With infection rates growing by a multiple of 2.2 times a month, it’s safe to say that our battle with the Wuhan virus will be long and painful. Its economic impact has so far been disastrous. With second quarter economic contraction plunging to an all time low of 16.5%, think-tanks agree that the economy will contract by at least 8% this year and joblessness will rise to 9 million.
While the IATF (Inter-Agency Task Force on Emerging Infectious Diseases) fumbles through its anti-pandemic response, our great consolation is that we have an economic team that is both competent and steadfast. This includes the Departments of Trade and Industry (DTI), Finance, NEDA (National Economic and Development Authority), and the Bangko Sentral. We look to them to get us out of this deep recession we are in.
Last week, DTI Secretary Ramon Lopez spoke before the joint European Chambers of Commerce and outlined the way forward to recover and rebuild.
The vision is to use this pandemic to strengthen everything that is weak in the economy. To make lemonade out of lemons, so to speak. This involves modernizing our industries, building production capacities, linking locally manufactured goods with global supply chains and producing more goods with higher value-added components. It also calls for our rapid digital transformation, the development of more innovative startups and green industries. By doing all these, the DTI hopes to manufacture more, export more, hire more and earn more when the crisis is over.
At the heart of the plan is to create and/or preserve jobs. Jobs stimulate consumer demand and in turn, entice corporations to produce more. This escalating chain reaction is what will restore the economy to its former vibrancy, said Secretary Lopez.
Four strategies are being pursued to create and/or preserve jobs. First, the government will do all it can to save micro, small and medium scale enterprises (MSMEs) from insolvency. Second, the government will accelerate its infrastructure program. Third, the government’s multi-billion stimulus fund will be cascaded to its intended beneficiaries faster so as to pump prime the economy. Fourth, all efforts will be focused on attracting foreign direct investments (FDIs). FDIs can bridge the unemployment gap and lessen the budget deficit. They also offer long term benefits such as technology transfer, recurring income through taxes and exports earnings.
On saving MSMEs, the DTI has so far disbursed P460 million in loans to 7,151 MSMEs (each receiving an average of P64,300) out of its CARES fund. We all know that this will hardly make a difference to save MSMEs as they require hundreds of billions in financial aid to stay alive. This is why Bayanihan 2 must be passed. Bayanihan 2 will give more MSMEs the lifeline they need.
Another thing the government must do is relax quarantine restrictions and allow commerce to resume. MSMEs can hardly survive under GCQ conditions, let alone under ECQ or MECQ. Each day of quarantine shortens the life of the remaining MSMEs.
We understand that relaxing quarantine restrictions comes with health risks. However, the number of potential infections should be balanced with the number of bankruptcies, lost livelihoods and jobs. This is as much an economic war as it is a health war. Harsh quarantines kill businesses.
On infrastructure, not only must the government accelerate infrastructure projects already under construction, it must also expedite all pending unsolicited projects awaiting notices to proceed. This includes the Bulacan Airport, among others. Government must also revive public-private-partnerships. All cylinders must be fired-up as far as infrastructure development is concerned. Infrastructure building also includes strengthening our healthcare system and stockpiling essential goods such as personal protective equipment, ventilators and medical equipment.
Awaiting ratification is a new stimulus package that could range from P374.89 billion (the senate version) to P1.3 billion (the congress version), or some amount in between. The larger the approved stimulus fund, the quicker our recovery will be.
As far as investments are concerned, Board of Investments (BoI) Vice-Chairman Perry Rodolfo was proud to announce that the BoI secured P645 billion worth of new investments from January to June this year, a 112% increase from 2019. This was achieved despite the three-month lockdown.
While the level of investment commitments are noteworthy, what is disconcerting is that P626 billion, or 97%, originate from local sources. Just 3% is attributed to foreign investors. This exemplifies how uncompetitive the Philippines is in attracting FDIs.
As I have written in this corner before, the Corporate Recovery and Tax Incentives for Enterprises Act, or the CREATE Law, is the silver bullet that can solve many of Philippine’s weaknesses. It has four features that will make us more competitive when it comes to attracting FDIs.
First, CREATE will cut corporate income tax from 30% to 25% as soon as it is enacted. The one-time 5% reduction will be followed by an annual cut of 1% from 2023 to 2027, to settle at 20%. This will put the Philippines in step with the corporate income tax rates of our regional neighbors. For context, corporate income tax is 24% in Indonesia, 20% in Vietnam and Thailand, and 17% in Singapore.
Second, to prevent existing investors from leaving, CREATE allows them to enjoy the same incentives that are in place today for a period of four to nine years.
Third, CREATE allows investors access to the domestic market, even if they are located inside PEZA zones.
Fourth and most importantly, CREATE allows our investment promotions agencies the flexibility to tailor-fit incentives to the needs of the investors. This gives us a greater probability of bagging the investors we deem “desirable.” It is certainly better than the one-policy-fits-all approach that is in effect today.
In addition, the DTI is pushing for the enactment of the Retail Trade Act, a statute that allows more foreign competition in the domestic retail scene; the enactment of the Public Services Act (approved in congress on third reading), a statute that allows foreign participation in public services such as electricity transmission and water distribution; and the reduction of industries where foreign investors are precluded from participation.
The passage of these acts are pending in the legislature. If enacted, the DTI is confident that the Philippines will finally get its fair share of FDIs.
All of us from the various Chambers of Commerce were satisfied with what we heard. The DTI clearly has a sensible roadmap to recovery. Let’s hope the rest of the government, especially the legislature, supports it.
Andrew J. Masigan is an economist