Economic Development Cluster (EDC)
Pre-SONA Activity
July 6, 2018
The Philippine economy is on course. We are well on our way to providing the inclusive development our people aspire for. Over the next few years, we expect our economy to continue to be among the growth leaders in the region.
In the first quarter of this year, the Philippine economy grew by 6.8 percent. We hope to achieve a faster rate for the rest of the year to bring us closer to the 7 percent target. Our first quarter growth figure caps 77 consecutive quarters of sustained economic expansion. Over the last 10 quarters, our growth rate was 6.5 percent or better. We are clearly building on a strong momentum.
The biggest contributors to our GDP expansion are manufacturing growing by 8 percent, industry growing by 7.9 percent, and services with a growth of 7 percent. Slowly but surely, we are shifting from consumption-led to investments-led growth.
At that rate of expansion, and with strong investment inflows contributing to more inclusive growth, we hope to bring down the poverty rate from 21.6 percent in 2015 to only 14 percent by 2022. This means pulling up a million Filipinos from below the poverty line each year henceforth. This is the most important number we all hope to achieve. All development efforts will be meaningless if they do not translate into liberating our people from the curse of poverty.
Our economic strategy is anchored on two major programs: the comprehensive tax reform program and the Build, Build, Build infrastructure modernization already in place.
The first package of the tax reform passed before the close of last year, and it has produced remarkable results we have expected. In the first quarter of 2018, our tax effort rose from 13.4 percent of GDP to 14.3 percent. This is the highest first quarter tax effort ever achieved in the past 25 years.
From January to May, revenue collections grew by 19 percent over the same period last year. In fact, the Bureau of Internal Revenue (BIR) improved its collection by a remarkable 15.5 percent growth over the same period in 2017. Not to be outdone, the Bureau of Customs (BOC) improved its collection by 31.2 percent.
Acknowledging the dramatic improvement in our tax effort, Standard and Poor’s raised our credit rating outlook from BBB stable to BBB positive. The upgrade recognizes that our policy making settings support a track record of more sustainable public finances and balanced growth over the next 24 months.
Expenditures also posted their fastest rate of expansion since the beginning of the Duterte administration. With continued growth, spending from January to May was 25 percent higher than the same period last year.
Having reduced the personal income tax rates of 99 percent of taxpayers, the tax reform program also seeks to modernize tax incentives extended to certain businesses as well as lower corporate income tax rates to match regional norms. This will empower our consumers and produce conditions more conducive to job-creating investments, especially in the provinces. The tax reform program will assure us of sufficient revenues to fund infrastructure modernization and expand social services. These are long-term investments in our people’s future.
Thirty percent of the incremental revenues generated from the tax reform law will go into social services. There will be larger allotments for improving public health, upgrading our educational system and providing conditional cash assistance for the poorest of the poor. This, after all, is what modern governments are about: looking after the welfare of its people and providing them effective protection. Meanwhile, seventy percent of the revenues raised from the new law will be directed to infrastructure modernization.
The Build, Build, Build program is well on its way. 35 of the 75 strategic infrastructure projects have passed all the approvals required. All of them will be ready to commence anytime soon.
Last year, public spending for infrastructure rose to 5.4 percent of GDP — slightly above the regional average. This, however, is more than twice the share of GDP invested in our infrastructure over the last three decades.
In the first five months of this year, national government spending on infrastructure reached P281 billion. This is an increase of 42 percent over the same period last year. These numbers are on top ofthe private sector construction and public sector projects financed through Public-private partnerships (PPPs). We expect infrastructure spending to reach 6.1 percent of GDP this year. By 2022, the share of GDP going to infrastructure investments will rise to 7.3 percent.
These investments will close the infrastructure gap with our neighboring economies. It will stimulate domestic economic activity and ensure that every community and every island participates in the mainstream of national wealth creation.
The improved connectivity brought about by the modernization of our infrastructure backbone will also enable us to take full advantage of regional economic integration within the framework of ASEAN. It will enable us to attract industrial investments seeking access to the increasingly integrated ASEAN market.
