THE economic managers of the Duterte administration boldly said the “worst is over” in terms of the impact of the coronavirus pandemic and a strong recovery is expected in 2021.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno, for one, said as restrictions were slowly lifted and economic sectors gradually reopened, “the BSP expects the Philippine economy to bounce back and grow between 6.5 percent and 7.5 percent in 2021 and 2022.”
“Indeed, we have been through difficult times. Yet, there are signs that the economy is on the road to recovery,” Diokno said in an online forum held recently.
The devastating impact of the pandemic triggered a 10-percent GDP contraction in the first three quarters and the economy went into technical recession already in the first half.
The Taal Volcano eruption in January coupled with the onslaught of the pandemic caused a 0.7-percent GDP contraction in the first quarter.
The economy sank deeper in the second quarter by 16.9 percent at the height of the lockdowns implemented by the government to prevent the spread of infections.
In the July-to-September quarter, however, the economy showed some signs of improvement after gross domestic product declined by a lesser 11.5 percent, bringing the contraction in the first three quarters to 10 percent.
The double-digit GDP decline in the first nine months prompted economic managers to declare that the previous 5-percent contraction
target for the full year could not be feasible anymore.
The industries that contributed the least to the GDP in the third
quarter alone were construction, -39.8 percent growth; real estate and
ownership of dwellings, -22.5 percent growth; and manufacturing, -9.7 percent growth.
On the other hand, the top three industries that posted positive growth were: financial and insurance activities, 6.2 percent; public administration and defense, compulsory social activities, 4.5 percent; and agriculture, forestry, and fishing, 1.2 percent.
On the expenditure side, the Government Final Consumption Expenditure posted positive growth of 5.8 percent while Household Final Consumption Expenditure declined by -9.3 percent, along with the Gross Capital Formation at -41.6 percent; Exports, -14.7 percent; and Imports, -21.7 percent.
Despite the double-digit contraction for the July-to-September period, economic managers—composed of Finance Secretary Carlos Dominguez III, Acting Socioeconomic Planning Secretary Karl Chua, and Budget Secretary Wendel Avisado said “the worst is over for the country.”
“The smaller GDP contraction of 11.5 percent in the third quarter from a contraction of 16.9 percent in the second quarter indicates that the economy is on the mend. The path is clearer to a strong bounce-back in 2021,” the three officials said in a joint statement following the release of the third-quarter GDP data.
They said the double-digit contraction in the third quarter was not surprising given the return to more stringent quarantine measures in NCR and neighboring provinces, and Cebu City, which together account for around 60 percent of the Philippine economy.
In addition, they said public transportation was restricted. This prevented many Filipinos from leaving their homes and reporting for work even if their industries are allowed to operate.
Positive economic indicators
Diokno cited some signs that point to economic recovery going forward.
First, he said headline inflation remained within the government’s target range for the year of 2 to 4 percent, averaging 2.5 percent from January to October 2020.
Second, he said even with the huge financing requirements to mitigate the effects of the pandemic, the economy’s debt profile remained manageable.
“While the Philippines’ debt-to-GDP ratio increased to 48 percent as of end-June 2020, this remains below the debt to GDP ratio that was recorded by the country during the fiscal crisis in 2004, which was at 72 percent,” he said.
Also, the country’s total external debt increased only to 24 percent of GDP as of end-June 2020, a large part of which is in the form of medium-, and long-term (MLT) loans.
He also cited the growth of net inflows of foreign direct investments that increased since May, recording a 46.9-percent year-on-year expansion in August 2020. FDI is seen to increase by 5.6 percent this year and by 7.0 percent next year.
Personal remittances from overseas Filipinos, on the other hand, recorded a 9.1 percent year-on-year expansion in September 2020, as host economies started to reopen.
“From an earlier projected contraction of 5 percent, year-to-date contraction was only 1.4 percent; full year contraction is estimated at only 2.0 percent. Next year, we forecast remittances to bounce back to 4.0 percent,” he said.
Also, he noted the record gross international reserves of $103.8 billion as of end-October 2020, equivalent to 10.3 months’ worth of imports of goods and payment of services and primary income. The doctrine is that three months’ worth of imports of good are enough.
