing overseas Filipinos’ remittances, the relentlessly robust BPO revenues, and the improving tourism receipts.
Our gross international reserves as of end-January 2023 stood at 100.7 billion US dollars. This is equivalent to 7.6 months’ worth of imports. The received doctrine is that 3-months’ worth of imports is sufficient. The 100.7 billion dollars is also about 6.2 times the country’s short-term external debt based on original maturity and 4 times based on residual maturity.
On the fiscal side, we have exceeded our fiscal targets for 2022, showing the country’s strong fiscal position. National Government revenues reached 16.1 percent, compared with our target of 15.2 percent, while disbursements reached 23.4 percent compared with our target of 22.9 percent under the Medium-Term Expenditure Framework.
Total revenue collections hit 3.5 trillion pesos, up by 18 percent compared to collections in 2021, and this exceeded the 3.3 trillion-peso program by 7.3 percent, showing the relentless effort of our revenue collecting agencies to expand our fiscal buffers.
Meanwhile, the National Government spent almost 5.2 trillion pesos, up by 10.4 percent compared to 2021 spending and up by 4.1 percent compared with the 5 trillion program for 2022. The higher spending is due to expanded intergovernmental grants for LGUs, net lending to the National Food Authority, filling up of positions, implementation of the third tranche of the Salary Standardization Law, and interest payments.
Mainly due to higher revenues, we managed to bring the fiscal deficit to 7.3 percent of GDP. This is lower than the 7.6 percent target for 2022 and significantly lower than the 8.6 percent in 2021. As a result, the primary deficit also declined to 5.0 percent, from 6.4 percent in 2021.
The national government debt remains manageable. Largely due to the better than expected economic growth rate, the debt-to-GDP ratio settled at 60.9 percent as of end-2022. Our target under the medium-term expenditure framework was that the debt-to-GDP ratio should be 62.0 percent, but we registered at 60.9 percent as of end-2022. The lower fiscal deficit and better debt metric means that the government is gaining more fiscal space after the pandemic. This is needed with the currently high level of uncertainty and expected global economic headwinds.
Despite the economy’s relatively sound macroeconomic fundamentals, persistently high inflation has been a major concern for the Philippine authorities, as with other countries.
In recent months, the country’s inflation levels have continued to accelerate due to food supply constraints and higher utility rates. In January this year, inflation was recorded at 8.7 percent, higher than the 8.1 percent in December last year. This exceeds the inflation forecast of the BSP at 7.5 to 8.3 percent and the median estimate of private sector economists at 7.6 percent.
Food and electricity, gas, and other fuels are the biggest contributors to January 2023 inflation. The main contributors to the higher food inflation are vegetables, meat, fish, and sugar, as well as dairy products and eggs.
Top contributors to non-food inflation are utilities, food and beverage serving services, actual rentals for housing, passenger transport services, and operation of personal transport equipment.
Latest forecasts from the BSP indicate that inflation will remain above-target in the near term. However, the BSP expects inflation to slow down to 3.1 percent in 2024.
The BSP projects that inflation could remain above 4.0 percent until December 2023. Projections show that inflation will revert close to the lower end of the target range of 2 to 4 percent by January 2024 mainly due to negative base effects and the likely deceleration in global oil and non-oil prices.
To tackle inflation and its effects, we must pursue an all-of-government approach.
BSP’s monetary policy has remained aggressive. On February 17, the monetary board increased the policy rate by 50 basis points to 6.0 percent to help maintain price stability. The BSP also stands ready to take all necessary policy actions to bring inflation back within the 2 to 4 percent target range over the medium-term as upside risks to inflation continue to dominate.
On the fiscal side, we maintain our strong resolve to intensify the timely implementation of non-monetary measures to curb persistent inflation and mitigate its impact on the most vulnerable sectors.
The DOF is working closely with the Presidential Management Staff to construct a short- to medium-term framework to mitigate inflation, with inputs from relevant government agencies. This was discussed during the Technical Coordination Meetings on Inflation. We have examined the supply chain as shown in the slide to improve every stage of the supply chain.
Aside from addressing supply issues in the short-term, efforts will also be dedicated to improving ground monitoring and protecting the vulnerable sectors from the effects of higher costs of goods and services.
Ground monitoring will entail further enhancing our early warning systems and situation analysis to ensure timely and immediate intervention from the government.
