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Stocks to rise ahead of inflation data, BSP meet

By Arra B. Francia, Reporter
THE MAIN INDEX is expected to continue rising in the week ahead with chances of a pullback, as investors look forward to a busy week ahead with the release of second-quarter earnings reports, July inflation data and a policy meeting by Bangko Sentral ng Pilipinas (BSP).
The bellwether Philippine Stock Exchange index (PSEi) gained 0.77% or 59.84 points to close at 7,819.39 on Friday, ending the week up 1.53%. The index was lifted by the mining and oil sector which increased 5.4%, holding firms that went up 3.9% and services that gained 1.4% for the week.
Average turnover jumped 4.08% to P6.1 billion on a weekly basis, alongside a net foreign buying that reached P1.06 billion.
For the week ahead, analysts expect the PSEi to continue its upswing.
“We don’t want to see the market go up too far too fast as this can reverse and cause a big swing to the downside. However, the market will do what it wants to do. Based on the technicals, we may see the index continue to surpass resistances,” Eagle Equities, Inc. Research Head Christopher John Mangun said in a weekly market report.
The Philippine Statistics Authority is set to release inflation data for July on Tuesday. The BSP sees the average rise in prices of widely used goods to have settled within the 5.1%-5.8% range. Should it hit the high end of this range, year-to-date inflation would reach 4.53%, way beyond the government’s 2-4% target.
The BSP will likewise hold its policy meeting on Thursday, where economists are predicting as much as a 50-basis-point hike as the regulator seeks to temper inflation.
The central bank already raised interest rates by 25 basis points each during its policy meetings last May and June amid accelerating inflation.
“Players would weigh the chances for adjustment in local interest rates, to narrow-down the differential with the US Fed’s anticipated rate hike in 4Q. Regardless of the move, the market will heed for clues if economic momentum is still strong to warrant an upward adjustment in rates, & aid in tempering the peso’s weakness,” 2TradeAsia.com said in a weekly market note.
A number of listed firms will also be reporting their second-quarter earnings this week, including Ayala Land, Inc., 8990 Holdings, Inc., Robinsons Land Corp., Megaworld Corp., Filinvest Land, Inc., SM Investments Corp., San Miguel Corp., Puregold Price Club, San Miguel Food and Beverage, Inc., Alliance Global Group, Inc., Globe Telecom, Inc., and PLDT, Inc.
These firms comprise 38% of the PSEi-member basket, according to 2TradeAsia.com.
Eagle Equities’ Mr. Mangun placed the main index’s support from 7,650 to 7,530, while resistance is at 7,880 to 7,960.
“We will continue to see investors flood in to blue chips that were laggards last year. Watch out for the Aboitiz companies and the Gokongwei companies,” Mr. Mangun said.

How PSEi member stocks performed — August 3, 2018

Here’s a quick glance at how PSEi stocks fared on Friday, August 3, 2018.

 
Philippine Stock Exchange most active stocks by volume turnover
July 30 — August 3, 2018 (Closing price as of August 3,2018)

