Philippines’ economic pie – some things to chew over
If you are checking in to find out what condition the country’s condition is in, I would refer you to Manuel Puig’s novel “The Kiss of the Spider Woman”. The whole novel is a conversation between two jailbirds, Molina a homosexual, and Valentin, a Marxist activist. Molina represents the majority of Filipinos, those stuck in a melodramatic dream world of celebrities and power figures, unable or refusing to see undercurrents, they stick to a deluded concept of reality. Valentin represents many Filipinos who are pawns in a world of political power play, where power or ideology is a control mechanism thrust onto society. They believe the need to belong to a power group or be rendered inutile, yet not knowing they themselves are being manipulated. The whole conversation between the two men is pure escapism. Puig’s use of ‘stream of consciousness’ technique allows readers insight into the speaker’s mind, yet it is difficult to understand what the truth is.
As it is in fentalyn-induced Philippines, so rich in events, and every incident a play with hidden agendas. Was the Congress President Alvarez-Congressman Floirendo tiff just a consequence of cat-fights of their lovers? Was the President’s invitation to the VP family for diner at Malacanang just an innocent social thing? Was the forceful dispersal of farmer protesters in Kidapawan City in 2016 a conspiracy by communists and Duterte, meant to discredit the Pnoy admin, now that we see the Senior Supt. Alexander Tagum promoted to acting police director of Davao City? Was the recent Mocha Uson rally to impeach the VP a delicate manipulation by the Marcoses to play the Duterte camp against Leni’s camp? The list goes on. It’s the state of being. Power brokers play their games, executives focus on a deadly drug war, foreign countries lambast the human rights violations and threaten curtailment of trade preferences, China is entrenched in Philippines seas, and the admin is in disarray. Look at NAIA, Imigration, DENR, Subic Bay Metropolitan Authority, Tourism Board, NIA, NFA, Philhealth — one wonders who is looking after the economy.
NEDA’S ‘PHILIPPINES’ DEVELOPMENT PLAN 2017-2022′
Neda (National Economic Devt Authority) puts up a development plan for each administration. The one for the current admin can be seen at its website. It’s a professional piece of work and makes for interesting reading. How much of it is the country chief economist’s view of things, and how much of it will be religiously adopted by Cabinet is left to be seen.
The things that capture my attention as to what will color this admin’s push are :
- expansionary budget
- the ‘golden age of infrastructure’
- the ‘sweet spot of Philippines’ demographics’.
GOVT’S 10-POINT SOCIOECONOMIC AGENDA
This is the grand plan of the Duterte admin. It has been much publicized and I would assume this is rehashed and summarized version of the Neda Plan. It calls for :
- Continue and maintain current macroeconomic policies, including fiscal, monetary, and trade policies.
- Institute progressive tax reform and more effective tax collection, indexing taxes to inflation.
- Increase competitiveness and the ease of doing business. This effort will draw upon successful models used to attract business to local cities (e.g., Davao) and pursue the relaxation of the Constitutional restrictions on foreign ownership, except as regards land ownership, in order to attract foreign direct investment.
- Accelerate annual infrastructure spending to account for 5% of GDP, with Public-Private Partnerships playing a key role.
- Promote rural and value chain development toward increasing agricultural and rural enterprise productivity and rural tourism.
- Ensure security of land tenure to encourage investments, and address bottlenecks in land management and titling agencies.
- Invest in human capital development, including health and education systems, and match skills and training to meet the demand of businesses and the private sector.
- Promote science, technology, and the creative arts to enhance innovation and creative capacity towards self-sustaining, inclusive development.
- Improve social protection programs, including the government’s Conditional Cash Transfer program, to protect the poor against instability and economic shocks.
- Strengthen implementation of the Responsible Parenthood and Reproductive Health Law to enable especially poor couples to make informed choices on financial and family planning.
I would like to opine on some points as they relate to the socioeconomic agenda based on what is already known from the past 9 months. The purpose here is not to be a smart ass on economic matters because these are calls made by professional folks in charge who have their studied ideas on which way to best take the country. Rather, it is to take a view as to whether they are in sync with proposed grand plans, and a bit of repose on the previous admin which have been unfairly maligned in many ways. Chunky data is avoided in the interest of the health of the readers’ eyes.
