Socioeconomic Reforms key to Jump-starting the Economy

by Amy R. Remo, Philippine Daily Inquirer, 21 Dec 2020

To accelerate economic recovery, the Philippine government continues to pursue the passage and implementation of critical economic reforms to support businesses and help millions of Filipinos get back on their feet amid the devastating impact of COVID-19.

According to Finance Secretary Carlos Dominguez III, this array of measures is expected to turn “the pandemic-induced crisis into an opportunity.” With the implementation of Bayanihan to Recover as One Act, or Bayanihan 2, expansion of lending to micro, small, and medium enterprises (MSMEs), provision of greater support to the agriculture sector, ramping up of spending for the “Build, Build, Build” program, and, hopefully, the enactment of the Corporate Recovery and Tax Incentives for Enterprises bill, 2021 budget, and Financial Institutions Strategic Transfer (FIST) bill, the Philippine economy is indeed primed for a stronger bounce back in 2021.

Here are some of the government’s ongoing and proposed measures.

A lifeline for local businesses amid and beyond the pandemic

Touted as the largest fiscal stimulus program in the country’s history, the Create bill will provide a much-needed lifeline for businesses reeling from the pandemic, once it is passed by Congress and enacted into law.

Domestic MSMEs are poised to benefit significantly as Senate Bill No. 1357, approved by the Senate on its third and final reading last month, will lower the corporate income tax (CIT) rate to 20 percent from the current 30 percent for domestic corporations with a taxable income of P5 million pesos and below, and with total assets of not more than P100 million. The CIT rate cut under Create is reportedly the biggest tax cut for MSMEs, which currently comprise more than 99 percent of all registered enterprises in the Philippines, in recent history.

Meanwhile, all other domestic and foreign corporations will be subject to a reduced 25-percent CIT rate under Create.

According to the Department of Finance (DOF), this tax cut is a welcome gift for local entrepreneurs. It will translate to savings that businesses can use to continue operations and retain employees amid the COVID-19 pandemic. They can also use the additional resources to expand businesses further and generate more jobs over the medium term.

At the same time, Create proposes to rationalize the tax incentive system to make it performance-based, targeted, time-bound, and transparent and to attract quality, high-value investments that can bring exceptional benefits to Filipinos. The Senate version of the bill includes a generous 10-year transition clause for companies currently enjoying incentives under the current regime.

In 2018 alone, a total of P477 billion worth of tax discounts and exemptions were granted under an incentive regime that does not have a mechanism to assess their net benefit to the economy—and which Create seeks to correct, according to the DOF.

“These reforms in the fiscal incentives system are crucial for us to be able to compete for high-value investments, which are what we want to attract. The passage of Create is timely as many investors located in China are now looking for alternative destinations to avoid a repeat of the supply chain disruptions they encountered earlier when parts of China were locked down to prevent the spread of COVID-19,” Dominguez said.

Investing in lives, investing in economic recovery

Building on the rollout of the government’s first stimulus package, the government has stepped up its efforts to accelerate economic recovery and resilience through the Bayanihan 2.

Enacted in September this year, Bayanihan 2 seeks to fight the health and socioeconomic crises inflicted by COVID-19 and further cushion the pandemic’s impact on businesses, industries, and Filipino households through a slew of measures, including an appropriation of P165.5 billion. This funding has been supporting the expansion of the country’s health-care system and providing “targeted support for unemployed individuals and the hardest-hit strategic industries,” according to Finance Secretary Carlos Dominguez III.

“Bayanihan 2 will allow the Duterte administration to keep its health initiatives [at the] front and center of the national COVID-19 response, with funding for contact tracing, streamlined systems for registering viral testing kits and testing centers, and various forms of support for our medical workers spelled out in this sequel to Republic Act No. 11469, or the Bayanihan to Heal as One Act,” Dominguez added.

As it is, Filipinos have already started benefiting from this package, which included strengthened pandemic response; additional risk allowances, hazard pay and cash assistance for public and private health-care workers; enhanced contact tracing; emergency cash subsidies for low-income households in granular lockdowns; unemployment or involuntary separation assistance for displaced workers; increased credit and guarantee programs for the private sector; a one-time, 60-day grace period for outstanding loans falling due on or before Dec. 31, among others. As early as October, the government had already started disbursements for these programs.

As prescribed under the law, the bulk of the funding, or P55 billion, has been earmarked for capital infusion in government financial institutions. Some P31 billion has been allocated for health-related programs, including testing and procurement of COVID-19 medication and vaccine. Another P24 billion supports interventions in the agriculture sector, while an additional P18 billion has been appropriated for cash-for-work programs, unemployment, or involuntary separation assistance for displaced workers. Even the heavily battered transport and tourism sectors have been allocated P9.5 billion and P4.1 billion, respectively.