He said the banking system remained resilient. The non-performing loan ratio of the banking system remains manageable at 3.6 percent as of end-September 2020. To put things in perspective, he said the NPL ratio during Asian Financial Crisis were in double-digits.
Banks also remain well-capitalized, with capital adequacy ratios above the BSP regulatory requirement of 10 percent and Bank for International Settlements standard of 8 percent.
Lastly, amid the COVID-19 crisis, the Philippine peso has remained stable and has been one of the strongest currencies in the region.
“The strength of the Philippine peso is reflective of our sound macroeconomic fundamentals, which was achieved through years of resolute structural and economic reforms,” he said.
The BSP at the onset of the pandemic have provided crucial support to the economy and market confidence. It reduced policy rate by a cumulative 200 basis points this year, and reserve requirements were also cut by 200 bps for universal and commercial banks, and by 100 bps each for thrift banks and rural and cooperative banks.
Higher health-related spending needed
Former government officials, however, considered as premature the statements of economic managers that the worst is over, saying there must be a significant increase in health-related spending to mitigate the impact of the health crisis and make the economy recover faster from the current recession.
Former National Economic and Development Authority director-general Ernesto Pernia said in a virtual forum organized by Stratbase ADR Institute it might take another one-and-a-half year or until the second half of 2022 before the economy returns to its pre-pandemic growth levels at an average of 6 percent annually.
He said the government had severe underspending in the health system, considering that the Philippines had a large population next to Indonesia.
“We have not done a good thing about COVID response spending… We have badly taken for granted our health workers,” Pernia said, adding that in underspending on health, the government might be trying to preserve its current investment grade rating.
Citing an Asian Development Bank data as of November 2020 comparing the COVID-19 response spending of Asean countries, Pernia said the Philippines had spent $21.65 billion, or equivalent to around 5.88 percent of gross domestic product, a miniscule figure compared to its peers in the region.
For the same period, Indonesia had already spent $115.78 billion, 10.94 percent of GDP; Singapore, $89.14 billion, 25.35 percent of GDP; Thailand, $84.09 billion, 15.96 percent of GDP; Malaysia, $80.78 billion, 22.73 percent of GDP; and Vietnam, $26.50 billion, 10.12 percent of GDP.
Pernia said there was nothing to worry about being downgraded by credit rating agencies if the government spent more.
“There is nothing to crow about our credit rating. The other five Asean countries had spent more on COVID response and still maintained their credit ratings,” Pernia said.
Currently, the Philippines has investment grade ratings of BBB+ (the highest) from S&P Global Ratings, Baa2 from Moody’s Investors Service, and BBB from Fitch Ratings.
“The Philippines could markedly ramp up its COVID response spending and still keep its likewise respectable credit ratings,” Pernia said.
Pernia said an increased spending must include fortifying the health system capacity, raise the remuneration and working conditions of healthcare personnel, and build and improve social infrastructure extending to the provinces, such as hospitals, laboratories, and medical schools like UP PGH in all regions.
Pernia said spending in these areas of concern, long overdue, would magnify the impact of other economic stimulus measures, such as for physical infrastructure to include digital connectivity, social amelioration programs, and assistance for distressed small businesses and unemployed workers.
Retired Bangko Sentral ng Pilipinas deputy governor Diwa Guinigundo, for his part, said it was inappropriate to say that the worst was over in terms of the pandemic, downplaying the previous optimistic statements of some Duterte administration’s Cabinet officials.
Although noting some signs of economic recovery such as lower decline in external trade as of late, softer drop in manufacturing and expansion in capacity utilization, Guinigundo said all of these remained “tentative.”
“The economic scars are still evident and should be managed if we are to build confidence and restore economic recovery,” Guinigundo said.
Guinigundo proposed the government should demonstrate primacy of pandemic mitigation alongside economic revival; repurposing of some budget items; and, sustain policy and structural reforms.
“It is unrealistic to assure that we have flattened the pandemic. It is too early to claim victory over the pandemic,” Guinigundo warned.
Funds for mass vaccination
Finance Secretary Carlos Dominguez III said the government will tap three sources for its planned P73.2 billion COVID-19 vaccine fund that will enable the government to inoculate 60 million Filipinos against the lethal coronavirus.
