By Carlos Dominguez – Secretary of Finance
(Speech at the joint meeting with the local and foreign business community, May 28, 2020)
His Excellency Peter MacArthur, Ambassador of Canada; His Excellency Koji Haneda, Ambassador of Japan; His Excellency Harald Fries, Ambassador of Sweden; leaders and members of the foreign and local business organizations; fellow workers in government; distinguished guests: good afternoon.
Thank you for this opportunity to address you today.
The COVID-19 pandemic we are all fighting created great difficulties for businesses not only here but all across the globe. The restrictions on movement, necessary to slow the spread of infections, proved devastating to our economic activity. Many companies have been pushed to the brink.
As we move out of the lockdown, all of you are surely interested about how government can help pull things together in some sort of new normal. Be assured that the Duterte administration is working round the clock both to protect the people’s health and provide a roadmap to rapid recovery.
Resilience due to prudent fiscal management
2020 will be a challenging year for the economy but we are confident of weathering these challenges and recovering with resilience due to President Duterte’s prudent approach to fiscal management.
As Ms. Du-Baladad mentioned, before this pandemic hit us, our economy was among the fastest-growing in Asia. The passage of the historic tax and economic reforms have kept prices stable and predictable for Filipino consumers, and our financial position strong and steady. Just last year, we enjoyed a credit rating upgrade to BBB plus. This is the highest rating we have ever received and only one notch below the sterling A territory.
Even amidst the negative impact of COVID-19, The Economist magazine in late April ranked the Philippines sixth out of 66 selected emerging economies in terms of fiscal strength. This “saving-for-a-rainy day” approach to economic management has gained for us the trust and confidence of the world’s most respected credit rating agencies, of our development partners, and the global investors as reflected in our recent successful US dollar bond issuance. This has allowed us to borrow money at lower interest rates and longer repayment periods.
RP first to impose lockdown in ASEAN
When the pandemic hit us, the Philippines was the first country in ASEAN to impose strong lockdown measures to save lives and protect our communities. According to the World Bank, this swift and decisive action of the President has likely saved more than 50,000 people from infection and death.
Nonetheless, we know that our efforts to protect our countrymen and to provide for their needs will always come at a very heavy price. As a result, we experienced in the first quarter of this year a GDP contraction of two-tenths of 1% for the first time in over two decades.
While it is likely that this quarter’s economic results will even be worse, global policy experts, such as those from the World Bank and the Yale University, have advised us not to focus too much on these quarter by quarter numbers. After all, the pandemic is hurting the entire global economy. What is important, according to them, are economic fundamentals and resiliency.
We are committed to conserving our strong fundamentals as they will help us ensure that our rebound will be strong and quick.
The Duterte administration quickly put together a four-pillar strategy to shield the Filipino people against the adverse impact of the pandemic.
We have to thank Congress for responding swiftly to the call of the times by passing the Bayanihan Law one week after the imposition of the enhanced community quarantine in Luzon. The law grants expanded budgetary powers to the President to effectively carry out the government’s COVID-19 response measures. This has enabled us to pursue the four-pillar strategy, which has a combined value of P1.74 trillion or 9.1% of our GDP.
For the first pillar, we are providing emergency support or lifeline assistance to vulnerable groups of our population and industries, with a total allocation of P595.6 billion.
Largest social protection program
These include the largest social protection program in the history of the Philippines, which will initially cost us P205 billion to be distributed to at least 18 million low-income families in the span of two months. The President has ordered the inclusion of additional household-beneficiaries in the program and reconfiguration of the budget for the second tranche of the emergency subsidies.
This is complemented by the P51-billion wage subsidy program for 3.4 million Filipinos of small businesses also for two months. This is our way of helping small businesses retain their employees.
Support for SMEs
To support the urgent needs of micro, small and medium enterprises, other relief programs for them have also been put in place to help these businesses get back on their feet.
For instance, the Philippine Guarantee Corp. has approved a credit guarantee program amounting to 120-billion-peso-worth of loans to enable small business owners to borrow from banks during this crisis.
We are also proposing a legislative measure that will strengthen the capacity of the Philippine Guarantee Corp., the Land Bank of the Philippines, and the Development Bank of the Philippines to provide assistance to MSMEs and strategically important companies adversely affected by the pandemic.
This includes infusing capital into our two state-owned banks and increasing the funds of Philippine Guarantee Corp.. The multiplier effect of every one peso capital put into the banks is at least eight and a half times, while a bigger 18 to 20 times are generated by guarantees.
Landbank and DBP will also serve as rediscounting agents for small and medium-sized banks and microfinance organizations. This is the most efficient way of getting the money out to the countryside to revive the economy.
Second pillar: Health
For the second pillar, we have marshalled resources to fight COVID-19. At this point, we have allotted P58.6 billion under this pillar to support our frontline healthcare workers and increase the testing, tracing, and treatment capacity of our health system.
Third pillar: Finance
The third pillar consists of bold fiscal and monetary actions to finance emergency initiatives and to keep the economy afloat. This has an estimated value of P1.1 trillion, which includes standby financing for our economic recovery plan and a 233-billion-peso liquidity infusion into the economy from the timely, anticipatory responses of the Bangko Sentral ng Pilipinas.
