The administration of President-elect Ferdinand ‘Bongbong’ Marcos Jr. is bent not only on overcoming multiple challenges but also on bringing the country to a higher economic and fiscal status.
Strong fundamentals and bright macroeconomic prospects provide room for optimism, according to the new economic team.
“It will not be an easy road ahead, but we are not without the necessary wherewithal and elbow room to manage the challenges,” Marcos, himself, said in an economic briefer.
Finance Secretary Benjamin Diokno, who left his post as Bangko Sentral ng Pilipinas governor, said pursuing a fiscal consolidation plan would help the country achieve the “A” investment grade score from global rating agencies Moody’s Investors Service, Fitch Ratings, and S&P Global Ratings.
Diokno said the country was on its way to the “A” level credit rating before the global pandemic hit in 2020. Despite the disruption, the economy remained strong and the Duterte administration carried on game-changing reforms.
“Not surprisingly, all the international and regional rating agencies unanimously affirmed the Philippines’ investment-grade ratings throughout the pandemic despite a wave of ratings downgrades for many advanced and emerging economies,” Diokno said.
“Now, the [Marcos] administration has to continue the country’s pursuit of A-level rating. This can be done by crafting, among others, a well-thought-out fiscal consolidation framework, which has been prepared by the Executive Department and ratified by Congress,” Diokno said.
“As Finance Secretary under the incoming administration, I will make the attainment of an A-level credit rating as one of the goals of the economic team. This can be done by improving tax administration and adopting a fiscal consolidation framework, among others,” he said.
Strong fundamentals
Debt watchers cited the country’s strong fundamentals, adequate buffers against shocks and sound macroeconomic management as reasons why they decided to affirm the country’s investment grade ratings.
At the height of the pandemic, Moody’s Investors Service affirmed the Philippines’ “Baa2” investment grade rating with a stable outlook in July 2020. It was followed by S&P Global Ratings’ affirmation of its “BBB” rating with a stable outlook in May 2021.
Japan Credit Rating Agency affirmed its “A” rating with a stable outlook for the Philippines in September 2021, while Fitch Ratings affirmed its “BBB” rating with a negative outlook for the country in February 2022.
Debt management
The economic team set its sights on the sustainability of the government’s debt that ballooned to a record P12.76 trillion as of end-April 2022, driven by the Duterte administration’s borrowings to finance COVID-19 response efforts and infrastructure projects.
Diokno said debt would be the first fiscal issue he would focus on at the DOF. “Maybe the first order of business will be [looking at] the sustainability of public debt. While our debt-to-GDP ratio is above the 60-percent limit, I don’t think that is a cause of concern,” Diokno said in a recent briefing.
“As long as the economy grows 6 to 7 percent, we can outgrow our debt… So it is important to look at the sustainability of the debt… We must [also] show that we are serious in consolidating our resources,” said Diokno, who also headed the Department of Budget and Management before being appointed BSP governor.
Diokno said he would look at the fiscal consolidation plan proposed by outgoing Secretary Carlos Dominguez III that includes raising taxes, deferring personal income tax reductions and expanding the value-added tax coverage to pay for the debt incurred during the Duterte administration.
“The tax system we are leaving to the next administration is much better than the previous administration. It is not a perfect tax system, but it is too early to talk about raising taxes at this time,” Diokno said.
He also said it is very important to raise the level of economic growth because, “the higher the growth of the economy, the more revenues that may be generated.”
Debt stock
The national government debt at P12.76 trillion in April was 8.83 percent higher than the end-2021 outstanding debt.
The DOF said in an economic bulletin that the recent build-up of debt was largely on account of the economy’s response to the pandemic. The economy borrowed massively precisely because it had the capacity to do so prior to the pandemic.
“The debt to GDP could have been higher had the additional stimulus bills earlier proposed by Congress [such as the Bayanihan 3] been passed. Stimulus packages are best unpacked at the appropriate moment such as when disasters strike, not when the economy is on high gear at which time the appropriate policy response is to conserve energy and keep powder dry,” the DOF said.