UNDERSPENDING BY PNOY ADMIN
The Pnoy admin has often been castigated for being slow in implementing infra projects and underspending, thus holding back growth. Remember Binay’s ‘paralysis from analysis’. Pres Arroyo (2002-2010) public spending on infra as a % of GDP was 2- 3% throughout. Pnoy had brought it up cautiously and steadily to 5%+ by 2016 (at the same time decreasing national debt levels from 52.4% in 2010 to 45% in 2015). In real terms it’s even more significant considering Pnoy had brought GDP up by 30% to Php292 billion from 2010 to 2015. The chart clearly shows the reality – it seems to be more on target to me.
Admittedly, some projects were slow to take off which ex-Budget Sec Abad explained thus:
- A lot of initial effort were spent on improving the budgeting process to stamp leakages. (Eg SARO, a weakness capitalised by crooks like Napoles, has been banished). They institutionalised processes to ensure it will be entrenched.
- They spent a lot of time reviewing brought forward projects in view of the high corruption levels in Arroyo’s time.
- Their strong anti-corruption stand, a new paradigm in admin, made line managers overly cautious and afraid to spend.
- The low absorptive capacity in civil service hampered a rush into infras.
I would add PPP (Public-Private Partnership) took a while to get organised and structured. However, in the latter part of the admin, several PPPs have been arranged. It is left to be seen whether the current admin will see these through in view of the warm reception of aid from China. (A Davao port project under PPP has been cancelled by the govt and replaced by private investment).
GROWTH IS NOT INCLUSIVE
Through disciplined macroeconomic policies and reforms to cleanse corruption and leakages, the Pnoy admin brought the country to investment grade rating by international credit rating agencies. The economy expanded by more than 1/3, infra spending increased, national debt declined, and social welfare spending increased. All these were done without increasing taxes, honoring an election promise. By most standards, an outstanding achievement that the international community applauds. Yet lots of Filipinos that long for national achievements to take pride in, reject this glory and choose to believe in the black propaganda that dumbs down the country’s progress.
Despite economic success, Aquino has been criticised for failing to ensure inclusive growth. The Pnoy admin was focused on fixing the country’s balance sheet which they did remarkably well. The economy needed to be fixed first before it could trickle down. Nevertheless, there were substantial redistribution of wealth schemes which had gone largely unappreciated.
Example 1 – Excise duties on cigarettes and alcohol in Philippiness were the lowest in the world. No president has ever dared to increase this because of powerful business lobbies. Aquino’ sin taxes on cigarettes were strongly opposed by many, including senators Recto and Bongbong Marcos. The additional Php 40 billion from cigarette tax went to fund universal health programs and tobacco farmers.
Example #2 – The 4Ps, or Conditional Cash Transfer program, was started by the Arroyo admin to assist the poorest of the poor segment. Beneficiaries receive cash grants subject to ensuring their kids attend school. Pnoy admin increased qualified beneficiaries from 800,000 to 4.4 million families. In budget allotment terms if went up from Php 10 billion in 2010 to Php 62.7 billion in 2016. It’s a remarkable achievement when considering the amount of work to qualify 4.4mm beneficiaries and the delivery of the grants to families living in the mountains and remote islands. Not to forget such programs are often riddled with corruption and politiking so getting it right is no easy achievement. If one still can’t comprehend the task, try this perspective. Vetting 4.4 million families by a small CCT team versus vetting under 1 million persons in the president’s drug list by a PNP of hundreds of thousands of personnel and which, by their own admission, they could not accomplish fully.
The Duterte admin is committed to continue with the 4Ps. There’s a subtle difference. The Pnoy admin saw the 4Ps as mainly a mechanism for social redistribution of wealth, a way to ease the sufferings of the very poor. The incumbent admin sees the importance of the 4Ps from the demand side contribution to the economy (Php 62.7 billion spending is significant) and as an effective way to alleviate poverty.
Watch out for new sin taxes to increase tax collection to help fund budget deficits, and hopefully, no attempts to politicize the 4Ps system.
EXPANSIONARY FISCAL POLICY
Current Budget Sec Diokno is a believer in spending as a way to growth. He is ushering in an expansionary phase in govt spending through deficit budgeting. Deficit budgeting leads to mindset of quick fix solutions for ill-disciplined admins. The increase in the SSS pensions (which will shorten the actuarial life to unsafe level), the doubling of the salaries of the policemen and the military, points to an admin that panders to knee jerk appeasement policies for political expediency rather than a tough and well thought out social re-distribution strategy. The latest incident is the cave-in by the president to surrender the houses built for the Army and Police to the illegal occupants of the Kadamay leftist group. Of course all these have budgetary implications — SSS shortfalls need to be funded by the govt eventually (it’s a time bomb for the next admin to resolve), salary increases need to be paid, new houses need to be built for the soldiers and policemen.
