His Excellency Norman Muhammad, Ambassador of Malaysia; His Excellency Koji Haneda, Ambassador of Japan; His Excellency Gerard Ho, Ambassador of Singapore; Former Finance Secretary Gary Teves; Mr. Peter Wallace; distinguished guests, ladies and gentlemen.
Thank you, Peter, for this opportunity to speak before this prestigious business forum.
As you may know, we grew our economy last year by 5.9 percent, slightly missing the lower bound of our target range. The main reason for the slower growth rate was the delay in the enactment of the 2019 national budget. Because of this delay, compounded by the ban on infrastructure projects during the election period, we lost nearly a whole percentage point in GDP growth. Had Congress passed the national budget on time, our GDP growth last year could have expanded by around 6.8 percent.
The year 2020 began with some unexpected challenges. The spread of the African Swine Fever, which has spread to Mindanao, forced us to cull thousands of pigs, resulting in huge losses for our hog raisers. However, the Department of Agriculture is on top of the situation, strictly enforcing biosecurity measures and setting up more quarantine checkpoints, as well as providing more disinfection facilities to manage, contain, and control the spread of the disease. An intensified anti-smuggling campaign and heightened meat inspection efforts are being implemented as well by concerned government agencies.
Meanwhile, the ongoing activity under the Taal Volcano could still result in a larger eruption. However, unless and until this actually happens, we can only speculate on the full economic impact of a larger eruption. What I can assure you is that the concerned government agencies and local government units are fast-tracking the release of production support, livelihood and financial assistance to affected farmers and fishers, and the implementation of recovery and rehabilitation plans for affected areas.
The new coronavirus or COVID-19, on the other hand, might very well be at an early stage of its global outbreak. However, the government responded to this public concern decisively and continues to implement proactive measures to keep our people safe. We are consoled by the observation that the virus has no local transmissions here.
A significant impact on the economy will most likely be centered on the tourism sector, given the various levels of travel bans imposed by national governments and of voluntary decisions of airlines to cut flights to and from China. Our exports to, and imports from, China might likewise be briefly affected due to temporary closures of factories in cities, which have been under lockdown in an attempt to control the virus.
While these developments may dampen our growth somewhat, these threats are not enough to force a dramatic reduction in our growth estimates. The 2020 budget has been passed on time. A special law allows us to use the unexpended project funds from 2019. Greater public spending in infrastructure and social services, supported by an expansionary monetary policy and a benign inflation rate, should allow us to dramatically increase our pace of growth this year.
By maintaining fiscal discipline, we have worked down our debt load to a sustainable 41.5 percent of GDP in 2019 from 44.7 percent in 2015. We continue to register remarkable improvement in our revenues even as we await the enactment of the remaining packages of the comprehensive tax reform program.
Comparing our revenues in 2019 versus those of 2015, our collections improved by 54 percent. Stronger revenue performance enabled us to fund President Duterte’s Build, Build, Build program. With enough fiscal space, spending on infrastructure dramatically grew by 42 percent last year compared to 2015. Clearly, improved revenue flows translate into greater economic investments.
Preliminary data show that our tax effort improved from 13.6 percent of GDP in 2015 to 15.1 percent last year, our strongest performance in 22 years.
Dividend collections from government-owned and controlled corporations reached an unprecedented 69 billion pesos last year. In 2015, it barely reached 30 billion pesos.
We also led a sustained campaign to crack down on errant Philippine Offshore Gaming Operators or POGOs and their service providers that evade proper taxation. We managed to collect a total of 6.42 billion pesos in taxes from POGOs in 2019—a 169 percent increase from the preceding year. We expect to collect significantly more this year as we properly document and audit the operations of these service providers.
Our revenue generating agencies are putting on the fast lane the digital transformation of their offices to provide convenient, reliable, and transparent services to the taxpayers.
