YEARENDER: Phl emerges as bright spot among emerging markets

MANILA, Philippines – As developed countries struggle to limp out of recession, the Philippines has emerged as a bright spot among emerging markets in the world this year, evolving from its decades-old tag as the “sick man of Asia” to a rising tiger due largely to a combination of robust domestic spending, sound fiscal management, resilient remittance inflows, and political stability.

After years of anemic economic performance, torpidity and political uncertainties, the Philippines is seeing a resurgence of growth that has won it its first investment grade scores from three of the world’s leading ratings agencies this year. Fitch Ratings was the first to upgrade the Philippines in March with Standard & Poor’s following suit in May then Moody’s five months later.

This means the Philippine economy has attained international respect and recognition that it is a solvent country that can repay its debts. An investment grade rating signals that the country’s debt has a low risk of default.

The upgrade represents an important milestone for the Philippines, which has constantly been undermined over the years by widespread corruption, poor infrastructure, poverty and a string of natural disasters.

The country’s ascent to investment grade status is expected to result in a significant increase in overseas funds coming in from investors eager to capitalize on the opportunities. It will also lower borrowing costs in the international capital markets, thereby freeing up more funds for social services, infrastructure and other long-term investments to boost growth.

It is considered vital to developing countries that need to attract more foreign capital flows to achieve sustainable economic development.

Most foreign funds are only allowed to invest in countries rated investment grade.

Thanks to bold governance reforms, prudent macroeconomic management, and steady remittances from about 10 million Filipinos working overseas, the Philippine economy has been growing at a solid pace, expanding by at least seven percent for five consecutive quarters despite a challenging global economic backdrop.

Growth has picked up from 5.2 percent in 2006 to 6.8 percent in 2012 and 7.4 percent in the nine months through September to mark the Philippines as one of the strongest performing Southeast Asian economies, second only to China and outpacing Indonesia, Vietnam, Malaysia and Thailand.

Remittances from overseas workers, which make up almost 10 percent of the total Philippine population, nearly tripled to $20 billion since 2004.

Reaping benefits of good governance

Finance Secretary Cesar Purisima believes that the Philippine economy is on track to hitting sustainable growth rates in the years ahead given declining debt, low and stable inflation, strong governance agenda and a current account surplus.

Purisima credits President Aquino’s commitment to root out corruption, which has been a centerpiece of the government’s policy efforts, for the country’s transformation from a basket case into a powerful engine of growth.

Confidence in the Philippines’ economy among the international financial community is running high as the country enjoys improved stability.

Three years into Aquino’s leadership, the Philippines has benefited from an increase in government efficiency and revenue collection.

Bankers say Purisima also deserves kudos for steering the economy through the global financial crisis and his steady handling of the country’s finances since returning as finance secretary in 2010.

Purisima has applied strict financial discipline to cut public debt as a percentage of the economy from its peak of 79 percent in 2004 to just 49.5 percent as of June this year. The debt-to-GDP ratio is a measure of the state’s capacity to settle its obligations.

The country’s outstanding debt stood at P5.61 trillion as of the end of September, up 7.6 percent year-on-year. Of the outstanding liabilities, the bigger share of P3.68 trillion was accounted for by debt incurred from the domestic market. This represented a year-on-year increase of 15.5 percent.

The country also boasts a current account surplus, shooting up by 84.2 percent as of end-September to $9.1 billion due to increased investments and a booming business process outsourcing industry.

The surplus is indicative of an economy that is saving money generated from the export of services and goods, income from investments. This means the nation is not dependent on foreign capital to fund its budget shortfall, which amounted to P112.46 billion in the 10 months through October.

The Philippines also enjoys hefty foreign currency reserves, which stood at $84.02 billion as of end-November, sufficient to cover a year’s worth of imports and pay the total external debt of the country.

The strong current account balance and foreign exchange reserves serve as buffers against possible foreign capital outflows when the US Federal Reserve starts tapering its massive stimulus program in January.

The expected decline in government’s debt relative to the size of the economy will be driven by the Aquino administration’s hardline efforts to clamp down on tax evasion and smuggling.

BIR tax collections

In a bid to shore up tax collections, the government, through the Bureau of Internal Revenue, launched a name-and-shame” campaign against professionals who were not paying proper taxes. The BIR comes out with a list every week on the top taxpayers in a given industry. The move is aimed at increasing tax payments and encouraging the country’s high-paying and “underrated” professionals to pay the right taxes.

Taxpayers who are in highly profitable industries but are not in the lists will be flagged for audit by the BIR.

Purisima hopes the BIR audits will lead to bigger revenue collections and more fiscal space for the government’s priority projects.

The BIR, which accounts for 75 percent of the government’s total revenues, aims to double its 2010 tax collection to P1.6 trillion by 2015. This year, the agency is targeting to raise P1.25 trillion in tax revenues or 17.59 percent more than the previous year’s P1.06 trillion.

From January to November, BIR’s collections reached P1.12 trillion, already exceeding the P1.058 trillion collected for the whole of 2012.

Purisima wants to increase the BIR’s tax take to at least P2 trillion by 2016 to help the government raise its tax effort to 16 by the end of President Aquino’s term from 13.6 percent as of June this year.

The BIR has filed more than 200 tax evasion complaints under the Aquino administration but none of these cases has led to a conviction. BIR commissioner Kim Henares, nevertheless, believes that the weekly filing of tax evasion charges against tax cheats will ultimately lead to a higher level of voluntary tax payment.