To maximize the investments and benefits from the funds provided under Bayanihan 2, both chambers of congress approved the extension of the validity of the appropriations until June 30, 2021.

“We are opening a wider window for the country to return to its original path to development,” Senate committee on finance chair Sonny Angara said during the plenary deliberations on the Bayanihan 2 extension.

Bayanihan 2, together with other economic recovery bills backed by the administration, will complement the 2021 national budget, the heftiest stimulus package to further fuel our country’s economic recovery.

FIST to fortify banks in rebuilding the economy

A bill approved and ratified by both chambers of Congress is expected to help the local banking system insulate itself from bad loans building up due to a COVID-19-induced recession.

The Financial Institutions Strategic Transfer, or FIST, Act will strengthen the financial sector by allowing banks and financial institutions to offload nonperforming loans (NPLs) and nonperforming assets (NPAs) to FIST corporations (FISTCs).

“Keeping the banking sector strong and stable is critical in overcoming challenging economic conditions,” the DOF stated. “The bill proposes improved versions of the special purpose vehicles created in the early 2000s in response to the Asian financial crisis. Once enacted into law, FIST will enable banks to offload souring loans and assets, clean up their balance sheets, and extend more credit to more sectors in need,” the DOF added.

This measure, proactively passed by Congress amid the pandemic, prior to a surge of NPAs and NPLs to the levels of the Asian financial crisis, was supported by the Bankers Association of the Philippines (BAP).

The need to revisit and enhance the Special Purpose Vehicle Act of 2002 under the FIST Act “will prepare the banking system for the expected increase in their NPAs arising from the community quarantines implemented to contain the pandemic,” said BAP Managing Director Benjamin P. Castro in a statement addressed to the Senate committee on banks and financial institutions.

Sen. Grace Poe, principal author and sponsor of the bill, described the measure as a proactive response to the COVID-19 pandemic. “[The FIST bill] is important for our economy and for the businesses and for our banks to maintain a healthy financial situation in our country,” Poe said during the plenary session approving the bill on third and final reading.

Once signed into law, the FIST Act will allow banks to dispose of NPLs and assets through asset management companies called FISTCs.

The swift enactment of FIST is seen to boost trust and confidence in the financial system. Banks are among our strongest economic assets. When the sector is strengthened, banks can extend more credit and other financial services to sectors in need.

Financial consumer protection mechanisms are included in the FIST Act, which requires FISTCs to ensure that the borrowers’ rights under existing laws will not be impaired. This mechanism will consist of standards of conduct on disclosure and transparency, conflicts of interest, protection of client information, fair treatment in terms of affordability and suitability of product or service, prevention of over-indebtedness, cooling-off period, and objectivity, effective recourse and exhaustion of all remedies, among others.

TESTING, TRACING and TREATMENT key to winning against COVID-19

At the onset, the Philippine government already recognized the need to quickly scale up capacities in testing, tracing, isolating and treating to respond effectively to this deadly virus.

Hence, as early as April, the government launched and convened the public-private Task Force T3 (Test, Trace, and Treat) to increase further the capacities of both government and privately owned laboratories for testing and contact tracing. Supported by the Asian Development Bank, T3 also mobilized the private sector to help in these initiatives.

“One cannot overemphasize the importance of improvements in public health management including testing, tracing, isolating and treatment to effectively control the spread of COVID-19 and secure a definitive recovery,” the World Bank, meanwhile, said in September.

Beyond the more obvious benefits of adequate health-care response, the DOF also pointed out that these measures to improve testing, tracing and treatment are allowing the government to build the people’s confidence to return to their workplace and restore their livelihoods. Renewed consumer and business confidence is deemed key to a stronger economic recovery in 2021.

Over the last nine months, since the first local transmission here was discovered, the country’s health-care capacity has significantly improved.

As of Dec. 17, some 6.4 million tests have been conducted nationwide, with the maximum daily testing capacity now at more than 90,000. The positivity rate is 8.6 percent. The country now also has 180 labs accredited to process COVID-19 specimens from only three in February.

While the increase in testing capacity resulted in the discovery of more COVID-19 positive cases, it allowed the health-care system to manage patients’ needs early on.

Also crucial are the increased tracing efforts by the government to curb transmission effectively. Contact tracing is meant to identify individuals who may have unknowingly caught or were exposed to the virus so they may be put under quarantine to help stop any potential transmission.

As of Dec. 2, 264,313 contact tracers make up the 30,503 teams deployed nationwide.

Other components of this strategy called for the isolation of all individuals with any exposure and effective treatment of COVID-19 patients. With the private sector’s help, the country now has quarantine centers with a total of 135,538 beds as of Nov. 29. This has enabled the government to isolate individuals, even those suspected to be COVID-19 positive to control the transmission of the virus. This increased capacity also allowed hospitals to focus on more patients with high-risk and critical conditions.