Road to domestic recovery and growth

CROSSROADS TOWARD PHILIPPINE ECONOMIC AND SOCIAL PROGRESS - Gerardo P. Sicat (The Philippine Star) - September 23, 2020 - 12:00am

The decisions of major actors (leaders, government, institutions, businesses and households) are essential in mapping the road to domestic recovery and then, the resumption of growth.

Bayanihan 2. An important recent government act is the passage of Bayanihan 2, known as R.A. 11494, or Bayanihan to Recover as One Act, signed into law on Sept. 11.

Recall that the first Bayanihan law (R.A. 11469, or Bayanihan to Heal As One Act) provided relief and assistance to the general population during the early months of the pandemic lockdown by reallocating P650 billion of the country’s budgeted funds for the government.

In contrast, Bayanihan 2 conveys less budgeted public funding, but much more direction by way of specific assistance. Bayanihan 2 has budgeted only around P165 billion of public money.

The government set this support budget at a more prudent level so that it could conserve other public resources to focus on economic and social programs with a productive thrust. On top of this list for which public funds are committed is the infrastructure construction program, or Build Build Build.

Bayanihan 2 supports projects and programs that involve direct assistance to identified sectors of the economy. There are programs to secure testing equipment, finance contact-tracing and the acquisition of critical supplies for the health care sector; cash-for-work programs for unemployed workers seeking new activities; loan programs to help farmers and provide subsidies for agricultural production; programs to help the tourism sector; subsidies to the Department of Transport to facilitate public transportation needs; livelihood and food programs of the Social Welfare Department; and lending programs to help small and medium enterprises.

Bayanihan 2 includes the infusion of capital to two government financial institutions – the Landbank and the Development Bank of the Philippines. The Landbank has to increase its lending program. The DBP has to bolster the lending program for small and medium industries. There is also appropriation of funds for a credit guarantee program for these lending institutions.

Some provisions of the law do not need direct appropriations, but they could have long-lasting impact and important consequences for the road to recovery.

Bayanihan 2 provides a grace period of 60 days for current and outstanding loans until Dec. 21. This applies to salary, personal, housing, commercial and motor vehicle loans; amortizations and lease payments, as well as credit card payments.

Realizing that this provision has major consequences to the whole financial system, the financial institutions that provide this relief will, in turn, be given regulatory relief from the central bank for their action. This has important implications for the future work of the Bangko Sentral as it tries to maintain the health of the country’s financial system.

Another provision that has important consequences is the exemption from review by the Philippine Competition Commission of mergers and acquisitions that have a value below P50 billion that are transacted within a two-year period from the effectivity of Bayanihan 2. Such a provision would help to speed up adjustments being made by companies facing serious restructuring and financing problems.

A realistic consequence of the COVID-19 recession is the decline in profitability and the rise of bankruptcies as a result of the fall in incomes for households and the loss of businesses among ongoing enterprises. Some hope of recovery is dealt a helping line by the provisions of Bayanihan 2.

Bayanihan 2, through its full title, tries to convey the sense of need for recovery by providing government interventions and mechanisms to assist the recovery and economic resilience.

Even as the national effort is designed on domestic recovery, the overall framework for world economic recovery needs to rise. Room to share in that recovery for world trade, when it comes, has to be part of the effort.

More important reforms needed. The policies embodied in Bayanihan 2 are framed in the right direction. They ease the burden of the worst impact of the economic crisis on companies and households badly affected by the COVID-19 recession, but they are not enough to jumpstart the full recovery.

Economic reforms are still needed. The list of important legislative reforms on the fiscal and financial front still has an important backlog to be filled.

For one, the CREATE tax reform program, which is designed to lower the corporate income tax and also stimulate investment incentives, has not yet passed Congress. Had this been passed one year ago (of course, in satisfactory form), the Philippines would be in a much better position to compete with other countries in the relocation of foreign direct investments from China and other countries.

Lack of action on the bill has raised the level of uncertainty of foreign investors which has the Philippines as one of their options. Even foreign enterprises located in the Philippines have been unable to act on their future plans, even as some others have decided to move elsewhere.

In general, our investment and tax laws should be able to compare well with our East Asian and Southeast Asian neighbors. The CREATE bill reduces the glaring differences. Its passage has been delayed in the Senate, but it is now being tackled as a priority legislation.

The nature of the problems we find ourselves in – the pandemic recession – has made more relevant two companion bills to CREATE.

The government now has two additional bills that would improve the operations of banking institutions that are saddled with non-performing assets. These measures will complement the need for financial institutions to strengthen their position, even as their overall finances are weakened by measures that have affected their client base – borrowers that are unable to pay their obligations.

The build-up of non-performing assets in the financial system will hamper the capacity of credit institutions to recover unless they are given a weapon to assist them in grouping these assets into special purpose vehicles to isolate and then, to help liquidate them.

A financial institutions strategic transfer (FIST) bill and a government financial institutions unified initiative to distressed enterprises for economic recovery (GUIDE) bill are being suggested as companion pieces of legislation.

These two bills, when turned into law, will help private and government financial institutions to deal with the problem of rising non-performing assets.

For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/

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