The Philippines’ fiscal response to COVID-19

COVID-19 continues to impact societies and economies globally. As days have stretched to months and months to years, the world is slowly pivoting towards “living with the virus”. Asia’s COVID story is a study in contrasts, with Southeast Asia proving its resilience yet again for multiple reasons. Here we take a look at the Philippines’ response to the pandemic.

In the first part of this interview, we speak with Carlos G Dominguez III, Finance Secretary of the Philippines, about the fiscal pressures brought about by COVID-19, how the country is handling them, the key areas of focus for the government for the economic recovery, and how it is maintaining economic competitiveness in the face of the pandemic.

Unravel: Can you tell us how the Philippines has coped with the fiscal pressures brought about by the pandemic?

Carlos G Dominguez: Due to the successive tax and structural reforms passed by the Duterte administration since 2016, the country’s fiscal fundamentals have largely endured the COVID-19-induced crisis. The Philippines did not suffer the kind of fiscal downturn that typically accompanies an economic crisis.

When COVID-19 struck, we fine-tuned our fiscal and monetary policies to support the economy. We immediately realigned our budget and utilised cash buffers built from prompt financing efforts made through domestic bond offerings and followed by official development assistance and international capital markets. We determined this financing plan as the most prudent approach, ensuring sustainability in our debt service. 

The Philippine government’s direct response to the pandemic amounts to $61.6 billion, equivalent to 15.6% of GDP. This includes the largest social protection programme in history that provided emergency cash grants to low-income families and wage subsidies to workers in small businesses. We also expanded medical resources to fight COVID-19, such as the procurement of test kits and vaccines. Funds were also made available to provide cash-for-work programmes and to assist affected industries. We infused additional capital into government financial institutions for them to lend more money to productive sectors of the economy.

Unravel: How has the Philippines managed public debt through the pandemic?

Mr Dominguez: Due to lower revenue collection because of the lockdown and higher spending for COVID-19 response, our debt-to-GDP ratio increased to 54.6% in 2020 and 60.5% in 2021. Nevertheless, this remains sustainable – especially taking into account the preserved robust structure of our debt profile.

Despite the increase in borrowings, we have reduced the cost of public debt through judicious debt management. Our high credit ratings, which have all been affirmed amid the wave of downgrades globally, allowed us to secure financing at very favourable terms. For instance, our average annual interest rate continued to decline from 5.2% in 2015 to 4.2%      in 2020 and 3.9% in 2021.

Our manageable debt ratio allowed us to temporarily expand our deficit-to-GDP ratio from 3.4% in 2019 to 7.6% in 2020. Supported by the rebound of revenue collections due to the reopening of the economy, our fiscal deficit for 2021 is expected to be lower at 8.2% of GDP from the programme of 9.5% of GDP for the year. In 2022, the fiscal deficit will continue its downward trend to 7.7% of GDP as revenue collections are expected to recover to their pre-pandemic levels.

With the lower projected deficit outcome, we have the scope to reduce our gross borrowings beginning 2022. This will allow us to peak our debt-to-GDP level to 60.9% this year, and drop thereafter, starting in 2023. We will continue exercising fiscal responsibility to let our growth outpace our debt over the near- and medium-term. Our goal is to keep our deficit and debt-to-GDP ratios at the median range of our neighbours and rating peers globally.

We are currently putting together a fiscal consolidation plan to bring the country back to its high growth trajectory. This plan contains both improvements in tax administration to further reduce leakages and updated tax policy proposals building on the reforms in place. Some features are also designed to future-proof our tax system. This will be ready by the time the Duterte administration completes its term in June 2022, as part of our transition document.

Unravel: What are your government’s key areas of focus for the economic recovery?

Mr Dominguez: The Philippine government’s priority is to ensure our people’s wellbeing and safety from COVID-19 while giving them opportunities to a livelihood. To do this, we are further accelerating the rollout of our vaccination programme, which is the most effective hedge against the pandemic. As of 10 February 2022, our total vaccine arrivals reached 222.5 million doses. We have successfully administered 128.7 million shots as of 9 February      2022. A total of 60 million Filipinos are now fully vaccinated while 8 million people have already received their booster shots. Funding is already secured for more booster shots along with vaccine doses for children below 12 years old.

Other than the vaccination programme, our sustained growth beginning in 2021, which culminated in a full-year GDP expansion of 5.6%, was driven by the successful management of risks. These include targeting the areas with the highest risk for stricter quarantine restrictions and allowing the rest of the economy to open. Thus, we will continue implementing policies that allow us to move from a pandemic to a more endemic paradigm. A zero-COVID-19 policy is both costly and unrealistic, as medical experts suggest that the disease may soon become endemic, like the seasonal flu.