To protect the vulnerable sectors, we will expand and improve the KADIWA Program and ensure that the most vulnerable segments of the population are protected against these shocks through targeted—let me repeat that, targeted subsidies. Yet, we must ensure that these measures do not add up further to demand-side inflationary pressures.
To effectively manage the country’s energy requirements this year, the Department of Energy is actively pursuing supply and demand side measures to ensure affordable and reliable energy supply.
On the supply side, the DOE will ensure the timely completion of major transmission projects to improve energy access in the country. These include the Hermosa-San Jose Transmission Line and the Mindanao-Visayas Interconnection Project, which is scheduled to be completed by March 2023, which is next month, and the Cebu-Negros-Panay Stage 3 Interconnection Project, which will be completed by June 2023. Furthermore, the Liquefied Natural Gas Facility of First Gen in Batangas is projected to be commercially operational by March 2023.
The DOE has also recommended the approval of the renewal of Service Contract 38 for 15 years to continue the operations of the existing field beyond February 2024 and to invest in activities targeted to extend the field life of Malampaya.
The DOE will also adjust its Grid Operating and Maintenance Program, or the schedule of planned outages of power generating plants and transmission facilities for the conduct of their maintenance. This will ensure energy security and power supply throughout the year.
For consumers relying on off-grid energy systems, the DOE and the National Power Corporation are awaiting the approval of the President for the original 5 billion-peso credit line to address the funding shortfall supporting missionary electrification, as well as the new credit line of 5 billion, as suggested by the DBM, to pay the amounts that have become due and demandable from different qualified claimants of the Universal Charge for Missionary Electrification in March 2023.
On the demand side, the DOE is an active proponent of an energy efficient economy. Under the Energy Efficiency and Conservation Act of 2019 and the Corporate Recovery and Tax Incentives for Enterprises or CREATE Law, energy efficiency projects are entitled to fiscal incentives. The Department is also implementing energy conservation promotion efforts for households.
Furthermore, the DOE submitted its proposed Administrative Order on energy efficiency and conservation for government offices.
Under the proposal, the following measures are to be adopted by government agencies: maintain temperature of 24 degrees Celsius in air-conditioned spaces; activate sleep settings on office equipment; turn off unused lights and air-conditioning units; and explore a modified 4-day work week arrangement and adjustment in working hours to 7:30 am until 4:30 pm or modified daylight saving time.
Now over the medium to long term, the government must ensure food and energy security to mitigate inflation.
Ensuring food security entails taking advantage of our economies of scale in production, increasing investment (including building infrastructure) for improvement of the agriculture sector, and providing extended financing to MSMEs, farmers, and fisherfolks.
Meanwhile, we must ensure an energy-secure future by accelerating renewable energy development and formulating strategic plans to provide a sustainable energy supply. The Philippine Energy Plan will be released in September 2023 by the Department of Energy. It should be sooner.
The enactment of the following measures in 2023 will help improve the agriculture sector:
First, the New Agrarian Emancipation Act, which seeks the condonation of agrarian reform beneficiaries from 58 billion pesos worth of debt stemming from the award of agricultural lands under the Comprehensive Agrarian Reform Program. This will allow farmers to focus their efforts on increasing the productivity of agrarian reform lands.
Second, the National Land Use Act will classify land according to use: protection (for conservation), production (for agriculture and fisheries), settlements development (for residential purposes), and infrastructure development (for transportation, communication, water resources, social infrastructure).
This will ensure that agricultural lands are not converted, as it will allow us to identify land that will be used for agricultural purposes.
Third, to mitigate inflation resulting from high prices of meat, the Livestock Development and Competitiveness Bill aims to replace the minimum access volume on corn with a uniform 5 percent tariff rate to ensure a stable supply of cheap corn for inputs, and earmark corn tariff revenues for corn productivity improvement.
Fourth, amendments to the Philippine Crop Insurance Corporation or PCIC Charter will include the provision of suitable disaster risk transfer programs to farmers and fisherfolk for their crop, livestock, and fishery products.
Ladies and gentlemen, I’d like to thank the House Committee on Appropriations for convening this briefing. Rest assured that the economic team will closely work with government to advance an economy that is truly inclusive, equitable, and globally competitive.
Thank you and good morning.