Without corresponding increase in revenues, increased govt spending leads to budget deficits. Due to increased spending in the 2nd half of 2016 by the govt, budget deficit jumped 190 % last year to P353.4 billion. This is a 5-year high and it’s just a starter. This admin sees govt spending as a driver of growth, so expansionary fiscal policy is here to stay. This is fundamentally diverging from their statement of following the macroeconomics of the previous admin.
Budget deficits need to be funded. So watch out for tax increases and DOF (Dept of Finance) build up inventory of Treasury Bills as debt builds up.
CENTRAL BANK INDEPENDENCE
With Bangko Sentral Gov Tetangco’s retirement in 2018, who Pres Duterte will appoint to head the central bank is closely watched. The outgoing governor, and most business people, are hoping it will be one of two current inhouse seasoned management staffer who will be moved up. That would mean continuity and commitment to an independent non-political central bank, a crucial undertaking. If it is another sycophant, from Mindanao or elsewhere, it will shake market and international confidence.
Trade policies are messy. The repercussions from western trade partners have yet to work it’s way to actually impact the economy. The EU’s threat to punish Philippines for the human rights violations by lifting preferential tariffs, if it comes to pass, will be an economic tsunami with compliments from the president. The govt is seeking alternative trade partners in Russia, Eastern Europe and China. Sure, there are trade possibilities but it requires years to set up all sorts of trade or bilateral agreements, meeting each countries specific standards and requirements, finding product fits, tariff negotiations, country-of-origin requirements, etc. There is only so much influence that the govt of an open economy can have. It’s left to the market to find its own way and that takes a long time. For example, we might have to forego barbie dolls and sell Russian Matryoshkas. It’s not simply a matter of trade partners, it’s what the market wants and needs.
The old ReformTax Act 1997 is dated and will be completely overhauled. Personal income and corporate tax reforms were studied extensively and prepared by the Pnoy admin and the plans handed over by outgoing DOF Sec Purisima to new Sec Dominguez. It appears the majority of the Pnoy proposals are adopted by the govt.
Tax reform will be done in 4 packages and targeted for completion by 2019. These will be (1) Wage earners or Personal Income Tax, (2) Corporate Tax, (3) Property Tax, and (4) Capital gains tax. The reform package for (1) is currently with Congress.
1. Reform package #1:
This covers a lot of grounds. The major points — tax-free for wages below Php250,000 pa, tax reduction from highest band 32% to 25%, VAT rate up from 12% to 14%, VAT base revised, and excise on petroleum and fuel-related products to be inflation-adjusted up for the next 4 years at 4% each year. Low wage workers hoping for a small windfall from a reduction of tax will be disappointed because of the increase in VAT as well as a general increase in consumer prices caused by the increase in excise on petroleum and fuel-related products.
2. Watch out for:
– As part of the effort to re-organise and improve collection at BOC (Bureau of Customs) and BIR (Bureau of Revenue), computerization at BOC is currently ongoing. This will help reduce opportunities for corrupt practices. Pnoy admin failed miserably to computerize BOC due to resistance by insiders with self-interests to protect. It would be interesting to see how the new govt fares.
– Pnoy proposal to make tax evasion a predicate crime and exempt evasion cases from banking secrecy is in reform package #1. Will this pass legislation?
3. Simplifying tax submissions / collection:
This is one of the govt’s aims. In this regards, senior citizen discounts will be discontinued. Whilst I applaud the respect and recognition of senior citizens this privilege means, I have always thought it to be a very inefficient way. The govt will replace this with some form of grant or voucher system. It’s really funny here. As Sec Dominguez is scrapping this cumbersome senior citizen discount scheme, Senator Grace Poe has filed a bill for a somewhat similar scheme for Junior Citizens.
4. The big difference in Pnoy and Duterte admin’s objective:
Pnoy’s tax reform was primarily to bring Philippines’ high tax regime down to a competitive level within Asean, in preparation for the regional economic integration. The increase in excise on fuel was to take advantage of the current low prices to adjust for inflation which has not been done for many years. Duterte’s admin looked beyond Asean competitiveness and instead are targeting net-net gain in taxes / duties to help fund budget deficits for the next 6 years. Watch out for widening of the tax net and new taxes, eg sugar tax.
