Malaya Business News, 17 January 2013
Written by Cesar Purisima
Transformative Agenda of ‘Aquinomics’: Addressing Critical Development Constraints through Good Governance
In a 2007 study, “Philippines: Critical Development Constraints,” the Asian Development Bank identified several constraints to private investment and growth in the Philippines: tight fiscal situation due to weak revenue generation, inadequate infrastructure, and weak investor confidence due to governance.
In 2012 we achieved milestones in addressing these constraints. We enhanced our macroeconomic fundamentals, generated fiscal space for inclusive growth, restored investor confidence, and won historic victories in long pending legislation.
The results speak for themselves. Through the unprecedented events of 2012 –the signing of the Framework Agreement on the Bangsamoro, successive PPP launches, the passage of the sin tax reform law and the responsible parenthood bill, record GDP growth and tax collections, low inflation and low interest rates– the government has exhibited its capacity to effect significant long-term structural reform.
“Good governance is good economics” is indeed a reality under a President unfazed in the fight against corruption.
Fiscal sustainability towards
Through tax collection improvements, aggressive debt management, and focused and prudent spending on priority programs, we created additional fiscal space for productive investments in 2012.
Even without the introduction of new tax measures, the country’s revenue-to-GDP ratio as of third quarter this year improved to 14.7%, up from 14.5% last year. Revenues as of November grew by a robust 12.7% over 2011 on the back of a reformed Bureau of Internal Revenue (BIR) growing 14.1%, historically surpassing its one trillion peso mark this year, and the Bureau of Customs (BOC) improving collections by 8.8%.
This robust tax collection performance driven by plugging tax leaks and hammering down on tax evaders and smugglers, allowed the government to fulfill its spending promises for inclusive growth, increasing allocations to social services that have long been kept at dismal levels.
Investing in the Filipino people has been the administration’s main priority in its good governance agenda. Compared with 2010, allocation to social services in 2012 increased by 48%, health by 63%, education by 33%, and the allocations to the conditional cash transfer program jumped threefold. The social services sector will continue to receive the bulk of the 2013 budget allocation at 34.8% of the total budget, up from 31.3% in 2012.
The second key development constraint on infrastructure is also starting to be addressed.
Spending on infrastructure for roads, bridges, ports, and other vital structures has grown leaps and bounds, improving by 57% as of November 2012 over the comparable period last year.
To continuously support long-term growth, the Aquino administration increased allocations to infrastructure and capital outlays by 17.5% in 2013 compared with the 2012 budget allocation. This 2013 figure is an 80% increase in allocations over the 2010 allocation.
The flagship public-private partnership (PPP) program also reached its goal in launching eight big-ticket social and economic infrastructure projects. The PPP pipeline continues to grow, with more projects evolving in varying stages of the project cycle.
Furthermore, despite the robust double-digit acceleration in spending of 14.1% as of November, the government through prudent fiscal management has contained its deficit levels to just 45.6% of the yearly program. The risk of fiscal slippage—the government spending more than it has planned—is therefore eliminated for 2012.
In addition to generating fiscal space, the country’s external payments position has also grown in strength. Gross international reserves (GIR) levels reached record highs at USD 84.3 billion, equivalent to 10.5 times the country’s short-term foreign debt. This can cover 12.1 months worth of imports of goods and payments of services and income.
Our aggressive debt management exercises likewise reduced our exposure to foreign debt and lengthened maturities. As of third quarter this year, external debt-to-GIR was recorded at 75.2%, lower than the 2011 figure of 82.0%. As of the third quarter, external debt-to-GDP was at 25.6%, notably declining over the last eight years from a high of 68.6% in 2003 and 27.5% in 2011. Average maturity of external debt has lengthened to 20.5 years.
Restored investor confidence
2012 was a remarkably bullish year for the Philippine economy: we achieved a record 6.5% GDP growth for the third quarter, besting our ASEAN neighbors; we leapt ten spots back-to-back in our global competitiveness rankings; the peso was hailed as the best performing currency in Asia; inflation remained benign at 3.2%, and interest rates were low.
Investors have responded to these signals of stability and economic vigor. Lauding these strong macroeconomic fundamentals and political reforms, local and international analysts have become increasingly creative in their portraits of praise for the country, depicting the Philippines as the continent’s rising star, the region’s diamond, and even ASEAN’s new tiger. The country has finally outgrown its ancient bearish moniker, “the sick man of Asia.”
Good governance sets in place a level playing field and political stability that boosts business confidence. The historic P24-billion privatization of the Food Terminal Inc., along with successive PPP launches, exhibit how fair and transparent bidding processes can generate for the people higher economic and social returns and generate more investor confidence.
With this renaissance in investors believing in the country, we are now overcoming the third key development constraint identified by the ADB.
and legislative reform
Addressing these constraints is not just a story of 2012. We will continue to generate inclusive growth by securing long-term reform victories.
We signed into law Republic Act No. 10351 or the Sin Tax Reform Act of 2012, after 16 years of pending in Congress.
The Sin Tax Reform Act is a victory for both the country’s health and revenue reform. This will reel in revenues of around P240 billion from 2013 to 2017 to fund the Universal Health Care program, while protecting the young and the poor from health risks caused by smoking and excessive drinking.
Structural biases that have historically favored older brands, and tax loopholes that have kept our tobacco and alcohol prices one of the lowest in the world, are now reformed by law. By 2017, the tobacco excise tax as a percentage of retail price will have increased from a measly 29% in 2012 to 63% in 2017, achieving the international health standard recommended by the World Health Organization and the World Bank.
This has been heralded locally and internationally as a victory of good governance and political will over vested interests.
2012 also marked a reinvigorated effort to hammer down on tax evaders and smugglers to increase taxpayer compliance and tax collection. In two and a half years the Aquino administration has filed more tax evasion cases than in five years of the previous administration, filing 140 cases worth P44 billion in tax liabilities versus the 2005 to 2010 output of 127 cases worth P7 billion.
The filing of smuggling cases has been more aggressive, with 51 cases this year surpassing the 38 cases filed in 2011. Meanwhile, cases against erring government employees—29 this year—exceeded the 21 cases filed last year. The finance department has so far secured 62 suspensions and 21 dismissals from its anti-graft unit.
Nearing investment grade
International debt watchers have taken note of our efforts to raise business confidence, achieve fiscal consolidation, and achieve political stability and long-term reform.
In two and a half years, the Aquino administration has reversed a decade’s worth of credit rating decline. All three credit rating agencies now rate us just one notch below investment grade. Standard & Poor’s raising our outlook from stable to positive at the tail-end of 2012 is the tenth positive ratings action under President Aquino.
Nevertheless we remain to be one of the most underrated countries in the world. The market already rates us at least two notches above investment grade. Philippine bond yields are at par or even lower than investment grade countries like Indonesia. We are the only Asian sovereign to issue hybrid global peso notes (GPNs), with the most recent deal’s high demand for 10-year GPNs slashing the price guidance by 20 bps to 3.9%, proof that the country is one of the safest emerging markets to invest in.
Credit rating agencies cite longer term reform trends as a prerequisite to the country’s anticipated investment grade upgrade.
But in major reform areas unmoved for decades— drafting a framework peace agreement on the Bangsamoro, launching fair and transparent bidding on 8 PPP projects, the decade-old pocket-open skies policy, the 15-year old reproductive health bill, and the16-year old sin tax reform—this administration has succeeded.
As we continue treading on “tuwid na daan”, we believe investment grade is well within our reach. With the leadership of a reform-minded president, we will continue to address the critical constraints to development in order to actualize the potential of our country and our people.