Carlos G. Dominguez
Secretary of Finance
Webinar on Philippines as Pathway to Asia in a Post-Pandemic World
by the Philippine Embassy Washington D.C.
November 13, 2020
His Excellency Jose Manuel Romualdez, Philippine Ambassador to the United States; Secretary Vince Dizon, Presidential Adviser on Flagship Programs and Projects, and President and CEO of the Bases Conversion and Development Authority; Mr. Charles Freeman, Senior Vice President for Asia of the US Chamber of Commerce; Our distinguished private sector panelists and guests; friends in the media: good evening and good morning to all of you.
First of all, I thank Ambassador Romualdez for putting together this webinar. This forward-looking event signals that the Philippines is back in business despite the pandemic.
I hope this meeting will provide you a meaningful understanding of the present disposition and immediate prospects of the Philippine economy.
When the pandemic struck, the Philippine government prioritized the health and safety of its people above everything else.
President Duterte decisively imposed a lockdown in March to protect lives, even if it was clear that this would affect the domestic economy. We were fully aware that such a move would impose heavy costs on the government.
The lockdown gave us time to strengthen our prevention, testing, isolation, and treatment capacities. According to our university researchers, the lockdown helped us avert an estimated 1.3 to 3.5 million infections.
The Filipino people fully understand the need for restrictions to stem the tide of COVID-19 infection. In fact, they approve of how our government has been handling this pandemic. In the latest survey conducted by an independent public opinion poll, President Duterte received a job approval rating of 91 percent.
As we gradually reopen the economy with health interventions, our GDP performed much better. We had a smaller GDP contraction of 11.5 percent in the third quarter from a decline of 16.9 percent in the second quarter of this year. On a quarter-on-quarter basis, the economy grew by 8 percent in the third quarter.
This indicates that the Philippine economy is on the mend. This is also a strong signal that the worst seems to be over for the country. The path is clearer to a strong bounce back in 2021.
We expect to see additional improvements in the last quarter of this year as we progressively reopen businesses and transportation.
It is to our advantage that when the crisis hit, the Philippines was financially ready.
When President Duterte took over in 2016, he introduced a zero-to-10 point socioeconomic agenda of governance.
The strategy emphasized the continuation of pro-market macroeconomic policies. It highlighted the need to have a progressive tax reform program and a more transparent government. It also underlined the importance of improving the ease of doing business and enhancing peace and order. Finally, the agenda pushed for increased investments in infrastructure and human capital development.
Over the last four years, the Duterte administration delivered resoundingly on this program of government.
An important step towards lasting peace in Mindanao was taken in 2018 with the establishment of the Bangsamoro Autonomous Region for Muslim Mindanao. The government has passed numerous game-changing reforms, such as the national ID system; the Ease of Doing Business law; and the universal health care program.
At the beginning of the President’s term in 2016, we had started building up our finances to support our aggressive infrastructure modernization. The Build, Build, Build program has been our main strategy to help Filipinos lift themselves from poverty.
We passed a series of tax reform measures that improved the equity of our tax system, increased revenue flows, and reduced personal income tax rates for 99 percent of our taxpayers.
As a result, we were able to bring up our revenue effort to 16.1 percent of GDP in 2019 from 15.1 percent in 2015. This is our best performance in more than two decades.
Last year, our spending on infrastructure investments reached 5.4 percent of GDP, double the average infrastructure spending to GDP for the past 50 years.
Little did we know that our financial build-up would serve to buttress our defenses against economic shocks.
We also faced COVID-19 with strength on the food security front because we passed the rice tariffication law. It has kept food prices affordable and our inflation rate benign during this health emergency.
In October of this year, the inflation rate remained low at 2.5 percent. This is well within the target range of 2 to 4 percent.
Our legislators passed reforms on a timely basis. They gave us the tools needed to fight the pandemic.
These measures, along with our prudent fiscal management policies, have strengthened our fiscal and economic stamina.
In 2019, our debt-to-GDP ratio was at a historic low of 39.6 percent from 42.7 percent in 2015.
In the same year, we posted a 20.2 percent external debt-to-Gross National Income ratio from 22.7 percent in 2015. The Philippines has the lowest external debt position among the ASEAN-5 countries.
Moreover, we received a BBB plus credit rating—the highest in our country’s history.
Last year, we also achieved the lowest recorded poverty incidence at 16.7 percent from 23.5 percent when the President took over. By the end of 2019, unemployment significantly dropped to 4.5 percent from 6.3 percent in 2015. Underemployment also fell from 18.5 percent in 2015 to 13 percent last year.
In other words, without this global economic crisis, we had realized better economic outcomes for our people. Our economy was ready to roar.
At the end of September of this year, our gross international reserves hit an all-time high of 100.4 billion US dollars. This is 25 percent higher than the 80.7 billion US dollar-level in 2015. Our current buffer is sufficient for 10 months’ worth of imports.
Crises in the past had pushed the Philippine peso to depreciate together with currencies of other emerging markets. Not this time. Year-to-date, the Philippine peso has appreciated by 5 percent against the US dollar, matched only by the Chinese Yuan.
Our credit ratings, on the other hand, endured a global tide of downgrades and remain at historic highs.
Overall, our strong financial position gave us enough fiscal space to reallocate budget items to fight the pandemic.
One week after the imposition of the lockdown in March, our Congress swiftly passed a COVID relief package called Bayanihan One. This cushioned the public from the initial economic shock of the lockdown.
