Legislation in aid of investments, jobs, recovery

I am pleased to share with our readers a piece based on our latest report for GlobalSource Partners, a subscriber-based network of independent analysts covering emerging markets. Christine Tang and I, assisted by Charles Marquez and Shanee Sia, are their local partners.

Since the pandemic, President Rodrigo Duterte’s economic team has had its hands full trying to save the economy from slipping deeper and deeper into recession. Part of the job was to convince Congress to give the executive branch spending leeway to fight the pandemic, accomplished through the Bayanihan I and II Acts, while reigning in lawmakers’ clamor for higher stimulus spending, done by capping the supplemental budget for this year to less than 1% of gross domestic product (GDP) and getting both houses to stick to its proposed P4.5 trillion national budget for 2021.

Economic managers needed also to persuade legislators to urgently act on the other elements of the executive’s economic recovery plan consisting of three proposed bills, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), the Financial Institutions Strategic Transfer (FIST) Act, and the Government Financial Institutions Unified Initiatives To Distressed Enterprises For Economic Recovery (GUIDE).

It has so far gotten the green light of both houses on two of the three, i.e., CREATE and FIST, with the less contentious GUIDE still awaiting the Senate’s nod. Although these bills still have some milestones to hurdle, notably reconciliation of differences between the versions passed by the two chambers, hopes are high that the 2021 budget together with CREATE and FIST, will be done by early Q1, 2021.

Many in the business community are rooting for the House to adopt as closely as possible the Senate version of CREATE to facilitate its quick passage. The Senate version keeps the structural reform thrust of the original Executive and House versions but tweaked to be more attuned to the impact of COVID-19 on MSMEs, hospitals and educational institutions, and the requests of PEZA locators for longer transition periods. It will also provide a needed fiscal stimulus of around P250 billion over the next two years (counting the retroactive application to July 2020), and most crucially, will lay to rest contributory uncertainty over Philippine tax regime deterring  investments due to its delayed passage.

To optimize on its impact in attracting investors many of whom are looking for new destinations due to the disruptions from COVID-19 and the US-China trade and tech wars, it would be ideal to package CREATE with a critical mass of other investment reforms that will demonstrate resolve. But with less than 18 months to go before the 2022 elections, has the window closed?

Many are hoping not. After all, amidst the hardships brought about by the pandemic, the President still enjoys tremendous trust and approval with unparalleled popularity ratings of over 90% which ought to give him immense influence over Congress even at this late stage of his administration.

Moreover, with his economic team’s track record of securing difficult reforms, some decades in the making (e.g., TRAIN, Rice Tariffication Act, Bangsamoro Organic Law, National ID Law), the hope is that more landmark laws can be pushed through the legislative mill in the narrow window between now and election season; realistically, about six months’ time.

While a pandemic may not be a good time to be thinking of structural reforms, there may be an opportunity to ride on the recently signed Regional Comprehensive Economic Partnership (RCEP). The RCEP binds its 15 signatories, i.e., the 10 members of ASEAN, Australia, China, Japan, Korea, and New Zealand, which together account for about 30% of global GDP and 30% of world population, to higher level commitments compared with existing free trade agreements (FTA).

Analyses of RCEP suggest that the agreement’s immediate value lies not in the incremental tariff reductions, which may take up to 20 years to implement, but in the promise of seamless production networks among the members who will be tied to common standards, disciplines on intellectual property, rules of origin, customs processes, e-commerce, and competition policy. Within this framework of stable and predictable rules, the Philippines could aspire to becoming a regional manufacturing and services hub, thereby creating much needed domestic jobs.

RCEP with the lower tax regime under CREATE along with proposed amendments to the Public Services Act (PSA), the Foreign Investments Act (FIA), and the Retail Trade Liberalization Act (RTA) strung together would send a powerful signal of the Philippine’s readiness to welcome foreign capital to help with post-pandemic recovery, offering a light at the end of the current gloomy tunnel.

The latter three bills have been approved by the lower house and are at varying stages of deliberations in the Senate, requiring the executive’s close shepherding to ensure speed. The RCEP too still needs the Senate’s ratification, a process that based on past experiences could take anywhere from one to three years.

Former International Monetary Fund (IMF) chief Christine Legarde used to counsel countries to fix the roof while the sun is shining. But for those who have spent a lifetime incrementally pushing reforms in the Philippines, one ought never to waste a good crisis.

 Priority economic bills

A. Pending the President’s Signature

1. NATIONAL EXPENDITURE PROGRAM. The executive proposed a P4.5 trillion national budget for 2021 with spending priorities focused on pandemic response and recovery.

