Full circle

September 18, 2023 | 12:04 am

Introspective by Romeo Bernardo

 

As reported in the news, I have been appointed by President Marcos Jr. as a Member of the Monetary Board. I received this news from Governor Eli Remolona while on a long postponed family vacation overseas. I understand that he, Prime Minister Cesar Virata, and my former bosses in the Department of Finance (DoF) as well as prominent leaders in the private sector and the legislature recommended me. I am most honored, delighted, and grateful for the opportunity to go back to my first love — public sector policy work.

To ensure no conflict of interest, I am obligated to say goodbye to private institutions/corporations and colleagues/friends I worked with. I do so with a tinge of sadness. They are the captains of industry and professional executives who make the investments that generate jobs that improve our people’s lives, and for whom I have the highest respect. At the end of day, they are the drivers of our economy.

Among these institutions is BusinessWorld (BW). I have had the privilege of writing a monthly column for over a decade, as part of our “Introspective” rotating crew (all Board Directors of the Institute for Development and Econometric Analysis, established by dear friend, now departed, UP Economics Professor Dondon Paderanga). “Introspective” featured Dondon together with his fellow professors Raul Fabella, Noel de Dios, Calixto Chikiamco (my Foundation for Economic Freedom co-founder, political economist, and net entrepreneur) and me.

In line with the highest ethical standards instituted by BW founder Raul Locsin to ensure that there is not even the impression of conflict of interest or lack of independence, this will be my last column.

With your permission dear readers, I reproduce below remarks I made on Sept. 14 to introduce Dr. Dante Canlas at the Philippine Center for Economic Development (PCED) 50^th anniversary lecture series on “The Philippine Economy and the UP School of Economics (UPSE): Academics and Policymaking.” Dante and other distinguished former UPSE professors who served as Socio-Economic Planning Secretaries were requested by the PCED to share lessons for scholars, practitioners, and the general public, to upgrade the quality of discourse on and execution of Philippine economic policy making.

In this final column, I will also share some preliminary thoughts on the work ahead for the Bangko Sentral ng Pilipinas (which I believe Dante also shares).

ON THE HONORABLE (SMALL ‘H’) DANTE CANLAS
Let me start with an apology that I cannot be personally present to introduce our featured lecturer. But it is not my fault. As some may know, it is my first day on the job.

I won’t devote much time enumerating the outstanding academic, government service record and awards of our speaker. Many here know of them. They are a matter of public record and downloadable from the web.

What I would like to do is introduce to you the man behind the accomplishments and awards, what we who worked with him and his students know.

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First, Dante as the impervious college heartthrob.

He was already a member of the faculty when I was a student. According to the female students, there were two in the faculty who qualified for the title “crush ng bayan.” One told me that she would sit in front of their classes, doubtless because of their pedagogical skills (not because of their looks daw). Our speaker was thought of as the Harrison Ford of UPSE — Ford as Hans Solo of the original Star Wars, not the old guy in the latest Indiana Jones movie. There was one difference between him and the other “crush ng bayan” I was told. Our speaker had no idea that he was good looking and a heartthrob, and “that made him all the more attractive” (said one who is now married to a faculty member and former top official).

Second, NEDA (National Economic and Development Authority) Undersecretary Dante, as the quiet modest achiever and ideal collaborator.

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I had the good fortune and privilege of being his counterpart at the DoF during the Ramos Administration. We worked with ultra-competent professionals like then Budget Undersecretary Emy Boncodin, then Central Bank (later BSP) Director for Research Say Tetangco, and others. One could not have wished for better teammates, with abundant intelligence, integrity, industry, and zero fanfare and zero ego. This quite efficient technical teamwork allowed our bosses to attend to the more political aspects of economic governance even as we, the most senior technicians, attended to the knitting, including various inter agency committees, debt negotiating panels, and donor conferences.

Our speaker chaired the Investment Coordination Committee (ICC) technical board with me as his co-chair. The ICC had the difficult task of putting together an investment program to fund enormous infrastructure and social expenditure requirements, at a time when interest payments alone ate up 20% to 30% of the budget and the foreign component a substantial part of export receipts. Mind you, this was when we were still reeling from the debt crisis, with no access to capital markets, and still finding our bearings politically as a nation. I would like to think we got the job done with the support of the donor and financial community which saw the Philippine macro and structural reform program as worthy of support. These reforms included accession to the WTO (World Trade Organization), a comprehensive tax reform program and privatization effort that raised tax and overall revenues to record highs as shares of GDP, breaking up of monopolies and partnering with the private sector in delivering public services especially in power and water, and the creation of an independent monetary authority to replace the bankrupt old central bank. All these led to the country’s eventual exit from IMF (International Monetary Fund) surveillance.

