Cesar Virata assesses Phl economic reforms, directions

Former prime minister Cesar Virata has written a short piece entitled “The Philippines readying for a suite of changes” for the East Asia Forum, a newsletter designed to inform on international economic development matters involving the Asia Pacific region.

Although written mainly for an international audience, it is useful for all who monitor Philippine developments. What follows below is his full article.

(We are fortunate that Mr. Virata, the country’s foremost senior economic statesman, has allowed us to share his article with readers of this column. To align with this column’s style, I added a few headings.)

The new Duterte government. The 2016 mid-year general election in the Philippines delivered power to the Philippine Democratic Party-Power of the People (PDP-Laban) and a new president, Rodrigo Duterte. With the change in national leadership, the Philippine economy has continued to perform well, growing at 6.8 percent.

The new Duterte administration has focused on drastically reducing the country’s drug problem and corruption in government. It has also prioritized advancing the ongoing peace process with Communist groups and the Muslim Bangsamoro groups. Police and armed forces are also continuing to pursue the Abu Sayyaf Group, a jihadist terrorist organization.

Economic and social fronts. The Duterte administration aims to reduce poverty by liberalizing investments and focusing on agriculture, food processing and infrastructure. These reforms are aimed at increasing employment, reducing poverty in rural areas and improving infrastructure to alleviate bottlenecks across the land, sea and air transport systems.

The proposed 2017 budget allocates up to five percent of GDP for infrastructure spending. To meet this infrastructure budget, the government has filed a congressional bill granting emergency powers to the Secretary of Transportation to bypass regulatory impediments, as well as facilitate the bidding of contracts and procurement of materials and equipment.

But to pave the way for increasing infrastructure investment, the overall capacity of both public and private sector contractors needs to be revved up.

In terms of the broader economy, Duterte has signed off on a P3.35 trillion budget (approximately US$153 billion) for 2017, an 11 percent increase on the previous year’s budget expenditure.

This increase in spending is to be met by proposed tax reforms targeting up to P1 trillion in additional tax revenues by 2018-2019. But so far the tax proposals that increase the tax rate have been questioned by Congress, while tax reductions have gained support. Even if the majority of Congress becomes aligned with the PDP-Laban party, the general lack of discipline in party politics means successful reform is not guaranteed.

The government has also proposed a 10-point basic socio-economic agenda which aims to increase employment, reduce poverty, improve education and health, as well as build up infrastructure to increase efficiency and productivity. But some aspects of the agenda have not been well aligned.

With many unemployed or underemployed, stricter labor rules are being implemented to make contractual labor arrangements illegal or difficult to obtain.

Likewise, the Philippines is rich in mineral resources, but responsible mining is not being promoted. Land use policy is ill-defined, meaning that government agencies and local government units have overlapping authority structures.

Uncertainties. There are also uncertainties that have been brought by remarks made by Duterte  and various Cabinet members on the Philippines’ foreign policy and economic reform that could affect investments in certain areas.

The remarks have been neither confirmed nor denied by the National Economic and Development Authority (NEDA) or Duterte. While this can be attributed to initial internal conflict in the Cabinet as part of the learning curve, it has promoted a degree of uneasiness and uncertainty.

Creating further uncertainty is the question of what the policies of the new US President Donald Trump will be on trade in goods and services and, of course, investment. The Philippines would be hit hard by any economic turbulence caused by Trump or further discontent in developed countries.

Constitutional reform. Looking to 2017, the Philippine Congress is due to convene as a constituent assembly to amend the 1987 Constitution. Duterte’s administration is proposing the Philippines adopt a federal form of government, but the exact details of a new political model remain unknown. What’s more, the budgetary aspect of the proposal will be difficult because only a few of the proposed federal states are fiscally sustainable.

On a more positive note, the government anticipates that a federal system could help resolve the question of creating an autonomous Bangsamoro state, establishing a more sustainable peace and furthering development opportunities.

The other constitutional reform proposed is to liberalize inbound foreign investment by removing restrictive provisions in the Constitution. In terms of the ownership of land, Duterte has reiterated that the existing law will remain, meaning that foreigners will still be allowed up to 40 percent ownership and lease for up to 75 years.

One of the most restrictive provisions in the Constitution concerns ownership and operations of public utilities. In 2012, the Supreme Court decided that foreign ownership cannot exceed 40 percent of a public utility’s common stock, but did not rule on other forms of shares. In 2016, the Supreme Court decided that foreign entities can own a majority of preferred shares without voting rights.

In other words, foreign investors’ voting control is limited, but not with reference to benefits from investment in non-voting capital shares and up to four-percent of common voting shares. With this ruling, foreign investors can invest more in public utilities such as telcos, toll roads and rail – but management and operations will remain with Filipino citizens.

With the Duterte administration presenting Congress with an agenda full of fundamental changes, a careful and rigorous follow up on progress at these various fronts will be necessary over the coming years.

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