Sec. Chua’s plan for recovery

by Andrew J. Masigan (The Philippine Star), 20 May 2020

As of last month, our economic managers were still hopeful that the economy would grow by three percent in the first quarter and -.8 percent to +2.5 percent for the whole year. Well, to everyone’s great disappointment, the National Economic Development Authority (NEDA) reported that the economy actually contracted by .02 percent in the first quarter and that we can expect whole contraction of 2 to 3.4 percent.

With the bleak prognosis, acting NEDA Secretary Kendrick Karl Chua, recently briefed the pundits on government’s recovery plan. It was my first time to listen to the young NEDA Chief and I must say, I was impressed by his clarity.

Government’s intention is to use the crisis as springboard to set the economy on a higher path of growth whilst strengthen our institutions, said the Secretary.

One thing we can be thankful for is that the economy was in the pink of health when we entered this crisis. This puts us in a strong position to absorb the shocks and navigate our way to recovery. Thanks to the passage of the TRAIN law, government is now able to collect more local taxes than it ever did in 22 years. Further, the country’s debt to GDP ratio stands at only of 41.5 percent of GDP – this gives us the fiscal room to borrow more at prime interest rates. As of last January, the country’s external debts amounted to $83.6 billion while our Gross International Reserves (GIR) amounted to $86.42 billion (now at $89 billion). In other words, we have more reserves than we do foreign debts. The Philippines has the sixth strongest financial system among 66 developing countries.

So what’s going to happen next? Our path to recovery will come in two phases. The first is what Sec. Chua refers to as the “Recovery Stage” which will take effect from June to December. This will be followed by the “Resiliency Stage” to take place from 2021 onwards. The objective is to realize a V-shaped recovery such that the economy grows by 7.1 to 8.1 percent next year. Government has prepared a P1.49 trillion stimulus package to support the plan.

The goal of the Recovery Stage first is to minimize the impact of the pandemic on the economy, to which it proposes the enactment of three laws:

First is the Bayanihan Act 2, a law designed to prevent more job layoffs (which has already topped the two million mark), save companies from bankruptcies and stimulate consumer demand. Bayanihan 2 seeks to appropriate more funds to strengthen healthcare infrastructure, support agriculture, food manufacturing and trading. It will also provide loans and credit guarantees to local enterprises to save them from insolvency.

Second is the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE. CREATE seeks to generate jobs, help local enterprises become profitable again and attract more foreign investments. It proposes to reduce corporate income tax from 30 percent to 25 percent, a one-time 5 percent reduction; Permit companies to carry-over losses, thus lowering their tax obligations for the next five years; Offer tailor-made incentives for strategic foreign investors, particularly those leaving China; Maintain the same incentives for investors already operating in our shores for four to nine years to prevent them from leaving; And provide tax incentives for Manila-based businesses migrating to the provinces.

Third is the General Appropriations Act (GAA) of 2021. It will be formulated in a way that it pump-primes the economy through massive spending on infrastructure, agriculture, healthcare and the food supply chain.

On the other hand, the intention of the Resiliency Stage is to strengthen the basic institutions of the country and set the economy on a path of high growth from 2021 onwards. It involves 11 key reforms.

On Investments, to pass three more economic liberalization bills and modernize our investment promotions agencies to allow us to get a larger share of foreign direct investments.

On Business conditions, to further ease credit for businesses, improve competition and deepen the culture of innovation, digitization and entrepreneurship.

On Labor, to improve pension programs and make labor more competitive.

On Agriculture, to enhance productivity and improve land use toward food security.

On Social Protection, to digitalize social protection services like the SSS and Pag-IBIG.

On Digitization, to migrate all transactions between government and the private sector to the digital sphere.

On Education, to adopt parameters for high quality online learning.

On Health, to strengthen healthcare infrastructure, produce pharma-grade medical supplies, implement universal healthcare and promote research and development.

On Public Transport, to modernize public utility vehicles and transport services.

On Logistics, to modernize the freight system, improve warehouse and cold storage facilitates as well as food terminals.

On Disaster and Emergency Response, to include health-related disasters to the system.

Acting Secretary Chua formulated a well though-out plan. It proves that our economic managers have a good grasp of our situation and that they know how to navigate their way to recovery. This should give us all confidence.

The one aspect I find missing is a plan on adding capacity to the economy. I wrote about this last week and I feel the need to stress it again.

Fact is, an economy that is driven by consumption and government spending coupled with a weak manufacturing base and subsistence agriculture, can only take us so far. We need to add capacity to economy by becoming production-led. This can only be done through rapid industrialization.

To keep the economy structured the way it is will result in lackluster growth and the further widening of our current account deficit. The Philippines will be stuck as a lower-middle income society.

Rapid industrialization entails making the transition from subsistence farming to technology-based agriculture; diversification of the economy from one that specializes in two industries (electronics and IT-BPO), to one that is competent in an entire basket of trades; widening our manufacturing base from one comprised mostly of food processing to one that encompasses complex industries such as pharmaceutical products, machineries and equipment, chemical-based products and automobiles; climbing the value chain through innovation and quality. This means products manufactured in the Philippines must have more intellectual property inputs (not just assembly) and must be renowned for its craftsmanship and durability.

Reforms toward industrialization can be included in the basket of reforms in the Resiliency Stage.

Sec. Chua is right that the COVID crisis is an opportune time to re-invent the economy. Let’s hope these reforms will not only make us a stronger republic, it will also make us an industrial economy that results to a wealthier life for all.