In his report to President Rodrigo Duterte in a meeting in Davao City latter part of November 2020, Dominguez said the estimates were based on an average vaccine cost of P1,200 per person.
Health Secretary Francisco Duque III said that vaccinating 60 million Filipinos might enable the country to reach “herd immunity,” based on pronouncements from the World Health Organization.
“Herd immunity” is a vaccination term in which a population becomes protected from a particular virus after reaching a threshold or certain number of vaccinated people.
Dominguez informed the President that the funding sources include multilateral institutions such as the Asian Development Bank and the World Bank, from which the government can obtain around P40 billion through “low-cost, long-term loans.”
The government is also tapping P20 billion from domestic government financial institutions such as the Land Bank of the Philippines, Development Bank of the Philippines and government-owned and controlled corporations.
Dominguez said the remaining P13.2 billion will be sourced from bilateral negotiations with countries from where the vaccines would originate, such as the United States and the United Kingdom.
With the government estimating the average cost of a complete vaccine dose at US$25 per person, or about P1,200 each, Dominguez said the amount of P73.2 billion will be enough to inoculate 60 million people in the country.
“Some are lower, some are higher so we don’t know exactly how much is the cost. But let say, US$25 or P1,200. P73.2 billion is good for 60 million people to be vaccinated,” he said.
Duque said that according to WHO, herd immunity can be acquired if 60 to 70 percent of the population is vaccinated, which means that with 60 million inoculated Filipinos the country would “pretty much arrest the spread” of the virus.
President Duterte said during the meeting that the country’s poorest population, and members of the Armed Forces of the Philippines and the Philippine National Police will be among those to be given priority in the would-be government’s COVID-19 immunization drive.
CREATE to help small businesses recover
Meanwhile, Dominguez said the Senate’s timely passage last Nov. 26 of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act will provide businesses with one of the largest economic stimulus measures in the country’s history to help them recover from the economic turmoil caused by the COVID-19 pandemic.
The Senate made history with its approval of the bill. Once signed into law, CREATE will finally put in place long-needed reforms in the country’s corporate tax and fiscal incentives system.
Senators deliberated on the bill for 14 months and worked closely with the Department of Finance to ensure that a fiscally responsible measure would be enacted by Congress.
The House of Representatives approved the earlier version of CREATE, then known as the Corporate Income Tax and Incentives Rationalization Act (CITIRA) bill, in September last year.
But Dominguez said the success of TRAIN (Tax Reform for Acceleration and Inclusion), CREATE, and other tax reform measures could not be attributed exclusively to current efforts of the present administration. In fact, he said the tax reform program is a logical continuation of the decades of reforms arduously passed by previous administrations, notably under Presidents Gloria Macapagal Arroyo and Benigno Aquino III.
Dominguez added that with CREATE, the Duterte administration has delivered five packages of its Comprehensive Tax Reform Program.
The CREATE bill, which will benefit pandemic-hit businesses, especially micro, small and medium enterprises, was certified as urgent by President Duterte, who had called on Congress to pass the measure in four of his State-of-the-Nation Addresses.
With the Senate’s approval of the CREATE bill, Dominguez is hopeful that it will be submitted for the President’s signature this December.
“This will allow taxpayers to properly adjust their books and returns for the filing season as the reduction of the CIT rate will be retroactively applied to July 1 of this year,” Dominguez said.
MSMEs, which make up 99 percent of all enterprises in the country, will be the biggest beneficiary of CREATE as they will receive the largest ever CIT cut in the country’s recent history. In the Senate version, domestic corporations with total assets, excluding land, of not more than 100 million pesos and net taxable income of P5 million pesos and below will enjoy an immediate 10 percentage point reduction in the CIT rate, from 30 to 20 percent.
All other corporations will benefit from an immediate reduction of the CIT from 30 percent to 25 percent.
Moreover, under the Senate version of CREATE, taxpayers whose gross sales or receipts do not exceed the value-added tax-exempt threshold of P3 million and are subject to the 3 percent percentage tax shall only pay 1 percent instead from July 1, 2020 to June 30, 2023.
Proprietary and non-stock educational institutions and hospitals are also among the major beneficiaries of the Senate version as it reduces the preferential tax rates enjoyed by these entities from 10 percent to 1 percent from July 1, 2020 to June 30, 2023.