5. Is the reform pro-poor or pro-rich:
If taken in totality, the 4 packages seem to be pro-rich.
Coming from a parliamentary system, I find all this talk of tax reform somewhat as symptomatic of the country’s difficulty of governance. Filipinos find such a tax reform as a big one time affair and legislature getting all worked up. In a parliamentary system, each year at budget time, the Minister of Finance (Exchequer in the case of UK) walks into parliament with a briefcase secured to his wrist. All eyes are on the briefcase. In each year’s budget debate, all tax rates and related matters are simply variables that the Minister adjusts in accordance with socioeconomic policies that the govt wishes to pursue. Parliamentary govts are thus responsive to changing times and policies. For this matter it is interesting to note reform package #1 gave the DOT the right to increase excise taxes on petroleum and fuel-related products by 4% each year for the next 4 years. Hooray, no need to legislate each year.
I find it strange that not much is written about this. I would have thought that this is a lynchpin in a typical economic plan. You decide to go the EOI or the ISI way and all sub-strategies, plans, and policies must then be in line with the decided path.
The country identifies some niche market, usually one in which it has a comparative advantage, such as commodities, or in most cases, cheap labour. They will then attract the necessary investments, prepare the labour force to acquire the relevant knowledge and skills training, and seek market access.
Govt policies seek to reduce tariff barriers, a devalued floating exchange rate to facilitate exports, and government support for exporting sectors. As this is heavy FDI-dependent, policies often tend to suppress labour.
The govt pushes for light industries producing just for the local market. Govt intervention is normally by nationalising strategic industries or subsidising vital ones. The aim is to minimise imports to save on foreign currency by producing as much as possible what is needed at home. Low income countries are predominately dependent on agricultural and mineral activities and do not have the capital nor structure to benefit from international trade. The local industries promoted would normally be those that benefit the agricultural and mineral activities.
Govt policies lean towards subsidising strategic substitutes, protective barriers to trade, an overvalued currency to help import capital goods, and lack of interest in FDI.
Global market-driven trade liberalization has changed past notions of EOI and ISI. Multi-national corporations take advantage of free movement of capital and labour and set up shop overseas where they find cost or strategic advantages. Factors like cheap labour, skilled labour, raw materials, tax breaks, closer to markets, tariff benefits, exchange-rate advantages, etc, play important roles. Countries with open markets take in these MNCs and benefit in the knowledge transfer, capital inflows, jobs creation, and encourage home-grown supporting industries. Equally important, these MNCs already have market access for their products. Countries like Sokor, Taiwan, HK, Singapore, India, Malaysia, China etc rode on export-driven paths to economic success and development.
On the other hand, ISI was gradually abandoned by developing countries in the latter part of the 21st century due to IMF, World Bank, and Asian Devt Bank programs that imposed structural changes in borrower countries in the name of trade liberation.
Philippines on ISI
The 10-point agenda is silent on this. NEDA Sec Pernia has mentioned that the export-driven growth model, pursued by past several admins, has failed. Whilst successful for many countries, it hasn’t worked for Philippines. The govt will switch to an ISI strategy. No mention was made as to the reasons why EOI failed. The past economic failure of Philippines has nothing to do with EOI or ISI. Let me illustrate with just one example. I once interviewed a job applicant who lost her job due to company closure. Her ex-employer was an Australian-owned company that set up operations in Philippines to produce pre-fabricated windows which are exported world-wide. They were making money so I inquired as to why the Aussies closed shop. She told me what I already knew – corruption and inefficiencies at customs and the ports broke the Aussie camel’s back. In a world of just-in-time production, factory production lines cannot be held to ransom by govt inefficiencies and corruption.
The switch to ISI is not following previous admin’s macroeconomics, it’s turning it upside down. It’s left to be seen, policy-wise, what changes will be forth-coming. Will less competitive and more expensive (due to lack of economy of scale) local products be protected in the name of import substitution? Will there be nationalization due to heavy subsidies? Will cheaper rice imports be banned or restricted to protect local farmers and Filipinos be forced to buy more expensive rice due higher cost of producing and price manipulation along the supply chain?
PHILIPPINES’ SWEET SPOT IN DEMOGRAPHICS
The ‘sweet spot’ in demographics is when youth account for a higher percentage of the population that is going to provide for a good source of labor and consumption. This is the state the Philippines is in. Whilst many countries spring off from this stage and achieve growth, it does not necessarily mean demographic dividends is a given. This is a stage where an economically active group is supporting a smaller aged population and a big economically inactive base. Much investment is required on education and creating new jobs for big numbers of fresh cohorts coming into the job market is critical.