We are the only administration to fully implement a Fuel Marking Program nationwide. Through this program, we expect smuggling and misdeclaration of petroleum products to be greatly reduced, if not totally eradicated, and revenue collections to dramatically increase. By 2022, we also aim to complete the full shift to an electronic invoicing system to do away with some of the redundancies and inefficiencies in the tax system.
When the Tax Reform for Acceleration and Inclusion or TRAIN Law was passed in December 2017, we brought down the personal income tax rates of 99 percent of our wage earners, effectively giving them a 14th month pay. This translated to a substantial increase in consumer demand. It also broadened the tax base and improved compliance.
In order to offset the revenue losses from the lower personal income tax rates, we introduced excise taxes on a range of sin products. We are the first administration to raise excise taxes on tobacco products twice in a single term. Within the first three years of this administration, a new set of sin taxes was imposed on electronic cigarettes and on alcohol. The additional revenue from these measures will help fund the Universal Health Care program that primarily benefits low-income families. Preliminary figures show our tax collections from sin products almost doubled in 2019 from what they were in 2015, and we expect them to increase by at least 130 percent over 2015 this year.
The Rice Tariffication Law, for its part, produced a 9-peso reduction in rice prices compared to their peak in late 2018. This is particularly helpful for lower income households who spend a fifth of their budgets on rice alone. People now have a wide choice of affordable to premium rice varieties. This law is also beneficial to the corporate sector as the much lower inflation rate eases the pressure on businesses to raise wages.
These reforms, which effectively reinforce the purchasing power of Filipino consumers, enabled the economy to bring down poverty incidence from 23.3 percent in 2015 to just 16.6 percent in 2018. In three years, a total of 5.9 million Filipinos lifted themselves out of poverty. We stand by our commitment to reduce poverty incidence to 14 percent or lower by 2022.
There are even more impressive numbers related to this.
Official statistics show that the lower income brackets experienced the highest increase in mean per capita income from 2015 to 2018. For the lowest 30 percent of the population, per capita income grew by an average of 32 percent, outpacing the 20.9 percent overall average. The richest 20 percent of the population grew their per capita income by only 18 percent during this period.
Clearly, the growth we are experiencing is not only rapid. It is also inclusive.
Last year, our credit rating was upgraded to BBB plus by Standard and Poors—the highest we have ever enjoyed. Just last week, the Rating and Investment Information or R&I agency also promoted us to BBB plus. This week, Fitch Ratings has revised the outlook on its BBB credit rating for the Philippines from “stable” to “positive,” signaling a potential upgrade of the score within a few months.
The upgrades create even better conditions for businesses in the country. These developments signal approval of the fiscal discipline that has characterized the policies of the Duterte administration. We are aiming to achieve an “A” rating before the end of President Duterte’s term in 2022.
Higher credit ratings tell investors that it is safe to do business in the Philippines and that the country is highly capable of paying its debts. For the private sector, this means being able to borrow at lower costs to finance business expansions and attracting new investors. Ordinary Filipinos likewise benefit because banks would eventually be able to lend money to them at lower interest rates. This will translate into larger investments, as well as more jobs and better quality of life for Filipino families.
All the positive conditions described above will be magnified by the passage of the remaining tax reform packages. These packages will help produce a more business-friendly environment for investors.
By March this year, we hope the Corporate Income Tax and Incentives Rationalization Act or CITIRA would be finally passed into law. It will bring down our corporate income tax rate from the highest in ASEAN to the regional average. Our high corporate tax rate has been an effective deterrent to foreign investments, making us the regional laggard in this regard.
CITIRA will also rationalize the badly tangled incentives regime and replace this with a targeted, transparent, performance-based and time-bound system. The old tax incentives scheme entrenched old businesses while discouraging new enterprises from competing in the market.
The tangled incentives regime is the result of 13 separate agencies independently awarding their own incentive packages, some in perpetuity. The old system forced government to forego hundreds of billions in revenues. For instance, in 2017, the government gave away a total of 441 billion pesos worth of tax discounts and exemptions to just 3,150 companies. This select group of firms, which account for less than half of one percent of almost a million companies currently registered in the Philippines, pay discounted tax rates of around 6 to 13 percent.