Both the Department of Finance and the Central Bank are in sync in ensuring that the fiscal and monetary tools in our arsenal are kept sharp and ready to be used when needed.
Fourth pillar: Recovery Plan
The fourth pillar is the actual recovery plan the economic team is refining. This plan intends to help us jumpstart economic activity and provide industries the assistance they need to get back on their feet.
The elements of this plan are drawn from an extensive nationwide survey as well as from active engagement with various stakeholders. The results have aided us in developing differentiated and targeted interventions for each sector. This is, in a sense, a crowd-sourced plan.
I have also recommended to President Duterte five priority actions to meet the challenges of this difficult period.
Five priority actions
First, we must quickly restart and accelerate the Build, Build, Build infrastructure program. With the highest multiplier effect, this program is indispensable to generating employment and rebuilding domestic demand.
Second, the massive hiring of contact tracers will help soften the impact of temporary job losses–including those jobs lost to Filipinos working overseas. Massive hiring of contact tracers is indispensable to keeping the number of infections in check.
Third, to stimulate demand, by promoting the manufacturing of products that have strong, inelastic demand, such as food production and the logistics that support it.
Fourth is to support the whole value chains of these products, from inputs to packaging and logistics. We need to help businesses, especially MSMEs, and the consumers weather the economic storm together.
Fifth, we need to attract foreign investors who want to relocate from other countries and are in search of resilient, high-growth-potential economies like the Philippines. This will involve the urgent passage of package 2 of our tax reform program.
CREATE to cut income tax
Now called CREATE or the Corporate Recovery and Tax Incentives for Enterprises Act, Package 2 has been recalibrated to make it more responsive to the needs of businesses negatively affected by the pandemic. This will also improve the ability of the country to attract highly desirable investments that will serve the public interest.
The amendments make the proposed bill the first-ever revenue-eroding tax reform package proposed by the Philippine Department of Finance, and the largest fiscal stimulus program for enterprises in the country’s history.
First, we propose an immediate across-the-board cut of the corporate income tax rate for all firms from 30% to 25% starting in July 2020, if Congress can pass the bill before it adjourns on June 3rd. The corporate income tax rate will be reduced further by one percentage point every year from 2023 to 2027. This will clearly be a powerful stimulus for rapid recovery.
The immediate cut in the corporate income tax rate will reduce government revenues of about P42 billion in the second half of this year alone. All firms, especially the country’s MSMEs, can use these funds for their operations and to retain employees.
P625B revenues foregone
Over the next five years, the total estimate is P625 billion foregone government revenues to fuel economic activity. The firms can invest these funds in the revitalization of their businesses and create even more jobs for Filipino workers. This is a simple yet effective measure to fire up our economy and quickly bring us back to the track of high growth.
Let me emphasize that this reform measure is really about trusting the private sector. Instead of increasing our budget and passing funds through what tend to be less efficient government programs, we will leave the money in the hands of the private sector.
The large and immediate rate cut in the second half of this year also sends a strong signal to the world that the Philippines is positioning itself as a premier investment destination for companies that are looking to diversify their supply chains.
Extending time-bound incentives
In addition to reducing corporate tax rates, we are also extending by two years the transition period to a new, highly-targeted, performance-based, and time-bound incentives system. This should reduce the uncertainty and encourage new investments in our economy.
Third, we have extended the applicability of the net operating loss carryover for those not included in the Bureau of Internal Revenue’s large taxpayer service from three years to five years. This will allow firms to utilize net losses in 2020 as additional deductions to their taxable income from 2021 to 2025. Ninety nine percent of corporate taxpayers, should they incur net operating losses, are eligible for this benefit.
Fourth, we are making the system more flexible by allowing the Fiscal Incentives Review Board to recommend to the President the grant of longer incentives and additional non-fiscal incentives for investments we want to invite here. The rigidity of the existing tax incentives system has kept our hands tied in the competition for super-investments in the region. The provision will allow us to tailor-fit our incentives according to the unique needs of specific investments with exceptional benefits to the public interest.
These changes are made in recognition of the extraordinary tough challenges that we face today. Overall, CREATE is a generous proposal that addresses most, if not all, of the concerns raised with us before by business and industry groups.
I invite all of you to participate in convincing our Congress of the need to urgently pass this bold reform. There is no better time to reform our corporate income tax system, and modernize our fiscal incentives system than now.
This could be the most important economic reform in decades. As statements of our partners in industry and civil society show, the economy can no longer bear any delay in this reform. Now is the best time to do it.
I strongly believe that your collective voice will finally get us over the hill on this policy effort. The unequivocal support of the business sector is crucial in urging our lawmakers to rally behind this long-overdue reform. There could not be a stronger signal that this country is back in the game than the passage of CREATE.
The comprehensive effort to simultaneously fight the pandemic and rebuild our economy has demanded great sacrifice and fortitude from the private sector and from the government. This is true for all countries around the world.
Be assured that the Duterte administration will do its very best to protect the economic gains together we have made, support our recovery, strengthen our resilience, and bring us back to the path of inclusive and shared prosperity. This challenge will be surmounted with decisiveness, agility, and determination. We will beat this pandemic and come out even stronger and more resilient than before.