Our speaker was very much on top of putting those programs together and with the Department of Finance, coordinating — one can say lobbying — and securing support of bilateral, multilateral institutions to fund the same. There is a saying that nothing is impossible for the man who does not care who gets the credit. This describes Dante.

Third, for Secretary Dante, it is principles over principal. Given his personal and professional virtues were known by all, it was no surprise when President Gloria Macapagal-Arroyo tapped him, her dissertation adviser, to be her “Economist in Chief.” I was no longer in government then, but from all I know, had she listened to him on a key infrastructure project, the deeply flawed North Rail project, the Philippines would have been spared some $185 million in public money that we had to pay China as a creditor, with nothing to show for it.

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He left government over that issue. What is not clear to me is whether his resignation was accepted as a matter of “loss of confidence,” a prerogative of the President, or whether this was a case of Dante being just ahead of the curve, 2-1/2 years ahead of the Hyatt 10.

Dante knew he owed his principals his best advice — and he gave it even when this may not have been what they wanted to hear and may cost him his job. To have done otherwise would have been a disservice to them, and a betrayal of his principles, of who he is. And ultimately a betrayal of our ultimate principals— the Filipino people.

It is in the best interest of our leaders to listen more to people like Dante. History will be kinder to them if they did.

Finally, may I publicly reveal a fervent wish to be able to work with Dante soon.

ON MY NEW JOB
It is the country’s good fortune that Professor Eli Remolona is heading our central bank during these times of heightened global economic uncertainties clouding the Philippine economic outlook (see my column “A 5% economy?” Aug. 28, 2023 https://www.bworldonline.com/opinion/2023/08/28/541704/a-5-economy/). My now former GlobalSource Partners fellow analyst Christine Tang and I described him as being “preeminently qualified” in our report to subscribers, being personally aware of his deep academic and hands-on experience, dating back to 1986 when he was country risk expert reporting directly to the legendary New York Fed Chairman Gerry Corrigan. Mr. Corrigan was instrumental in helping the Philippines reach final settlement with its consortium of creditor commercial banks at the height of our debt crisis. I was part of the Philippine delegation led by Finance Secretary Cesar Virata, later Secretary Jimmy Ongpin and Governor Jobo Fernandez. Governor Remolona would later be closely involved in crafting what would be the definitive solution to the emerging market debt crisis — the Brady Plan.

Since that period, armed with distinguished degrees from UP and Stanford, he would chalk up impressive experience and credentials in central banking at the NY Fed for 14 years and the Bank for International Settlements (BIS), the central bank of central banks, ending a 19-year career retiring as head of BIS regional office in Asia. Our paths would cross again as fellow board directors in the Bank of the Philippines Islands, even as he was concurrently teaching courses as Director of Central Banking at the Asia School of Business in Kuala Lumpur and in Williams College, Mass., my MA alma mater.

I mention all these to underscore that the country’s financial system is in the best of hands. Supported by a solid monetary board composed of professionals with diverse backgrounds and by the best career officials and staff in the Philippine bureaucracy, we can sleep soundly knowing that monetary policy and financial system supervision can withstand headwinds all around.

I am most honored to join their ranks. And intend to be fully supportive of the Governor’s announced priorities. As he said in his remarks to the banking community on July 28 (see https://www.bis.org/review/r230731f.htm): “(We will) work hard in pursuing our mandate of ensuring price stability, financial stability, and a safe and efficient payment system. We will do this through greater investment in our research and operational capacities to become a more responsive, efficient, agile, and future-ready institution.” He also expressed the intent “to deepen Philippine capital markets and consider a framework for sustainability that includes financial inclusion.”

If I may be allowed to add, aside from its conventional usage, financial inclusion should also cover banking regulatory policies that give primacy to job creation and poverty elimination. For example, to enable our banks to continue to lend so we will have secure and affordable energy to fuel Philippine development — a subject I have written on in this space, most recently: “It’s not easy being green: Balancing energy security and decarbonization for an emerging economy,” in November 2021 (https://www.bworldonline.com/opinion/2021/11/07/408820/its- not-easy-being-green-balancing-energy-security-and-decarbonization-for-an-emerging-economy/).