2. FINANCIAL INSTITUTIONS STRATEGIC TRANSFER (FIST). The executive’s proposal aims to facilitate the disposal of financial institutions’ non-performing assets through tax and other incentives on the transfer of these assets to and from special purpose corporations created under the law. As with CREATE, the House of Representatives adopted the executive’s version while the Senate introduced regulatory and loan coverage amendments.

B. For reconciliation in Bicameral Conference Committee

3. CORPORATE RECOVERY AND TAX INCENTIVES FOR ENTERPRISES (CREATE). (https://taxreform.dof.gov.ph/tax-reform-packages/p2-corporate-recovery-and-tax-incentives-for-enterprises-act/)

C. Approved by the House of Representatives; Pending Second Reading in the Senate

4. AMENDMENTS TO FOREIGN INVESTMENTS ACT. The proposal seeks to exclude the “practice of professions” from the coverage of the law and to reduce the number of direct local hires of foreign investments in SMEs from 50 to 15.

5. AMENDMENTS TO RETAIL TRADE LIBERALIZATION ACT. The proposal seeks to lower the $2.5-million minimum paid-up capital for foreign retailers, among others. The bill approved in the lower house set the threshold at only $200,000.

D. Approved by the House of Representatives; First Reading in the Senate

6. GFI’S UNIFIED INITIATIVES TO DISTRESSED ENTERPRISES FOR ECONOMIC RECOVERY (GUIDE). The two main features of the proposal are to (a.) increase the capital of three government financial institutions, namely, Land Bank, Development Bank of the Philippines and Philguarantee Corp. to enable them to assist in pandemic recovery efforts, and (b.) mandate the two banks to set up a special holding company to assist strategically important industries in various sectors.

7. AMENDMENTS TO PUBLIC SERVICES ACT. The proposal seeks to amend the 84-year-old law to exclusively designate as “public utility” the distribution and transmission of electricity and waterworks and sewerage systems. Under the Constitution, a public utility can only be operated by firms that are 60% owned by Filipinos. The aim is to allow more foreign participation in other public services (e.g., in telecommunications and transportation) to enhance competition, improve service quality and lower the costs to consumers.

E. For ratification by the Senate

8. REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP). (https://asean.org/asean-hits-historic-milestone-signing-rcep/)

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. He is a Board Trustee/Director of the Foundation for Economic Freedom, the Management Association of the Philippines and the FINEX Foundation.

2021: Big bounce back year?

 

With esteemed financial practitioners and good friends, BDO Capital Pres. Ed Francisco and ING Bank President Hans Sicat, I was recently asked to be a panelist in a Philippine Daily Inquirer 35 Anniversary forum.  That question, the title of this piece, was posed by our moderator, Business Editor Tina Arceo-Dumlao. 

Save for minor variations, we gave similar answers which i paraphrase thus: “Yes, we will see some bounce back, but largely due to base effects from the depressingly low level this year, and we won’t be seeing the Philippine economy back to 2019 levels until 2022 at the earliest.  The recovery shape won’t be a V, may not even be a Nike swoosh or a U, but more like a “dirty L” (Han’s depiction) with features of a K, uneven across industries, firms and the populace.

Characterizing the crisis as unprecedented and whose impact is sudden, severe and globally synchronous, I was the most pessimistic among us three. I echoed what we wrote for GlobalSource Partners of a bounce back to only 5 pc next year, after a severe contraction of 9.5 percent this year.  Moreover, that medium term growth is unlikely to recover to the 6 to 7 percent range of the recent past 7 years, and more likely to struggle at 4 to 5 percent, closer to the long-term growth record of the Philippines.

I mentioned the following reasons for my pessimism:

1.     Risk of more infections and stricter quarantines, possible second or third waves:
Notwithstanding success in flattening of the infection curve recently that has allowed some easing of the longest and strictest lockdowns.

 

This is thanks to the notable augmentation of DOH efforts by heavy hitters Secretary Charlie Galvez as National Task Force Chief Implementor, Secretary Vince Dizon as his Deputy, the three other czars (for testing, tracing and quarantine facilities) and Presidential Adviser Joey Concepcion.  They have also commendably mobilized the massive support of the private sector, too numerous to enumerate here, in what everyone appreciated to be an existential national undertaking.

 

However, major gaps exist including execution of a more digital tracing system, much delayed payments by Philhealth to labs and hospitals and vaccine procurement where the Philippines is unfortunately at the end of the queue.

 

An expert I consulted considered that only 25 to 50 percent of our 108 million population are likely be inoculated by the end of 2022, a good two years away; quite understandable considering how massive and unprecedented such an undertaking is with enormous uncertainties on the approval process, which vaccines will work, for how long, inadequate cold chain and other logistical infrastructure and willingness of people to queue up given concerns over unknown long term side effects.  The fairly recent controversies regarding the anti-dengue vaccination program of the last administration is a further dampener.  

