Tax reform has been front and centre of President Rodrigo Duterte’s policy agenda since the combative former mayor of Davao City was elected to the Philippines’ highest office in 2016. Indeed, enhanced revenue mobilisation from a more efficient and effective tax system is seen by the Duterte administration as a key component of plans to address nationwide infrastructure gaps and deliver ambitious social programmes such as universal health care. While these big-picture policies should help foster inclusive and sustainable economic growth over the long term, the tax reforms that have been pushed through so far have been met with mixed reactions from the business community and the general public.
How the Duterte administration’s tax reform packages have landed
The Tax Reform for Acceleration and Inclusion, better known locally by its acronym TRAIN, was the first package of the Comprehensive Tax Reform Programme that successfully passed through Congress. Effective since January 1, 2018, TRAIN has exempted many low-wage workers from income tax but was also partly blamed for causing inflationary pressures last year due to higher excise taxes on fuel and certain consumer goods.
Now that the dust has settled somewhat, we find corporate leaders divided on TRAIN’s impact on local business conditions. Of the almost 100 C-suite executives who participated in the latest OBG Business Barometer: Philippines CEO Survey, some 35% said TRAIN had affected local business conditions in a negative way, while 33% gave a neutral response. On the other hand, 29% responded that TRAIN had a positive impact on the business environment and 1% opted for very positive.
The survey results skewed even further to the negative side when we factor in responses to the question: How competitive is the Philippines’ tax environment on a global scale? Some 54% described the tax environment as globally uncompetitive or very uncompetitive, while just 17% gave favourable responses. These results may give lawmakers plenty to ponder with another major package – the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) – currently stalled in Congress.
Concerns over the country’s spiked inflation
Part of the negativity towards TRAIN can be attributed to the fact that it was blamed – somewhat unfairly – for the spike in inflation last year. Inflation averaged 5.2% for 2018, which far exceeded the central bank’s target range of 2-4%.
However, other factors were at play besides new excise taxes. For example, the rise in oil prices through most of the year pushed up the import bill and placed pressure on the peso. At the same time, the price of agricultural commodities such as rice also rose considerably, but this was the result of a plethora of supply-side issues. With last year’s inflation worries still fresh in their minds, it is little wonder that a plurality (43%) of CEOs chose commodity price rises as the external factor that could most impact the Philippine economy in the short to medium term, while trade protectionism was the second-most-popular choice (27%), despite the global disruption caused by the US-China trade war.
However, with oil prices remaining stable so far in 2019 despite geopolitical tensions in the Gulf and Latin America, and the recently signed Rice Tariffication Law helping to lower rice prices, we expect Philippine CEOs to be less concerned about inflation and – by extension – commodity prices in our next survey.
The long-term plan to build, build, build a stronger economy
While the jury may still be out on tax reform, CEOs who participated in our survey were predominantly upbeat on the economic impact of the Duterte administration’s infrastructure drive. Under the banner of Build, Build, Build, the government plans to inject around $158bn of public funds into infrastructure projects from 2017 to 2022.
The importance of state spending on infrastructure to the wider economy is evidenced by the slowdown in GDP growth that occurred in the first quarter of 2019 due to delays in passing the government budget and, consequently, releasing public funds. This massive increase in public spending on infrastructure is being complemented by official development assistance (ODA) from key partners such as Japan, US, South Korea and, increasingly, China.
Although the Duterte administration’s preference for ODA funding has limited the scope for public-private partnerships to some extent, 56% of survey participants said Build, Build, Build was impacting the wider economy in a positive or very positive way, with only 15% responding negatively.
One factor that could potentially slow the progress of infrastructure development is a shortage of engineers and construction workers – a challenge even President Duterte himself has acknowledged. Poor working conditions and relatively low pay are seen as two significant reasons why qualified engineers and construction workers often seek opportunities overseas or pursue other professions. CEOs who participated in our survey seemed to share this concern, with 33% choosing engineering as the skill most needed among the domestic workforce, followed by leadership (25%), and research and development (18%).
Despite the many challenges that economic policymakers face in the Philippines as they attempt to foster inclusive growth, move domestic industries up the value chain and address stark income inequality, they can feel assured that a significant majority of the business community remains upbeat about the country’s prospects. According to our latest survey, 92% of CEOs are positive or very positive about business conditions in the year ahead (matching the results of our last survey), and 74% say their firm is likely or very likely to make a significant capital investment in the domestic market during the same period.
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