Financial inclusivity can also be brought about by reducing regulatory and other costs that cause Philippine banks to have the highest operating cost ratios (mandated lending, reserve ratios, etc.). Lower costs mean greater ability to take on risk and reach broader markets. Similarly, arbitrary caps on interest rates reduce inclusivity and access, as banks ration limited funds and exclude marginal clients, driving them to the unregulated grey market that charges much much more.

 

Romeo L. Bernardo was principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He has served as a board director in leading companies in banking and financial services, energy, telecommunications, education, food and beverage, real estate, and others. He had a 20-year run in the public sector, including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

globalsourcepartners.com

romeo.lopez.bernardo@gmail.com

 

A 5% economy?

 

August 28, 2023 | 12:04 am

 

Introspective By Romeo L. Bernardo

I take no delight in having been right and was unsurprised when the disappointing second quarter gross domestic product (Q2 GDP) annual growth number of 4.3% (from 6.1% in Q1) came out. Together with a few other private macro watchers like Anton Periquet (Chairman and CEO of AB Capital) and Philippine Institute for Development Studies (PIDS) Senior Fellow Margarita Debuque-Gonzales, we forecast a less optimistic growth of around 5% for this year, and over the medium term.

At a public forum in the UP School of Economics last week, honorable Professor Philip Medalla, unshackled by public office, was also less sanguine. Analysts who earlier were more optimistic hurriedly adjusted their forecast downwards by as much as one percentage point.

But not government.

Planning Secretary Arsi Balisacan — recently awarded Most Distinguished Alumnus by the UP Alumni Association (UPAA) — in a related lecture reaffirmed that their 6-7% is still achievable this year. Attributing the underperformance largely to government underspending, especially on capital outlays, he said that the government economic team — made up of himself, Finance Secretary Ben Diokno, and Department of Budget and Management Secretary Amenah Pangandaman — committed to do catch up spending for the second half.

I am vigorously rooting for the government to succeed in this.

I am also somewhat skeptical that this can be done speedily given the structural nature of the bottlenecks in government’s execution capacity. This impediment was underscored in a question that UPAA Lifetime Achievement awardee, engineer Rene Santiago, posed to Secretary Balisacan, noting the very low absorptive capacity of the Department of Transportation (at around 30% of disbursements) and the Department of Public Works and Highways (at 50%-60%). With inputs from him, Christine Tang and I identified the roadblocks for both (official development assistance/general appropriations act) ODA/GAA-financed and private-public partnership (PPP) projects which I excerpted in my column last April, “Infrastructure Anyone?” (https://www.bworldonline.com/opinion/2023/04/30/519979/infrastructure-anyone/).

These include: 1.) right of way delays; 2.) lack of a national inter-modal framework to serve as a basis for identifying, selecting, and prioritizing projects that will yield the highest economic returns for our archipelagic country; 3.) non-implementation of contracted user fees and charges; 4.) the problem that is the Department of Transportation and Communications (despite its having a very qualified and competent head, Secretary Jimmy Bautista); and, 5.) third-party challenges that hold up progress, from project preparation to award, especially for PPP.

While I would like to be optimistic that these can be overcome, it may be Panglossian to believe so, at least in the short run. Of course, government can choose to prioritize spending magnitude over quality, which may boost growth for 2023, but at high cost beyond.

THE MEDIUM TERM
Like Anton Periquet and Maggie Gonzales, we are also not optimistic that the Development Budget Coordination Committee’s forecast GDP growth of 6.5% to 8% for the balance of the administration’s term is likely, for several reasons.

 

First, there is the still depressed global growth due to several factors including the persistence of recession risks in the US, the war in Europe, and China’s reeling from a real estate bust, its poor COVID management, and the trade tensions with the US and its allies.

Then, consider that pre-pandemic, we were already at the peak of the credit cycle, largely due to long-running benign inflation and being “forever QE,” thus having both low interest rates and abundant capital (and with no way to go but to slow down).

Third, there are the adverse effects of COVID scarring, especially on the labor force (e.g., resistance to going back to the office, jobs mismatches) and a learning crisis.

 

Fourth, we have constrained fiscal resources and headroom, with public debt-to-GDP now at 60% from 40% pre-pandemic, and a highly elevated deficit-to-GDP of 7.3% in 2022, targeted to be pruned to 6.1% this year, and a primary budget deficit of 5.6% last year, targeted to go down to 3.6% this year.

Then there is the still high inflation as the continuing Ukraine-Russia war and the emerging El Niño phenomenon have an impact on food markets (e.g., India and Vietnam restricting rice exports), aggravating the decades-long hopelessly dysfunctional Department of Agriculture and Department of Agrarian Reform coupled with political resistance to agricultural imports from impacted sectors and rent seekers.