 

This all means that physical distancing as a policy to prevent a resurgence in sickness will need to remain in place, especially in dense metropolitan areas that also account for a large share of output, as well as continuing constraints in public transportation and fearful public behavior.  Which brings us to the next concern.

                                                      

2.     Lack of domestic demand 

a.     Household consumption which accounts for 70 percent of GDP has dropped sharply, notwithstanding Government cash transfers and wage subsidies in the hundreds of millions.  A World Bank survey in August revealed that 24 percent of household heads employed in February were no longer working in August and of those still working, 57 percent reported reduced or no income.  A separate BSP consumer survey also showed that the share of households with savings dropped from 38 percent to 25 percent.  Meanwhile, latest consumer and business sentiments showed negative indices, meaning pessimists outnumber optimists.

 

b.     Investments have also plummeted.  Reports indicate that firms have underutilized capacities with poor earnings prospects, with certain conglomerates mulling further cuts in capital expenditures next year. The World Bank July 2020 firm survey showed that 15 percent of over 74 thousand respondents had permanently closed down, 40 percent had temporarily suspended operations (evenly split between voluntary and by government mandate) and job losses had been extensive with 48 percent of firms having laid off workers, especially in education, food services, and construction.  (Uncertainties related to post 2022 national elections are a further reason for firms to “wait and see“).

 

We also need to be mindful of “scarring”, output losses that are permanent due to damage to medium-term supply potential such as bankruptcies, lower labor force participation from skills mismatch, impact on human capital due to disruptions in school attendance and health services, and obstacles to resource allocation such as supply chain disruptions.

 

3.     Policy constraints.

a.     Monetary policy has been timely and vigorous in providing the needed liquidity shot in the arm. But there are limits to monetary policy in lifting demand especially when interest rates are already at low levels, what economists call “pushing on a string “.  

 

Data thus far validate this. The BSP as of October 27 had already injected P1.9 trillion into the financial system through its set of accommodative policy actions. But banks have understandably been cautious, mindful of their fiduciary responsibility to depositors who provide the bulk of their loanable funds.  At the end of Q3, net domestic credits to the private sector increased by only 1.4% yoy compared with a 12% growth in M3. Meanwhile, monies parked in the BSP’s deposit facilities stood at over P1.2 trillion as of end October compared with less than P400 billion at the end of the first quarter. 

 

The one area where the BSP can perhaps be more aggressive is in arresting the further appreciation of the peso, the only currency in our region that appreciated vs the dollar, by doing even more market interventions.  This will help our exporters, OFW families and support overall aggregate demand. 

 

b.     Fiscal policy.  Spending so far has been “middle of the pack” versus other countries.  The DOF‘s announced policy to “keep our powder dry “, is meant to ensure that we do not compromise needed  future access to finance.  Already, programmed deficits for the next two years are estimated at 7 to 9 percent of GDP, two to three times normal prudent levels, and there is much uncertainty on how long this plague will last. 

 

 

 

 

 

 

 

Moreover, I believe current spending has been constrained not so much by the size of the budget, but by limitations on a) distribution of income and wage support absent a national ID system that will enable “ayuda “with minimum of leakages and b) slow releases and execution of projects, as shown in the poor disbursements of capital outlays.

 

The soon to be signed CREATE bill which lowers corporate income taxes and rationalizes fiscal incentives will also provide immediate stimulus equivalent to over P250 billion in the next two years. This does not count the favorable effects this long delayed   structural reform will have in generating more investments, both foreign and local.  

 

(I congratulate Secretary Dominguez and Secretary Chua and the sponsors of the bill for bringing this landmark reform to the finish line, building on the efforts of their predecessors, who publicly -supported this bill).

 

Against this dour prognosis I also mentioned some green shoots which we all wish will bring early spring: 1) unveiling of several vaccines and their much earlier roll out in rich country trading partners which will have some trade, remittance and investment spillovers to us, 2) robustness of our BPO sector which has nimbly adopted working from home thanks also to our telco service providers, 3) surprising resilience of remittances which only declined by 1.4 percent in the year to September, 4) some evidence of “revenge spending” by those in the upper leg of the K curve, 5) accelerated investments all around in digital technology. 

 

I ended my remarks by saying, despite having a good track record in forecasting output growth, this is the one time I would love to be terribly wrong.  And quoted noted economist John Kenneth Galbraith: “The only function of economic forecasting is to make astrology look respectable”.  

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. He is a Board Trustee/Director of the Foundation for Economic Freedom, the Management Association of the Philippines and the FINEX Foundation.

 https://www.bworldonline.com/2021-big-bounce-back-year/