The Philippines has continued to step up to the global challenge of carrying out the difficult “balancing act” of saving as many lives as possible from the coronavirus pandemic with as little damage to the economy as possible, before a vaccine or cure brings a definitive end to this unprecedented health crisis, Finance Secretary Carlos Dominguez III said.
Dominguez assured the business community the Duterte administration will not rest until the country has prevailed over this challenge, and will intensify its efforts to “solidify the country’s return to the path of inclusive growth” in the face of the global health and economic crisis.
Even with the best efforts to protect lives and livelihoods, Dominguez noted that the Philippines, like almost every other pandemic-stricken economy in the world, has “taken a serious hit.”
He pointed out that the 16.5-percent contraction of the Gross Domestic Product (GDP) in the second quarter underlines the effects of the 11-week strict lockdown that the government put in place from the second week of March to the end of May as the healthcare system and the people were adjusting to the unprecedented pandemic.
Dominguez conceded that President Duterte’s decision to place back Metro Manila and neighboring provinces from the relaxed general community quarantine (GCQ) status to the stricter modified enhanced community quarantine (MECQ) from August 4-18, in response to this recent surge in COVID-19 cases, will negatively affect livelihoods, consumer demand and production in the short run.
But it will benefit the country in the long haul, he added, if this two-week timeout is used to boost medical resources and prevent the further spread of the virus.
“The Duterte administration will not rest until we have prevailed over this extraordinary challenge. We will redouble our efforts to protect our economic gains over the past three years, prepare our economy for a strong recovery, strengthen our resilience, and solidify our return to the path of inclusive growth,” Dominguez said during the Security Bank Economic Forum 2020, which was held on Thursday last week (August 6) via video conferencing.
“I trust that you will continue to support us in these efforts,” Dominguez told private sector leaders present at the virtual Security Bank event.
He noted that among the Philippines’ credit rating peers, the first semester GDP decline of negative 9 percent reflects what is happening across the globe.
The first-semester contractions among the economies of Italy is by 11.6 percent, Mexico by 10.2 percent, and Indonesia by 1.2 percent.
“We are not alone in our struggles, although the unique fiscal and macroeconomic strengths with which we entered 2020 will continue to provide us with solid footing as we confront our economic challenges,” Dominguez said.
Without continued and increased public-sector spending, especially on infrastructure, public health, and social protection, the economy would have performed much worse, and the first semester GDP would have shrunk by 2.5 percentage points more than it did, or a total of 11.5 percent versus the actual 9 percent, he said.
Dominguez said the government was fully aware that the President’s imperative on putting primacy on saving human lives would come at a heavy price, as gleaned from the contraction of the economy in the first and second quarters; the significantly lower tax collections; and a higher deficit-to-GDP ratio that the government aims to keep below or at the median of the levels of its peers in the Association of Southeast Asian Nations (Asean) region.
But signs of recovery are emerging, said Dominguez, as he pointed to the higher imports volumes reported by the Bureau of Customs (BOC) and the major gains of the Bureau of Internal Revenue (BIR) from excise and value-added taxes (VAT) last month, along with the slower annual declines of the volumes and values of the production index in June for key manufacturing enterprises as compared to the months of April and May. In addition, the overall manufacturing capacity reached 73 percent in June, up from 72.4 percent in May and 70.5 percent in April.
The country’s total merchandise trade also further eased its negative trajectory in June with a slower decline of 19.9 percent, after a steep 35.3 percent contraction in May and 59.5 percent in April.
These positive indications of rising economic activity have resulted to the BOC surpassing its collection target for July by 5 percent and the BIR by 2 percent despite the fallout from the coronavirus-induced global health emergency.
“We have also learned from the industry leaders that business activities in various sectors of the economy have started to pick up following the economic standstill during the lockdown. In general, most firms reported that they have begun to see a gradual sales recovery in June, coinciding with the partial reopening of the economy,” he noted.
As the government continues to balance the reopening of the economy with health and safety interventions, “it is doing its utmost to protect lives in ways that do not prevent Filipinos from earning a living,” he said. “Every effort is also being exerted to ensure that we restore consumer and business confidence.”