We urgently delivered an emergency cash grant to 18 million low-income families for two months. We distributed wage subsidies to more than 3 million small business workers, also for two months. These interventions cost us about 5 billion US dollars. This is the largest social protection program in Philippine history.
Fighting the pandemic is costly, as you very well know. Fortunately, the Philippines quickly accessed emergency loans from our development partners and commercial markets at very low rates, tight spreads, and longer repayment periods. With our enduring financial strength, we will meet these obligations.
This year, we expect to collect less in taxes as we increase spending in healthcare and relief measures. The borrowings we have secured at concessional rates will help us cover our revenue shortfall.
We appreciate the importance of continuing our fiscal discipline to ensure the resilience of our economy.
Despite the many populist excuses to grow the deficit and bury future generations in debt, the Philippines has chosen the path of fiscal prudence.
Our goal is to land our deficit-to-GDP ratio in the middle range of our ASEAN neighbors and credit rating peers around the world. This conservative approach will allow us to continue accessing the financing we need at favorable terms for the Filipino people.
The battle against COVID-19 is going to be a marathon, not a sprint. We need to maintain our fiscal stamina. We should have ample ammunition to outlast this enemy.
We are thankful that Congress adhered to our prudent approach by passing a fiscally responsible economic stimulus package called Bayanihan Two.
Bayanihan Two puts our health response front and center. It provides funds to hire thousands of contact tracers and to support our medical workers. We will purchase safe and effective vaccines when they become available.
In addition, Bayanihan Two makes possible several streams of support for individuals and enterprises to restart their operations.
We are infusing more capital into government financial institutions to dramatically expand their lending to micro, small and medium enterprises. This will have a large multiplier effect in economic activity. Every peso infused into our government financial institutions will generate around 10 times its value in credit. The additional capital will be used to protect the productive parts of our economy.
The increased lending capacity will also enable our government banks to serve as wholesale banks and rediscounting agents for rural banks and microfinance institutions.
The Duterte administration is also maintaining its commitment to ramp up infrastructure spending. With its high multiplier effect, the Build, Build, Build program will play a pivotal role in our economic recovery.
Even as infections continue, it is important to begin the difficult task of rebuilding our economy. We are working closely with our legislators and the private sector for the urgent passage of key recovery measures.
We are pushing to modernize our outdated corporate tax regime. The Corporate Recovery and Tax Incentives for Enterprises or CREATE bill aims to provide an outright 5 percentage point reduction in the corporate income tax rate as soon as it is made effective. This will help businesses continue their operations and retain jobs.
CREATE will enhance the flexibility of our incentives system so that we can proactively attract investments that will bring exceptional benefits to the Filipino people.
Through CREATE, we see an opportunity to deepen our trade and investment partnership with the United States by incentivizing industries with higher value-added.
We are also seeking Congressional approval for banks to dispose non-performing loans and assets through asset management companies. This bill is an improved version of the special purpose vehicles created in the early 2000s in response to the Asian Financial Crisis. We hope to enable banks to offload souring loans and assets, clean up their balance sheets, and extend more credit to sectors in need.
We support a bill that will enable government banks to form a special holding company that will infuse equity, with strict conditions, into strategically important companies facing solvency issues. This is very similar to some key features of the TARP or the Troubled Asset Relief Program of the US in 2008.
We also seek to provide greater support to the agriculture sector by increasing credit access to the entire agricultural value chain.
Meantime, the swift passage of our 2021 national budget is crucial. It will provide us with some of the most effective tools necessary to rebuild our economy.
While strengthening our health system, we intend to continue finding more ways to revive the domestic economy. We see many areas of cooperation between the US and the Philippines on this front.
For instance, we are turning this crisis into an opportunity to boost the competitiveness of our manufacturing and agriculture sectors.
We are pushing the use of digital technologies to transform Philippine agriculture into a dynamic, high-growth sector. With the US being one of the world’s greatest food producers, we see immense potential benefit in having American investments in this area.
Manufacturing is another key sector that we will revitalize in the post-pandemic era. This is a good time for the US firms that are looking to diversify their supply chains to see the Philippines as a viable source of intermediate products and services.
While some of our closest neighbors are grappling with aging populations, the Philippines has a very young workforce. We have invested a lot in preparing our youth for the competitive world that lies ahead. There is a great talent in our market ready to be unleashed.
In particular, we have an extensive pool of highly skilled workers to assist in the development of the US manufacturing and innovative industries.
We also see great potential in partnerships with US companies as we accelerate our move to a digital economy.
The COVID-19 crisis is also a time for renewed cooperation between our nations in the area of medical research.
As we traverse very difficult circumstances, we intend to maintain fiscal discipline and make our financial sector more inclusive. We are introducing additional reforms that will help us consolidate a pro-business environment.
We are committed to pursue the remaining packages of our tax reform program. These include improvements in our property valuation system and in taxation of passive income and financial intermediaries.
We are also considering measures to fairly tax the digital economy, a sector we expect to grow dramatically over the coming years.
We will push for the passage of complementary bills that will open up the country to more foreign direct investments, such as the amendments to the Foreign Investments Act, the Retail Trade Liberalization Act, and the Public Service Act. These measures will provide more opportunities for our countries to engage in more mutually beneficial investments.
Next year, we expect the Philippine economy to post a strong rebound. The challenges are immense, but we are determined to build back a better economy that our people deserve.
We hope that the Philippines’ strong fundamentals, fiscal stamina, and effective governance will continue to make us a promising investment destination and a growing market for US investors.
Thank you!
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