From economic management in general, the agency said trimming down the debt-GDP ratio means growing the economy at a faster rate than the build-up of debt. The interagency Development Budget Coordinating Committee—composed of the heads of DOF, National Economic and Development Authority, and Department of Budget and Management—projected a 7 to 8 percent GDP growth in 2022 and 6 percent to 7 percent next year through 2025.
The DOF said there are higher odds of achieving these investment-led growth targets given the infrastructure spending in prior years, the lowering of corporate income taxes and the recently-passed structural reforms (amendments to the Foreign Investment Act, Retail Trade Liberalization Act and Public Service Act).
The DOF said fiscal consolidation is achieved by narrowing the deficit: shoring up revenues and cutting non-priority expenditures but without sacrificing infrastructure spending.
In the absence of new tax measures and further cuts in spending, the latest baseline scenario projects the deficit reaching 4.1 percent of GDP by 2025, down from 8.6 percent in 2021.
“Mobilizing an additional P250 billion a year will cut further the deficit to reach around 3.2 percent by 2025, a figure comparable to the pre-pandemic deficit of 3.4 percent,” the agency said.
Tax administration
Former Finance Undersecretary Valery Joy Brion said in a briefing that by the end of 2022, the Philippine government would have borrowed P3.2 trillion more than initially planned in December 2019, prior to the outbreak of the COVID-19 pandemic here in the Philippines.
“Our debt-to-GDP level stands at 63.5 percent, slightly higher than the internationally prescribed best practice of 60 percent of GDP. As early as next year, the Philippine government will begin principal payments for loans incurred over the past two years,” she said.
Brion said the new administration has three options. These include borrowing more, cutting spending or raising revenues and improving tax administration to maintain productive spending in infrastructure, health, education and other investments for the future.
Borrowing more cannot be a viable option as this would further push up the country’s debt level and risk downgrading the investment-grade credit ratings, she said. Interest payments would also balloon, reducing the resources available for productive spending.
Cutting spending, except for wasteful expenses, is also not a recourse because it could imperil the economic recovery and lead to reduced budgets on education, health, infrastructure and other socioeconomic priorities.
Both widespread budget cuts and financing debts with borrowing would lead to slower economic growth, spiraling debt levels and eventually, fiscal and economic crises.
Brion said the best way is “to raise more revenues and improve tax administration and for the government to channel resources from unnecessary and non-priority expenses to productive spending.”
Bureau of the Treasury data show that to prevent having to use borrowings to pay the country’s P3.2 trillion in incremental debt, the government needs to raise at least P249 billion every year in incremental revenues for the next ten years.
The measures proposed by the DOF are estimated to yield an average of roughly P284 billion every year for the national government.
Economic recovery
Diokno said the country is on its way to “full recovery” despite risks emanating from both the domestic and external fronts.
The economy grew by 5.7 percent last year and sustained its robust momentum with an 8.3 percent growth in the first quarter of 2022 after the pandemic-driven recession in 2020.
“We expect the economy to grow much faster in the second quarter, making the growth target for this year of 7.0-8.0 percent doable,” Diokno said.
Diokno cited the country’s strengths that could support the economy to full recovery. These are the recovery in employment, surging foreign direct investments, vibrant manufacturing, improving business and consumer outlook, and rebound in domestic economic activity.
The employment rate is close to its pre-pandemic level. From a peak of 17.6 percent in April 2020 at the early onslaught of the pandemic, the unemployment rate went down to 5.8 percent in March this year.
Foreign direct investments reached an all-time high last year, growing by 54.2 percent. In the first two months of 2022, FDIs went up by 8 percent to $1.7 billion.
Manufacturing strongly rebounded, with the purchasing managers’ index at 54.1 in May. This represents nine months of expansion in factory activity.
Diokno said the strong rebound in domestic economic activity and labor market conditions in the first quarter provided scope for monetary authorities to start rolling back pandemic-induced interventions.
“One thing is sure: economies with strong fundamentals tend to handle crises better. In the case of the Philippines, it entered the pandemic with strong macroeconomic fundamentals. Its healthy external accounts and hefty gross international reserves served as a buffer during the pandemic,” Diokno said.
He said the government’s fiscal space allowed it to finance its huge COVID-19 response without incurring unmanageable public sector debts.
“Given all these positive developments, we are optimistic that the Philippine economy will do better this year,” he said.