Dominguez said an effective recovery plan grounded on pragmatism–which means the government can afford and fully execute it–includes four legislative imperatives that will help bring the economy back to its once robust status.
These are: 1) the infusion of additional capital into government financial institutions for them to be able to act as wholesale banks and fund substantial portions of loans that other commercial banks will provide to businesses affected by the pandemic; and 2) allowing banks to dispose of non-performing loans and assets through asset management companies similar to special purpose vehicles.
“Our government banks will also set up a company to deal with problems involving solvency issues as opposed to liquidity issues and we will be inviting other multilateral agencies and foreign investment companies to participate in this venture,” Dominguez said.
These four measures also include: 3) the swift congressional passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act that will reduce corporate income taxes (CIT) for the majority of small- and medium-sized businesses from 30 percent to 25 percent, and tailor-fit fiscal and non-fiscal incentives for the kind of investors that the government wants to participate in the domestic economy; and 4) providing greater support to the agriculture sector by giving the banking system the ability to support the whole value chain of agri-enterprises.
“If we can pass these critical reforms on time, we can help businesses in need sooner, and further improve the post-COVID-19 business climate. These critical reforms recognize the crucial role of a durable banking sector in ensuring that the rebuilding of the rest of the economy can be financed adequately,” Dominguez said.
He said the government will likewise maintain the “Build, Build, Build” program, given that infrastructure investments will be the best way to revive the economy because of their high multiplier effect.
Moreover, he said, the Duterte administration is also committed to push the passage of complementary bills that will open up the country to more foreign direct investments (FDIs), such as amendments to the Foreign Investments Act, the Retail Trade Liberalization Act and the Public Service Act.
“Even as we navigate through very difficult circumstances, we intend to maintain fiscal discipline, make our financial sector more inclusive, and introduce more reforms that will help us consolidate a pro-business environment,” he said.
Dominguez noted that without COVID-19, the Duterte administration “had already realized better economic outcomes for our people.”
He pointed out, for instance, that before the pandemic, the Philippines was among the fastest growing economies in Asia with an average GDP growth of 6.6 percent from 2016 t0 2019; had a historic low debt-to-GDP ratio of 39.6 percent; and posted a revenue effort of 16.1 percent of GDP, its best performance in 22 years.
Also, infrastructure investment was at 5.4 percent of GDP, or double the average infrastructure spending to GDP for the past 50 years; inflation remained stable, averaging 3 percent from 2016 to 2019; the unemployment rate was at 4.5 percent, underemployment at 13 percent and poverty incidence at 16.7 percent by the end of 2019, he added.
The Philippine peso remains one of the most stable Asian currencies amid rising risks, with its year-to-date value appreciating by 3 percent against the US dollar, Dominguez said.
Dominguez noted, too, that when this global health emergency happened, the Philippines had already received a “BBB+” credit rating, the highest in the country’s history.
Even amidst the pandemic, international credit rating agencies have affirmed the Philippines’ high investment-grade sovereign ratings, with the Japan Credit Rating Agency (JCR) upgrading the country from “BBB+” to “A-” in June, while other countries suffered downgrades and negative outlooks.
Given the country’s strong economic fundamentals, Dominguez said the government was, at the onset of the pandemic, able to quickly draw up a four-pillar strategy to shield the Filipino people against the adverse effect of the COVID-19 contagion.
With a combined value of P1.7 trillion or 9.1 percent of the country’s GDP, this four-pillar strategy quickly delivered targeted relief assistance to Filipino families and businesses affected by COVID-19.
These social protection measures—the largest in the country’s history–include cash grants under the Social Amelioration Program (SAP) amounting to P205-billion for some 18 million poor and low-income families and another P51 billion in assistance under the Small Business Wage Subsidy (SBWS) for 3.4 million displaced workers of small businesses, both for a period of two months.
The government has also opened credit facilities and services for struggling businesses; unemployment insurance benefits for laid off workers; a ‘study now, pay later’ program for students; online training programs to upskill displaced workers and retool them; credit guarantee program for small enterprises; and measures to help businesses equip themselves to operate in the new normal.
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