Economic legs
- Boo Chanco (The Philippine Star) - April 20, 2018 - 12:00am

The market plunged mid week in reaction to the weak OFW remittance data, a market analyst said. A sliding PSE index shouldn’t be a serious concern just yet because market volatility everywhere has been high.

Besides, the price earnings ratios of local stocks worth buying are still on the high side. Market dips provide a good opportunity to buy stocks.

It is also wrong to take the stock market sentiment as an indicator of the economy’s health. But sentiment can give a hint of dangers ahead. Weak OFW data, for example.

The BSP reported that personal remittances from overseas Filipinos (OFs) amounted to $2.5 billion in February, higher by 5.4 percent than those sent in the same month a year ago.

But crunching the numbers further, a market analyst concluded “OFW remittance growth fell below expectations.” It may be higher compared to the same month last year, but it is a growth rate that has fallen by half from the previous month’s (Jan.) +9.7 percent growth YoY.

If at all, that could be a foreboding of trouble ahead, making it important for Duterte’s economic managers to get everything right. A wrong move may have political implications as we enter the mid-term election season next year. There are many ways things could go wrong.

Data on OFW remittances is an important indicator to watch because this is our largest source of foreign exchange. It is one of the two legs supporting the economy, the other being the local BPO industry.

Manufacturing should be the third leg. It is showing significant improvement that may be cut short by a new endo executive order and TRAIN 2. Agriculture, the fourth leg, has always been problematic despite massive subsidies spent on rice production, irrigation, overpriced fertilizers, and so-called farm to pocket roads.

There are threats to these legs supporting our economy. For the OFWs, jobs in Middle Eastern countries may no longer be as easily available. The Saudis, for example, have a program of Saudization of jobs. We have already stopped our workers from going to Kuwait because of abuses there.

 As for BPOs, I had a long talk with Rey Untal, the BPO association’s president, and he cited the threats to growth they are facing.

 No, Mr. Untal said, the industry is not about to be wiped out by Artificial Intelligence. While it may affect a portion of their industry, the BPOs here are more than call centers. The challenge, he said, is getting enough trained people to work on the higher end of the industry.

 The other challenge, he said, is the potential of TRAIN 2 to disrupt their business models. Margins in the business, he explained, are so thin due to stiff competition. That makes any removal of incentives critical to their continuing survival.

 I am told that investments have been withheld both in the BPO and manufacturing sectors pending what happens to TRAIN 2. Suffice it to say that they don’t like the draft they are seeing now.

 Curiously, it seems there is conflict within the Duterte administration on TRAIN 2. PEZA director general Charito Plaza made a passionate plea to reconsider the removal of investment incentives under TRAIN 2.

“May I appeal to the government not to kill the goose that lays the golden eggs, our industries and investors,” Plaza said  before a crowd of foreign investors at the World Trade Center. The event, attended by some 2,000 executives, was to celebrate the contribution of investors to our economy over the last two decades.

Too bad President Duterte was unable to attend the event because he was still in Hong Kong. He would have felt the anxiety of the investors.

Investors concede the need to reform our system of investment incentives. But they want the tax planners to mind the nuances, taking into account each industry’s actual needs… and what our ASEAN neighbors are offering.

TRAIN 2 seeks to gradually lower corporate income tax to 25 percent from 30 percent. In exchange, some incentives currently enjoyed by some 4000 large investors registered with PEZA will be curtailed.

PEZA grants export-oriented companies income tax holidays of up to eight years. After that, the companies’ gross income is subject to a perpetual five percent tax.

The DOF however, wants more accountability by basing tax breaks on performance such as export volumes and how labor intensive it is. This means some companies may lose incentives. The five percent tax will also be replaced with a 15 percent levy on net taxable income.

As one affected company complained, TRAIN 2 wants to change a simple corruption proof system of flat five percent tax with one that will subject them to BIR audits based on net income. They are anxious to avoid a net taxation system given our BIR’s reputation for corruption.

“TRAIN 2 has become a sword of Damocles hanging over the head of PEZA and the industries and investors,” Plaza told reporters after her speech. “All industries have submitted their position papers and everybody is against it.”

But the DOF pointed out government is losing P300 billion a year because of the fiscal incentives. Plaza, nevertheless, insists there is a reason why the last four administrations left the incentives untouched.

 “It’s our incentives that are the first consideration of investors, not infrastructure, logistics, and supply of raw materials, because we are still deficient in these factors,” she said. She wants to present her case directly to President Duterte.

Hmm… I wonder how Secretary Dominguez will take this open rebellion within the ranks of this administration’s economic managers. I suspect President Duterte will just let Congress decide this one so as not to offend either Dominguez or Plaza.

 How TRAIN 2 is finally written, or if it will even pass Congress at all, will determine the investment climate and the state of the economy for the remainder of Duterte’s term.

Boo Chanco’s e-mail address is Follow him on Twitter @boochanco

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