Observers believe that while the BIR has intensified its drive against tax offenders, tax fraud remains rampant with the Philippines losing at least P360 billion a year due to tax evasion.

The passage of Republic Act 10351 or the “sin tax” law, which raised the excise taxes on tobacco products and alcohol, has yielded billions for the government’s universal health care program and the rehabilitation or upgrade of health facilities.

“I see better prospects for the sin tax law in 2014 since there will be no more overstocking by tobacco makers. I personally think that the numbers were quite good in 2013 as it helped boost BIR’s tax revenues,” Purisima said.

Sin tax collections are seen to exceed target by least P2 billion this year and the figure is expected to rise further in 2014 with the new round of rate increase beginning January. New tax rates for premium tobacco brands will go up by P2 for premium brands and P5 for the low-price cigarettes per pack.

What lies ahead for the revamped BOC

While the country’s fiscal position has significantly improved, Purisima says there is still much work to be done in improving tax revenue collections, particularly with respect to the graft-ridden Bureau of Customs.

The Finance chief is hopeful tax revenues will improve with the newly-reorganized BOC and that the new customs bureau chief can reduce the incidence of smuggling.

Purisima said the BOC would push toward greater productivity and transparency as part of efforts to repair its tarnished image.

Newly-apppointed John Philip Sevilla has outlined the agency’s priorities which involve maximizing the use of technology, minimizing human intervention, improving the quality and timeliness of information on movements of vessels and goods, and updating the benchmark values of imports for assessing duties.

The Aquino administration will institute sustainable and effective reforms that will transform the Customs bureau into a professional, credible and competent government agency.

The BOC is undertaking a three-pronged reform program which includes the modernization of personnel through training and development; adaptation of relevant tools and equipment through the upgrade of the agency’s It infrastructure and automation of frontline and back services; as well as a review of existing policie.

2014 plans/priorities

Purisima said the Aquino administration remains committed to fiscal consolidation which includes keeping the budget deficit to two percent of GDP from 2013 onwards and bringing down the national government debt ratio to GDP to below 40 percent after 2015.

“From the start of the Aquino administration, we have taken consistent liability-management actions that have lengthened average maturities of Philippine debt to beyond 10 years, lowered average cost and eliminate bunching up of debts due,” Purisima said.

To help keep the momentum going, the government will invest heavily in roads, highway, airport and other infrastructure projects through partnerships with the private sector.

Weak infrastructure has been identified as one of the weaknesses of the Philippines. Both the World Bank and the Asian Development Bank have urged the Philippines to boost spending on infrastructure to sustain inclusive and sustainable growth and keep up with its Asian neighboring countries.

The government normally spends three percent of GDP on public infrastructure. But in the last two years, infra spending has increased at a faster pace to support longer term growth in the country.

The destruction left by Super Typhoon Yolanda has highlighted the pressing need for the Aquino administration to spend more money on providing basic services such as fixed phone lines, power and electricity as well as building quality infrastructure that can withstand super typhoons and ward off high-magnitude earthquakes and severe flooding.

Developing world-class tollways, international airports and seaports will attract more foreign investments into the country, thereby creating new jobs.

Economic priority measures

The Aquino government will continue to lobby for the passage of 10 key economic measures that will enable the country to sustain its momentum and attract more foreign investors. These include the rationalization of fiscal incentives, removal of investment restriction in specific laws cited in the Foreign Investment Negative List (FINL), the rationalization of the mining fiscal regime, amendments to Republic Act 7718 or the Build-Operate-Transfer Law, the Customs Modernization and Tariff Act and the Tax Incentives Monitoring and Transparency Act.

The other bills that the government wants certified as urgent include amendments to the BSP Charter, Anti-Money Laundering Act; the Act to facilitate the acquisition of right of way, site or location for national government infrastructure projects; and the Cabotage Law also known as the Jones Act of 1920.

The government is also pushing for the freedom of information bill which will ensure a level and transparent playing field for enterprises, which, in turn, will encourage faster expansion of our industries and contribute to inclusive growth.

Revisions to the BOT law would help fasttrack the Aquino administration’s Public-Private Partnership program, which was launched in 2010 with the aim of giving the nation’s infrastructure development a boost.

PPP projects

The country is putting two infrastructure projects worth P100.3 billion on the auction block in April and will offer 12 more before the end of President Aquino’s term in 2016. These include the Cavite-Laguna Expressway (P35.4 billion) and the LRT Line 1 Cavite Extension Railway (P64.9 billion).

The government has so far awarded five PPP deals three years after the program’s launch which included the $380 million Manila airport expressway project which was bagged by San Miguel Corp. It has yet to announce the winner for the $400 million Mactan Cebu airport redevelopment project. India’s GMR Infrastructure and Philippine contractor Megawide Construction Corp. submitted the highest bid.

Rosy prospects

Growth prospects remain strong especially with the Philippines hitting its demographic sweet spot in the next few years, bringing more young people into the working-age population. Majority of the population would be of working age by 2015 , a situation that would last until 2050, he said.

The impact of Super Typhoon Yolanda, which displaced thousands of people, is expected to slow down growth in the fourth quarter and possibly next year due to the wide-scale rebuilding efforts in Eastern Visayas.

The Asian Development Bank, however, believes that the nationwide impact wont be long lasting, saying timely implementation of the country’s recovery and reconstruction program will help the Philippines sustain a high growth rate.

The road to economic stability may be rocky but the Philippines is considered tough enough to weather any crisis, do better than most of its peers and perhaps be a breakout economy again in the years ahead. –Zinnia B. Dela Peña (The Philippine Star)