Long-term economic outlook remains good

CEBU, Philippines - Favorable long-term view on the Philippine economy and the stock market is still intact, COL Financial said, noting that changes the Duterte administration wants to implement are painful in the short-term but they will have a favorable impact over the long-term.

"The major risk factor in our opinion is the failure of the government to pass the first package of its comprehensive tax reform program. Without it, our ability to improve infrastructure and attract investments would be negatively affected, making it more difficult for us to sustain rapid economic growth," April Lynn Tan, head of research, noted in COL's latest research on 2017 outlook.

The government needs to implement tax reforms to raise enough funds to meet its goal of increasing disbursements from around 18.2 percent of gross domestic product (GDP) in 2016 to around 20.2 percent of GDP in 2019, led by the growing share of capital outlays from 4.5 percent of GDP in 2016 to 6.3 percent of GDP in 2019.

The planned reduction in personal income taxes that will be implemented together with the first package of the tax reform policy in the second half of 2017 will also have a favorable impact on consumer spending and economic growth, COL said.

Data from the Department of Finance showed that 93 percent of the 5.6 million taxpayers in the country will get an automatic increase of around 20 percent in their disposable income.

"The size of the income tax cuts will increase further in 2020, leading to another round of increases in disposable income. We believe that the benefits of the comprehensive tax reform policy will be felt as early as 2018. Based on the government’s plans and forecasts, GDP growth would accelerate to 7 percent to 8 percent in 2018 from 6.5 percent to 7.5 percent in 2017 as it plans to use proceeds of its new revenue generating measures to fund a 46.5 percent increase in spending on infrastructure," the stock brokerage firm said.

Meanwhile, under the second package of the tax reform policy, the government plans to reduce the corporate income tax rate from 30 percent to 25 percent.

All else equal, this will immediately lead to a 7 percent increase in corporate earnings. The second package will hopefully be implemented by 2019 at the latest.

It further added that better infrastructure and more productive citizens will make the country more attractive to foreign investors, ensuring the sustainability of the country’s rapid economic growth at 7 percent annually and allow the government to reach its goal of achieving high middle income status by 2022.

It believes President Duterte has a strong leverage to push his agenda given that he holds super majority of the Congress and has the Senate's strong support.

"The high level of his administration’s net satisfaction rating should also help. According to the latest SWS survey, the net satisfaction rating of the Duterte administration is “very good” at +61 percent. Net satisfaction rating was the highest on the subject of “helping the poor” at +66 percent," COL said.

The DoF has also decided not to remove the VAT exemptions enjoyed by senior citizens and persons with disabilities, making the tax reform policy less controversial.

To generate revenues needed to fund the administration’s aggressive infrastructure spending plan and make economic growth more inclusive, it also plans to increase excise taxes which could potentially hurt several industries such as automobiles, sugary drinks, alcohol and tobacco.

The government also pushes to put an end to the practice of hiring contractual workers which would push up the manpower cost of some businesses.

Meanwhile, the government’s plan to pursue an “independent foreign policy” could initially lead to weaker exports, investments and tourism as numbers coming from one of the US, which is one of our major export markets and sources of investments and tourists, potentially deteriorate. (FREEMAN)