All this, together with still ongoing US Fed monetary tightening and the resulting elevated global and domestic interest rates, have a consequent negative impact on private investments and consumption. An emerging sustained “twin deficit scenario” (fiscal and foreign exchange) flagged by Prof. Medalla, also implies a likely wider interest rate premium on Philippine loans and securities.

Then there is the absence of any obvious new growth drivers to complement two old reliables, OFW remittances and BPO (business process outsourcing) earnings, whose future growth is challenged by an already high base compared to decades ago. Generative AI also poses a medium-term threat to BPO, especially for routine work, unless we can rapidly upskill our workers.

 

Finally, despite highly acclaimed roadshows by President Marcos Jr. and his economic team and prominent business leaders, there has been so far limited conversion to foreign direct investments — thanks to a miserable NAIA airport matched by a bureaucracy stuck in neutral. (Overheard from a foreign investor and tourist: “I won’t ever go back — spent more time at the airport than the beach.”)

Anton Periquet is even forecasting medium term growth of 4.5%, “a return to GMA era trajectory where foreign investment was absent and fiscal constraints prevailed.”

 

IMPACT ON FISCAL SUSTAINABILITY

A low medium term growth scenario, say of under 5%, has implications on fiscal sustainability. This can fuel a downward spiral of low revenues, high budget deficits, high interest rates, low public capex spending, thus even lower GDP, and potentially an expansive public debt-to-GDP ratio that makes us vulnerable to risks from financial shocks. Prof. Medalla even flagged the risk of a “perfect storm if perception of the Philippine government as a borrower were to go back to what it used to be.” This is well analyzed in a PIDS paper by Margarita Debuque-Gonzales, Justine Diokno-Sicat, et al (https://www.pids.gov.ph/publication/discussion-papers/fiscal-effects-of-the-covid-19-pandemic-assessing-public-debt-sustainability-in-the-philippines).

Thankfully, Secretary Diokno and his team are well aware of this, and are thus pushing for reforms that can tame spending and raise revenues, including: 1.) the reform of military pensions; 2.) tax measures such as new taxes on the digital economy and on junk food (though unpopular and regressive), and further reform of VAT to limit leakages; 3.) the privatization of government assets and operations, notably the big ticket Philippine Amusement and Gaming Corp. (better known as Pagcor); and, 4.) expenditure reforms including revisiting the expensive and flawed “free tuition in SUCs” (RA 10931), and streamlining of government bureaucracy.

These are all highly political. With resolve, strategic and skillful management leveraging of the President’s high approval rating, and with closer coordination with legislators via LEDAC (the Legislative-Executive Development Advisory Council), they are achievable. A column I wrote last month elaborates on some of these actions for the next 365 days. (https://www.bworldonline.com/opinion/2023/07/25/535716/marcos-2-0-year-2-to-dos/)

 

Romeo L. Bernardo is principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He serves as a board director in leading companies in banking and financial services, energy, food and beverage, real estate, and others. He has had a 20-year run in the public sector, including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

romeo.lopez.bernardo@gmail.com

 

Marcos 2.0: Year 2 to-dos

 

July 25, 2023 | 12:03 am

By: Romeo Bernardo 

(I am pleased to share with readers a post to subscribers of Globalsource Partners (globalsourcepartners.com) written by Christine Tang and I.)

WHEN Ferdinand R. Marcos, Jr. assumed power at the end of June last year, we listed five areas where the new administration needed to take fire-fighting stances to speed up post-pandemic recovery. These were: a.) battling inflation and putting fiscal consolidation on more solid footing to ensure macroeconomic stability, b.) rebuilding private sector trust in long-term public-private partnership (PPP) contracts to expand financing sources for infrastructure, c.) addressing high food prices which the President drew attention to by appointing himself agriculture secretary, d.) crafting an exit plan for COVID-19 to allow the economy to fully reopen and start addressing the pandemic’s scars especially on education and worker skills, and, e.) addressing uncertainties in the power sector affecting the reliability and cost of electric power over the medium-term.