In addition, some of these firms cheat the government of some 63 billion pesos by abusing transfer pricing rules or by shifting profits and costs to reduce tax liabilities. The total is a staggering 504 billion pesos in one year alone. That amount is equivalent to around 93 percent of the budget of the Department of Education and more than 5 times the budget of the Department of Health in 2017. In other words, we have to account for 504 billion pesos that we gave up and ensure that the taxpayers’ hard-earned money is not wasted.
CITIRA, by contrast, adopts the best practices, such as those in Malaysia, Thailand and Singapore, to ensure a truly contested market that will benefit consumers and ensure that the healthiest enterprises survive. Moreover, this reform measure will create about one and a half million jobs for our people.
We also expect the Passive Income and Financial Intermediary Taxation Act or PIFITA to be a game changer when it is passed later this year. This reform will make the country more attractive for long-term investments.
PIFITA will fix a complicated tax structure by cutting half of the 80 combinations of tax base and tax rates on passive income and financial transactions. It will however, affect the business of tax lawyers like Miss Baladad over there. The complicated tax structure makes tax administration and compliance difficult and costly for both government and the private sector.
It will also remove the tax on initial public offerings and reduce the stock transaction tax from six tenths of one percent to one tenth of one percent to further encourage the capital market expansion. Low- and middle-income earners will benefit by way of reducing the tax burden on their bank deposits, insurance premiums, and other passive investments. PIFITA will allow our country to be more competitive in attracting capital and investments to finance large-scale public and private-sector projects that create jobs and boost the economy.
Meanwhile, the real property valuation reform bill aims to adopt globally benchmarked standards and inculcate a higher degree of professionalism in property valuation. These, in turn, will promote investor confidence in property markets. It will likewise enhance the revenue-generating capacities of our local governments. As a beneficial side effect, it will help clear right-of-way issues currently inhibiting many key infrastructure projects.
While we await the passage into law of these remaining tax reform packages, we continue to implement measures that will reinvigorate our capital markets, boost investor confidence, and enhance financial inclusion.
After 11 long years, we have finally released the set of regulations that will allow the Real Estate Investment Trust or REIT to finally take off. It will democratize wealth by opening access to thousands of small investors wanting to be shareholders in secure and profitable real estate projects. In turn, this will allow big players in real estate to raise up more capital to further invest in our country, a win-win situation for all.
REIT is a powerful financial tool that will boost investments in property development while ensuring that funds raised using this tax-free mechanism are reinvested exclusively within the country’s real estate and infrastructure sectors, thereby ensuring that the money invested by Filipinos will stay in our domestic economy.
More recently, the Philippines issued its lowest and first ever zero-coupon Euro Global Bond in the international capital markets. The overwhelming response from the market for our 3- and 9-year global bond issuance worth 1.2 billion Euros underscores the international investor community’s deepening confidence in the Philippine economy.
The wider public also patronized the first-time sale of our Premyo Bonds last year, enabling us to raise 4.96 billion pesos or over 65 percent more than the initial issue size of 3 billion pesos. Access to the bonds were made easy and convenient through the use of online purchasing platforms. These bonds open yet another channel for ordinary Filipinos to be included in the financial mainstream.
The continuing review of government contracts is an effort to protect the taxpayers and ordinary citizens from onerous provisions. This review sends a clear message that the government is determined to create a pro-business environment in the country. But while the government is interested in inviting businesses to our economy, the interests of the whole nation should be a primary consideration.
The most recent independent, professional surveys find President Duterte’s job approval ratings at unprecedented high levels during the second half of his term. This should not be surprising. The key reforms already in place, and the ones forthcoming, have produced a pro-people economy and tangibly improved the quality of life at the grassroots.
We will pursue the socioeconomic reform program of the President with a decisiveness that this administration proved it can deliver.