On the long-overdue fiscal incentives reform, investment promotion agencies maintain their key functions and powers under their respective charters, but they will now be supervised by the Fiscal Incentives Review Board (FIRB). Approvals of incentives for investments with capital exceeding P1 billion will be made on the FIRB level.
Dominguez said that placing the governance of tax incentives under this body chaired by the Department of Finance and co-chaired by the Department of Trade mirrors international best practice and is a major win for the Filipino people. The FIRB ensures accountability and transparency in the grant of tax incentives.
Under CREATE, a Strategic Investment Priority Plan shall be formulated every three years to identify priority projects or activities that will receive incentives.
A DOF study utilizing data made available through the Tax Incentives
Management and Transparency Act revealed that the government gave away P477.17 billion in tax discounts and exemptions to favored enterprises in 2018 alone. These incentives were granted without a mechanism in place to assess their net benefit to the economy, which CREATE corrects.
Dominguez said certain sectors claimed that CREATE has created uncertainty in the business community, “but many investors have told us that they were waiting for the congressional passage of this corporate tax reform.”
He said tax reform and the prudent fiscal policies implemented by the President have provided the government the fiscal space it needs to bankroll COVID-19 containment measures and provide relief to poor Filipino families and other sectors hardest hit by the pandemic.
IMF sees deeper contraction for 2020
Amid the prolonged impact of the pandemic, the International Monetary Fund middle of October 2020 revised its gross domestic product estimate for the Philippines this year to a deeper contraction of 8.3 percent, worse than its previous forecast of a 3.6-percent decline made in June 2020.
IMF resident representative to the Philippines Yongzheng Yang said the downward revision of 2020 growth forecasts for the Philippines mostly reflected a larger-than-expected downturn in the second quarter and a more gradual resolution of the pandemic as witnessed over the past months, with prolonged social distancing.
“Despite a somewhat softer global contraction expected in the October WEO, weak public confidence and low remittances in the Philippines as a result of the pandemic are expected to continue weighing on private investment and consumption. The negative impacts of COVID 19 are expected to be only partially offset by policy support,” Yang said.
This put the Philippines with the worst expected GDP decline this year among Asean-5 countries. It is followed by Thailand, -7.1 percent; Malaysia, -6 percent; and Indonesia, -1.5 percent. Vietnam (1.6 percent) is the only country in the grouping that is expected to grow this year.
Asean-5 economies are seen to contract this year by 3.4 percent, before expanding by 6.2 percent next year.
For 2021, Malaysia is projected to post the fastest growth by 7.8 percent, followed by the Philippines, 7.4 percent; Vietnam, 6.7 percent; Indonesia, 6.1 percent; and Thailand, 4 percent.
The GDP estimate for the Philippines next year of 7.4 percent is faster than the previous forecast of 6.8 percent made last June 2020.
Overall, the IMF said global growth is projected at –4.4 percent in 2020, 0.8 percentage point above the June 2020 WEO Update forecast.
It said the stronger projection for 2020 compared with the June 2020 WEO Update reflected the net effect of two competing factors: the upward impetus from better-than-anticipated second quarter GDP outturns [mostly in advanced economies] versus the downdraft from persistent social distancing and stalled reopenings in the second half of the year.
IMF said recovery has taken root in the third quarter of 2020 and is expected to strengthen gradually over 2021.
“The recovery is likely to be characterized by persistent social distancing until health risks are addressed—and countries may have to again tighten mitigation measures depending on the spread of the virus,” it said.
Global growth is projected at 5.2 percent in 2021, 0.2 percentage point lower than in the June 2020 WEO Update. It said the projected 2021 rebound following the deep 2020 downturn implied a small expected increase in global GDP over 2020–21 of 0.6 percentage point relative to 2019.
Growth in the advanced economy group is projected at –5.8 percent in 2020, 2.3 percentage points stronger than in the June 2020 WEO Update.
The upward revision reflects, in particular, the better-than-foreseen US and euro area GDP outturns in the second quarter.
In 2021 the advanced economy growth rate is projected to strengthen to 3.9 percent, leaving 2021 GDP for the group some 2 percent below what it was in 2019.
The US economy is projected to contract by 4.3 percent, before growing at 3.1 percent in 2021.