YEAR 1 PERFORMANCE IN BRIEF
There were hits and misses. Where the administration got it right from the start was to abandon lockdown as a policy to control COVID. This unleashed unexpectedly large pent-up demand quickly that pushed last year’s GDP growth past most forecasts. Where it most evidently got it wrong was in managing food supplies. Skyrocketing prices of items that make up a tiny part of the consumer’s food basket (notably sugar and onions) generated outsized impacts on inflation at a time of already elevated global food and energy prices. Alongside a recovering economy, tight global financial conditions, and volatile financial markets, it left monetary authorities with no choice but to raise interest rates aggressively and saw agriculture officials resorting to stopgaps in the form of food subsidies through a network of (Kadiwa) retail stores/pop-ups/on-wheels outlets.

The administration may also be credited for the steps taken to build on the foreign investment liberalization laws left behind by the previous administration. These included the issuance of the implementing rules and regulations (IRR) of the Public Services Act and re-writing of the same for the BOT law, the Senate’s ratification of the Regional Comprehensive Economic Partnership (RCEP), and greater regulatory clarity with respect to investments in renewable energy. It also caught the eye of foreign policy experts by moving further away from an overly pro-China stance whilst trying to avoid antagonizing the neighborhood giant. The foreign trips of the President to major industrialized countries, accompanied by his economic team and business leaders, doubly served as roadshows to showcase the Philippines as an investment destination.

One year on, positive reviews on the administration’s performance from business circles [show] appreciation that President Marcos has exhibited none of his father’s autocratic qualities, nor of his predecessor’s uncivility, boorishness. He has been praised for choosing high caliber cabinet members, including his latest cabinet appointments for the health and defense departments as well as the governorship of the BSP. His personal more consultative style vis-à-vis the business sector has also been welcomed. At the same time, criticism against the administration in the economic area included: failures to take necessary decisions in a timely manner, most notably in agriculture, the President’s purview, that led to shortages of certain basic food items and thus, high prices; seeming haste to act on ideas that have not benefited from complete staff work as in the case of the Maharlika fund; and, insufficient consultation with stakeholders on otherwise good reforms as in the case of the military pension reform which entailed unnecessary losses in political capital.

YEAR 2 CONTEXT
Entering its second year, the Marcos administration continues to face strong external headwinds with economic growth of key trade partners (US, Japan, China) predicted to slow further in 2024, persistence of inflation in advanced economies that is expected to lead to more policy interest rate hikes and possible spillover effects from US financial sector stress, and continuing geopolitical tensions raising uncertainties all around, from food and energy prices to trade, technology, and regional security risks.

Domestically, pent-up demand is easing and macro policy room, monetary and fiscal, remains limited.  While government is committed to its 5% of GDP infrastructure spending target, it has yet to line up adequate revenue generating tax reforms to be able to, at the same time, stick to its medium-term fiscal consolidation program. Too, despite several international roadshows declaring the Philippines open for business, foreign investment inflows are still in trickles with the total for the first four months of this year almost 20% lower than last year’s, amidst feedback of poor follow through domestically by bureaucrats when the investors come to look see.

THE NEXT 365 DAYS
The President’s economic managers are eyeing more investments to enable the economy to reach an accelerated GDP growth rate of 6.5% to 8% over the medium-term and provide better local jobs. Current global economic conditions may not be on the administration’s side but a lot of work is still pending to increase the odds of translating all the marketing efforts into actual investments in brick-and-mortar and/or e-commerce businesses. Below are some of the priorities we see:

1. In line with the practice in private companies, government’s Medium-term Philippine Development Plan (MTPDP) needs an accompanying action plan that concretely spells out shorter-term strategies, resource constraints, refined timelines and persons accountable for the deliverables. This will help in identifying gaps and bottlenecks and additional resources needed, whether public or private. At the macro level, a more exhaustive revenue/tax program is needed to anchor medium-term fiscal targets. At the program level, the Maharlika Fund, which is not in the MTPDP but has been identified as a priority measure and signed into law this week, needs detailed mapping out to ensure that as a vehicle for bringing in private investments in strategic sectors, it will not be a source of unmanageable fiscal risks down the road. Job one, finding credible highly regarded fund manager CEO and board directors, will not be easy, given the ambitious return and development objectives that its sponsors have publicized. They also need to find an institution builder that will define the rules, risk management principles, investment guidelines, and other governance guardrails of this new agency. It’s actually better if this is done separate from the investment mindset, so such guardrails are shorn of agendas and biases.

2. Following its welcoming stance for public-private partnerships (PPP) in infrastructure, government now needs to identify low-hanging fruits, expedite approvals from national to local levels, and get the program up and running to attract even more investments. Among the issues that government needs to demonstrate progress include clearing right of ways, automatic fare adjustments per formula, and, not the least, addressing inordinate delays in all legs of the multilevel, multi-agency, and in some cases multi-year preparation, evaluation, and approval process. The PPP center will need to play its proper role, not just in promoting but in facilitating. Local government units also need capacity building for preparing PPP projects to be able to tap private finance for local projects.