The Philippines population is in an expansionary phase. Unless it is oil-rich, no country achieve economic success with a triangular model having a wide base. The Philippines ranks #61 in the world with a birth rate of 24.24 per 1,000 and for death rate it is #191 with 4.92 per 1,000. The population is now about 102mm. It has doubled within 34 years. If left unchecked, going forward the growth will be exponentially higher because the base of child-bearing Filipinos is getting bigger. Further analysis of the demographics shows that the highest growth is in the lower income class. Poverty can never be eradicated if no attention is paid to slowing down population growth.
Aquino has done what no previous admins have dared to do in a staunchly Catholic Philippines in passing the RH bill (Responsible Parenthood and Reproductive Health Act 2012). It was an election promise that he delivered in the face of loosing substantial political capital. That was an act of strong, quiet leadership, putting national interest above self.
The govt understands the need for investment in education, job creation and supports the RH bill. Managing a slow down of the population is critical for the economic health of Philippines and this should be central to this admin’s responsibilities. Watch out for how the govt effectively implements the RH bill for the benefit of the country. In this regard, it is noteworthy that opportunity was not taken in the tax reform to introduce creative incentives in furtherance of the RH bill objectives.
GOLDEN AGE OF INFRASTRUCTURE
The govt intends to spend about Php7 trillion each year for the next 6 years on infrastructure, about 5% of GDP each year. The economy will be driven by investments in infrastructure, education and health. The focus is on acceleration of infras to make up for what the govt views as previous admin’s failures at implementation. Of course infras are good for the country and 5% of GDP seems a fairly good rate by world standards. But the flip side is the funding. We are talking of Php 42 trillion over 6 years. With the govt pursuing expansionary fiscal policy, how much additional revenues can be raised and how much national debt will the country take on? The govt has also indicated willingness to pursue a PPP strategy in which case the private sector will provide most of the funding. However, with the pivot to China, the govt is looking to the Chinese for future source of funding for infras, which means national debt. So far, it seems 12 infra projects have already been lined up for China aid. So watch out for infras under Chinese aid money where (1) the projects will not undergo the normal bidding processes, and (2) national debt will rise.
The country’s economy is affected by external and internal factors. The external factors are matters outside the govt’s control. Top-most of these are the unpredictability and uncertainties brought about by the Trump presidency, the manipulation of interest rates by US Fed, the economic repercussions of Brexit, flat economies of Europe and US, Chinese economy running out of steam, the fear of Chinese banking and real estate market collapse, etc. Internal factors are both controllable and uncontrollable. We have no power over natural calamities. However, macro socioeconomic management and good governance are within our control. We are masters of our own economic destiny if we choose to be.
It will take some time for the actions of the new govt to impact the economy, but some signs are beginning to show, and they are ominous. Capital flight, peso depreciation, rising inflation, foreign companies holding back investment plans, US aid holding back in view of human rights issues and the pivot to China, EU countries re-assessing on trade benefits, diminished foreign interest in aid in natural calamities, etc – sure indicators of ill omen. Optimists have explained these off as external-influenced and there well may be some percentages of truth. Those compelled to political correctness may voice similar sentiments and make no reference to the human rights violations, political infighting, corruption, savage political vengeance, ineptitude in governing agencies, immature foreign policies, executive placements based on (a) personal loyalties, (b) repayment of debt of gratitude or (c) Mindanao residency, govt prosecutors’ unusual brand of justice, and executive sycophancy that panders to egos first and national interest last. But there is no denying, business confidence has dipped as reflected in surveys.
The Current Account for 2011 to 2015 averaged Php 8.2B, and in 2016 it has dropped to Php0.6B. The country is exporting less and trade in goods have widened. With the exuberance on infras, watch out for increased imports of capital goods leading to a worsening Current Account. The expansionary fiscal policy will see new taxes to increase revenues, including generous condonation on unpaid taxes to encourage faster settlements, and increased national debt. Keep an eye on one of the last bastions of Filipino pride, the country’s foreign exchange reserves. Bangko Sentral has build up over the years a foreign exchange reserve that can support slightly more than 9 months imports. This is a very healthy position and is the highest in Asean. A deteriorating balance of payments may see attempts on raiding the reserves. History taught us a president once cleaned out the central bank reserves back in the 1980s.