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Business leaders say economy ‘yet to run on all cylinders’

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Carlos G. Dominguez III
Finance Secretary Carlos G. Dominguez III hopes to submit the second tax reform package -- consisting of a cut in corporate income tax rate and streamlined investment fiscal incentives -- when lawmakers return from a month-long Christmas and New Year break on Jan. 15.

By Elijah Joseph C. Tubayan
Reporter

A STABLE ENVIRONMENT helped the economy rev up in 2017, and business groups now believe tax reform, further ease of doing business, lifting of foreign investment restrictions and increasing the pace of infrastructure development should help spur the country’s growth momentum further.

The Philippine economy has kept its growth pace above six percent since 2012 — with 2013 recording 7.1% — but business leaders said that it needs to expand by an even faster clip to keep up with competitors in the Association of Southeast Asian Nations (ASEAN). Gross domestic product grew by 6.7% in 2017’s first three quarters against the government’s 6.5-7.5% full-year target and 2016’s actual 6.9%.

“The Philippine economy maintained its high growth rate, low inflation, stable exchange rate environment in 2017 with domestic and foreign investment levels at record levels,” John D. Forbes, senior adviser of the American Chamber of Commerce of the Philippines, said in an e-mail.

“But the country’s economic engine has yet to run on all cylinders.”

Mr. Forbes said that foreign investors are anticipating the acceleration of infrastructure development as the government tries to put economic growth on a faster lane. “Investors are concerned by worsening airport and traffic congestion, so the privatization proposal for NAIA and early passage in Congress of the traffic crisis legislation would be welcome,” said Mr. Forbes, referring to Ninoy Aquino International Airport — the country’s premier air gateway.

The current government hopes to spur gross domestic product growth to 7-8% annually from 2018 until it ends its six-year term in 2022, and is banking on an P8.44-trillion infrastructure development drive — financed partly by increased revenues from the Tax Reform for Acceleration and Inclusion (TRAIN) program — to make this happen.

For European Chamber of Commerce of the Philippines President Guenter Taus, “We need to build a more solid employment/job creation basis, for this will be the backbone of sustained growth.”

“This past 2017, there have undoubtedly been reforms in helping improve the Philippine business climate. Much headway has been made, but still a lot can be done to improve the competitiveness of the Philippine in terms of FDIs (foreign direct investments). We need to keep moving faster in order to become and remain competitive versus our ASEAN neighbors.”

Easing restrictions to foreign ownership in local sectors, Mr. Taus said, “will surely have a substantial effect on the Philippine economy through opening up the market to foreign players and thus opening the floodgates to investors who see the high potential and wealth of opportunities in the Philippines.”

The administration of President Rodrigo R. Duterte is currently finalizing the next foreign investment “negative list” in its bid to lift restrictions on foreign ownership and participation in certain sectors. That list was supposed to have been released late last year.

After the just-enacted first TRAIN package — which cut personal income tax rates but raised levies on cars, fuel and other items and reduced value-added tax exemptions — foreign business groups said they are now looking forward to the next tranche that will reduce the corporate income tax rate to 25% from 30% currently and streamline fiscal incentives given to investors.

Finance Secretary Carlos G. Dominguez III has said his department hopes to submit the second TRAIN package to Congress on Jan. 15, when lawmakers return from their one-month Christmas and New Year break.

“The TRAIN 2 package will be watched carefully in two respects: (1) to see if it reduces the corporate income tax to a level close to large ASEAN economies and (2) whether competitive fiscal incentives are maintained for new and expansion FDI projects,” Mr. Forbes said.

“Despite reaching much higher levels, FDI in the country remains significantly lower than amounts flowing into Vietnam, for example.”

Mr. Taus, meanwhile, said: “Further challenge in line with the tax reform will be to keep the incentives scheme attractive enough to retain and actually grow the BPO (business process outsourcing) sector, a vital industry to continue the emerging middle class.”

Local business groups on the other hand are banking on further steps to develop micro, small and medium-scale enterprises (MSMEs).

The Philippine Chamber of Commerce and Industry (PCCI) President George T. Barcelon said the government should complement further liberalization of the economy with steps to strengthen small local businesses.

“We welcome competition because it benefits the customers. But it has to be a level playing field. Foreign companies coming in will be using funds from abroad. MSMEs will find it difficult — the cost of financing is higher, it’s a disadvantage,” he said in a telephone interview.

He also cautioned against the government’s plan to further cut the paid-up capital threshold for foreign retailers’ entry, arguing that this could allow lower-quality businesses to come in.

“What we would like to see is the quality investments. We need to put some qualifiers, that if they come in, it’s going to help us in upgrading our know-how or management,” Mr. Barcelon said, noting US micro-level businesses’ $2-million minimum paid-up capital.

Socioeconomic Planning Secretary Ernesto M. Pernia earlier said that the government was looking to reduce the $2.5-million paid-up capital threshold under Republic Act No. 8762, or the Retail Trade Liberalization Act of 2000, to just $200,000.

“So if you put it too low, what are we attracting?” Mr. Barcelon said.

He added that institutionalization of efforts to ease the cost of doing business — embodied in Senate Bill No. 1311 and House Bill No. 6579 — will complement the reduction of the corporate income tax in spurring more business activity.

“We need to be more efficient,” Mr. Barcelon said, explaining that this would help businesses cope with high electricity and logistics costs that make them uncompetitive against regional peers.

“We still want hopefully the legislative side — both national and local government — to review the ease of doing business,” the PCCI chief said.

“Whether it be the benefit of the local business establishments or to attract foreign investments, we really need to streamline.”

Sergio R. Ortiz-Luis, Jr., president of Philippine Exporters Confederation, Inc. (Philexport), meanwhile hoped that the government would also provide new sources of financing for small businesses.

“We would like a portion of the CCT fund to be allocated to MSME financing,” Mr. Ortiz-Luis said of conditional cash transfers in a telephone interview, adding that the government should sustain the increase in infrastructure spending, arrest worsening traffic and give “more attention to the agriculture sector.”

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