Meanwhile, the average inflation rate during the first six months of this year was 4.3 percent. This is above the target range of 2 to 4 percent for the whole year but within the DBCC’s forecast of 4.0 to 4.5 percent. We are confident that with the relaxation of oil prices in the global market, the consolidation of the peso’s exchange rate and the normalization of rice supply, we can pull back the inflation rate to within target range.
While slightly elevated, the inflation rate during the first six months of the year is understandable. Economies expanding at a fast clip tend to put pressure on supply. This is particularly true of our economic performance. The tax reform law increased the purchasing power of our communities. The massive importation of capital goods needed for the Build, Build, Build program increased our trade deficit and weakened the peso. The rice situation pushed prices to abnormal levels. None of these factors are permanent infirmities. But without the tax reform and the infrastructure program that it is funding, we will continue to suffer from high cost of production and transportation. With the tax reform and better infrastructure, the road to higher productivity, and thus lower and stable inflation is within reach.
The bill that will shift rice trading from quantitative restrictions to tariffs is in its final stages of legislation. This should ensure adequate rice supplies and prevent the uncertainty we saw when the NFA rice dissipated, causing a spike in rice prices. The speedier implementation of the cash transfer program for the poorest Filipino families will help ease inflation’s impact. The national ID system will also greatly enhance the efficiency of transactions in our economy.
The debt-to-GDP ratio held steady at 42.1 percent in 2017, same rate as in 2016. We continue to prudently manage our obligations and we are confident that the rapid expansion of the domestic economy will enable us to decrease our debt further to 39 percent of GDP in 2022.
Given the rapid expansion of our GDP, we will certainly outgrow our debt. Those who raise the specter of a debt crisis arising from our use of official development assistance (ODA) to finance our infrastructure program are not reading the numbers well enough.
Foreign businessmen also brought in a record amount of investments into the country last year. The foreign direct investment (FDI) inflows reached a record high of 10 billion US dollars, double the rate in 2015. For the first quarter of 2018, FDI totaled 2.2 billion US dollars in net inflows, an increase of 43.5 percent compared to the same period last year. This is indicative of the broader and sustained increase of investment inflows into our economy.
The higher volume of foreign direct investments supports our efforts to shift our economy to investments-led growth. By achieving this shift, we aspire to provide meaningful employment to the young, well-trained Filipinos entering the workforce in the coming years. As of April of this year, the Philippines’ unemployment rate has dropped to 5.5 percent, lower than the same period last year. 625,000 jobs were created. Of this number, 605,000 Filipinos were employed in manufacturing and construction. This is a testimony to the great multiplier effects of our infrastructure investments.
Although our balance of trade chronically falls into a deficit, the total Philippine merchandise exports reached 62.87 billion US dollars in 2017. This represents a strong 9.53 percent growth over the 2016 performance. We will surely try harder to get double-digit growth in our export performance.
Moreover, our agriculture and fisheries sector registered a remarkable 4 percent gross value added growth in 2017, reversing the 1.2 percent decline in 2016. In the first quarter of 2018, our agriculture grew by 1.47 percent. Rice production grew by 9.4 percent, translating to 1.65 million metric tons (MMT) yield last year. For the first time ever, we are poised to export corn to neighboring countries as we improve both hectarage and yield for the crop.
Reforms in other areas also support our economic strategy. The Department of Trade and Industry (DTI) has set an ambitious goal of putting the country in the top 20 percent in the ease of doing business rankings. With all our efforts at simplifying processing, speeding up approvals for startups, and reducing red tape, this should be an achievable goal.
The global economy, to be sure, could pose numerous challenges to our growth in the coming period. We are looking at the possibility of increased protectionism and some uncertainty that could affect oil prices. A full-fledged trade war could impair the global economy’s capacity to grow.
Notwithstanding, our numbers all point to a positive direction. We are doing the right things at the right time. There is reason to be confident in the Philippines’ growth story.
We will continue to push the reforms with the vigor demonstrated the past two years. We will be unrelenting in modernizing all sectors of our economy. We are determined to achieve the inclusive growth and higher incomes the Filipino people deserve.
Thank you and good day.
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