Going forward, we will drive up domestic economic activity by continuing to focus on our massive Build, Build, Build infrastructure programme. The Duterte administration brought infrastructure investments to an annual average of 5% of GDP, double the average infrastructure spending to GDP of the previous four presidencies. The programme has been our main strategy to help lift Filipinos out of poverty. To speed up our recovery, infrastructure investments as a percentage of our GDP are targeted to reach 5.6% in 2021 and 5.9% in 2022. We will likewise continue to modernise our governance system, strengthen our public health system, and invest more in our human capital.

Unravel: What are some structural reforms that the current government is undertaking?

Mr Dominguez: We will strengthen the implementation of our structural reform measures to put the country back to its pre-pandemic growth rate of above 6%. We quickly enacted the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act in March 2021, which makes possible the largest economic stimulus programme for businesses in the country. From a high corporate income tax rate of 30%, CREATE provides a hefty tax cut of 10 percentage points for small and medium enterprises and 5 percentage points for big corporations. Additionally, CREATE puts in place a flexible incentive system. We can choose the investors we want to come in as the law allows us to tailor-fit incentives that are performance-based, time-bound, targeted and transparent for prospective businesses.

Moreover, our economic liberalisation bills have been passed by Congress, and we will fully implement them this year. These include the amendments to the Retail Trade Liberalization Act, the Foreign Investments Act, and the Public Service Act. All of these will allow the country to attract more foreign investments, create more meaningful employment, enhance innovation, and improve the quality of goods and services for all Filipinos.

Unravel: How does the Philippines maintain confidence with domestic and international investors?

Mr Dominguez: Increasing the Philippines’ competitiveness and improving the ease of doing business has always been among the priorities of the current administration. Over the last five years, we pursued game-changing reforms that provide a more investor-friendly environment in the country.

The reforms include the establishment of the Anti-Red Tape Authority; the passage of the Ease of Doing Business Act, the Tax Reform for Acceleration and Inclusion (TRAIN) Act, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the Rice Tariffication Act, and the amendments to our economic liberalisation laws; the implementation of the Real Estate Investment Trust Act; the rollout of the Build, Build, Build programme; and the comprehensive shift to digitalisation, among other measures.

In particular, our economic liberalisation laws are composed of the amendments to the Retail Trade Liberalization Act, the Public Service Act and the Foreign Investments Act.

Unravel: What are some of the amendments to these Acts, and what are their impacts?

Mr Dominguez: On 10 December 2021, the President signed into law the amendments to the Retail Trade Liberalization Act. This lowered the minimum paid-up capital requirement for foreign corporations from $2.5 million to about $500,000, provided that foreign retailers with more than one physical store have at least $200,000 minimum investment per store. It likewise simplified the qualification requirements of foreign retailers by removing the required net worth, the number of retailing branches, and retailing track record conditions. Further, it encourages foreign retailers to have a stock inventory of products that are made in the Philippines, supporting our country’s small local manufacturers.

The amendments to the Public Service Act, which is awaiting the President’s signature, will differentiate between public services and public utilities by providing clear and explicit definitions for both in the law. By doing so, it will open up public services to 100% foreign ownership, and retain public utilities as majority Filipino-owned, subject to the 60-40 ownership rule. The list of public utilities will soon be limited to distribution and transmission of electricity; water pipeline distribution system, wastewater, and sewerage pipeline systems; petroleum and petroleum products pipeline transmission systems; seaports; and public utility vehicles. All other industries previously subject to restrictions on foreign ownership through this law will be opened up once the bill is enacted.

The amendments to the Foreign Investments Act, awaiting the President’s signature, will help improve the country’s openness to foreign direct investments by mandating a review of the Foreign Investment Negative List every two years and by liberalising the practice of professions. The measure also allows enhanced transparency in monitoring foreign investments by requiring an analysis of foreign investment performance under the Foreign Investment Negative List to be submitted to Congress.

Meanwhile, the pending tax reforms bills are already in the advanced stages of legislation and we will continue pushing for their approval until our last hour in the office. These measures will introduce improvements in our property valuation system and in the taxation on passive income and financial intermediaries.

Additionally, we are strengthening investments in our human capital to take full advantage of the demographic sweet spot the Philippines enjoys. We have a young and talented workforce prepared to swiftly adjust to the transformations taking place in our economy.

Apart from this, we are committed to maintaining fiscal prudence, which allowed us to earn unprecedented upgrades in our credit ratings. This essentially means international investors continue to find us attractive. Our high credit ratings resulted in tighter spreads and concessional rates for our borrowings, giving us relatively easy access to financing from our development partners and the commercial markets.