3. We said many times last year that one of the President’s most pressing tasks is to find a suitable agriculture secretary, one who not only understands the sector but is honest and bold to take on powerful vested interests and perhaps most importantly, has the President’s ear. Although we still think this ideal, it appears that nobody has the necessary skills mix for the job or in any case, nobody suitable wants the job. Following the proposal of a sector expert, perhaps finding a highly technically capable senior undersecretary who could serve as the President’s alter-ego may be the second-best option.

4. He also needs to address food security both in the short term (driven by geopolitical events like Russia’s termination of the deal allowing Ukraine to ship out wheat) and long-term (climate change) by allowing more food imports and enabling the private sector to be more resilient in responding to food shortages.

5. With the country now facing a likely two gap (fiscal and foreign exchange) scenario over the medium term, and   BPOs now running into headwinds due to talent constraint, and, down the road, potentially disruptive regenerative AI, the country needs to find new growth and foreign exchange sources. Mining and tourism have been identified, but the administration needs new policies to drive their growth.

All told, we would agree with conclusion of Ramos Finance Secretary Roberto De Ocampo, OBE, in a recent column that “it would seem that the pluses have outweighed the minuses so far and the private sector’s wait-and-see posture is leaning more toward a qualified but positive assessment” (“Crossroads,” PDI, June 22, 2023).

 

Romeo L. Bernardo is principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others. He has had a 20-year run in the public sector, including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

romeo.lopez.bernardo@gmail.com

The Public Sector: Debt sustainability handles

June 12, 2023 | 12:04 am

Introspective By Romeo L. Bernardo

 

I am pleased to share with readers, the fiscal sector section of our June 7 Quarterly Economic Outlook Report, “Growing Pains.” Christine Tang, Shane Sia and I wrote this for GlobalSource Partners (globalsourcepartners.com), a New York based network of independent analysts in emerging markets.

The National Government debt was steady at 61% of GDP in Q1, held down by a smaller budget deficit and a high denominator that reflected both real GDP growth and higher inflation. With nominal GDP expected to normalize ahead, the Finance department has come up with proposals to boost revenues and manage expenditures (see the Table) to bring the overall deficit down from the 6.1% of GDP target this year to 3% by the time this administration ends.

Based on the latest fiscal program, revenues, expected to dip to 15.2% of GDP this year from 16.1% last year, are targeted to grow 2 ppt to 17.2% by 2028 while expenditures, also expected to decline to 21.3% of GDP this year from 23.4% last year, are programmed to slide by 1 ppt more and maintained at around 20% of GDP.

OURVIEW
The previous administration raised the tax effort by 1.4 ppt between 2016 and 2019 through a comprehensive package of tax reforms. Given what this administration has presented so far, it is not clear that it can achieve a 2 ppt increase in the tax effort by 2028 with the package it has drawn up so far. The target requires government to generate incremental annual revenues of 0.3% to 0.5% of GDP but the revenue flows we have seen are not large: a.) PIFITA (Passive Income and Financial Intermediary Taxation Act) is expected to be revenue neutral, b.) the other three measures for near-term implementation are not expected to yield much, about half of 0.1% of GDP per the IMF’s 2022 Article IV report, and, c.) the second set of measures are estimated to yield a flat stream of annual revenues equivalent to 0.3% to 0.4% of GDP starting 2025.

The proposed budget reforms could help improve tax administration (e.g., digitalization) and create fiscal space through efficiency gains but we expect the benefits to be spread out over long time periods. Likewise, the recently approved Maharlika Investment Fund as well as the merger of the two banks, targeted by end-year, will need time to yield the promised benefits. In the limelight now is the politically sensitive military and uniformed personnel (MUP) pension reform which the IMF’s latest end of mission statement cited as “important to create fiscal space for economic and social priorities.” Department of Finance (DoF) officials are now doing the rounds of consultation with MUPs and the likely outcome would be a set of more modest changes that will reduce the annual drain on the budget and slow the growth of pension liabilities. (See the Box.)

Overall, we think that unless other revenue measures are identified, a gentler slope for debt reduction can be expected. Government is currently targeting to bring down the National Government debt ratio from 61% last year to below 51% by 2028.

 

 

Romeo L. Bernardo is principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others. He has had a 20-year run in the public sector including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

romeo.lopez.bernardo@gmail.com