Barangay Ginebra defeats San Miguel in close game to go up 3-2

By Michael Angelo S. Murillo
Senior Reporter
FOR a change the best-of-seven Philippine Basketball Association Commissioner’s Cup finals had a close game, with the Barangay Ginebra San Miguel Kings beating the San Miguel Beermen, 87-83, in Game Five on Sunday at the Smart Araneta Coliseum.
Following four straight games of big-margin victories, averaging 30 points, PBA fans, numbering 16,958 at the Big Dome, finally saw a tightly fought match between the Kings and Beermen with the former going on a strong finish on both ends to notch the victory and move 3-2 up in the championship series.
The match started with the two teams making runs and counterruns with hardly any team establishing full control.
Barangay Ginebra held a seven-point cushion, 17-10, midway into the opening frame before San Miguel finished the period strong with a 16-7 run to claim a two-point lead, 26-24, after the end of the first 12 minutes.
In the second period, the two teams held each other in check.
The Beermen would race to a 38-29 lead at the six-minute mark only for the Kings to make a flurry of a finish to level the count at 40-all by the halftime break.
In the third period, import Justin Brownlee and Greg Slaughter would jump-start the Kings to a fast start, holding a 55-50 advantage in the early part.
Towed by June Mar Fajardo and Alex Cabagnot, however, the Beermen would rally back.
The count stood at 62-60 in Barangay Ginebra’s favor with two minutes remaining in the quarter.
Both teams battled the rest of the way with the score eventually settling in a stalemate at 66-all heading into the final canto.
The fourth period saw the two teams in a tight race early to establish control.
San Miguel held a slim one-point lead, 71-70, with 10 minutes remaining.
The lead swang back-and-forth thereafter until San Miguel pushed ahead to a three-point lead, 79-76, with 5:41 to go.
The Beermen continued to hold sway, 83-80, entering the last two-minute mark.
Barangay Ginebra tried to inch its way closer but its initial attempts at the basket failed to connect.
But two free throws by Scottie Thompson pulled the Kings within one point, 83-82, with 1:07 left on the clock.
In the ensuing play, Mr. Fajardo got fouled off a rebound play but failed to hit his free throws.
That led to Mr. Thompson giving the go-ahead basket to the Kings, 84-83, with 36 ticks to go off a pass from Mr. Brownlee.
San Miguel sued for time after but Renaldo Balkman’s jab at the basket was foiled by the Barangay Ginebra defense which led to another Thompson basket with 23 seconds remaining to extend their lead to three, 86-83.
The Beermen had several attempts from beyond the arc but none of which hit the mark.
They were forced to foul LA Tenorio with 2.9 seconds left but the Barangay Ginebra guard only buried the Beermen further by splitting his charities for the final score of 87-83.
Mr. Thompson led the Kings with 20 points and 11 rebounds with Mr. Brownlee adding 18 points.
For San Miguel it was Mr. Balkman who led with 34 points and 20 rebounds while Mr. Fajardo finished with 23 points and 11 boards.
“I guess everybody got the game they wanted. It was as close as it could get,” winning Kings coach Tim Cone opened at the postgame press conference.
“We just talked about stepping up our defense in the end and that made a difference. But it’s not yet over and we have to do it again on Wednesday,” he added.
Game Six of the finals is on Wednesday at the Mall of Asia Arena.

Automakers hope second-half performance will improve

THE auto industry is hoping for an improved performance in the second half of the year after a lackluster first semester due to higher excise taxes, with estimates for the rest of the year currently favoring a slight year-on-year gain.
“Maybe the parameters of the first semester are not available in the second semester. Things might improve. First semester was pretty bad,” Dante C. Santos, president of the Truck Manufacturers Association, Inc. (TMA), told reporters Thursday in Taguig City during the 30th anniversary celebration of Toyota Motor Philippines, Corp.
“Conditions can’ be bad forever, so we need to analyze thoroughly how the second semester will play out. That’s what we want to project. Because we’re not very comfortable if we start by saying things will fall.”
Mr. Santos, also the first vice-president of Mitsubishi Motors Philippines, Corp., said negative impact of tax reform came amid a depreciating peso, though the industry does not expect the currency to weaken further.
He added that the executive committee of both the TMA and the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) is now reviewing the industry’s outlook for the year.
“We don’t feel there will be big growth as before. Little changed, a little bit higher,” Mr. Santos added.
The industry has been signalling flattish growth for 2018 vehicle sales.
In an earlier phone interview, CAMPI President Rommel C. Gutierrez confirmed that adjustments were made to this year’s targets but declined to disclose details.
The auto sector was hit hard by the first package of the Tax Reform for Acceleration and Inclusion (TRAIN), which raised excise tax rates on vehicles.
Automobiles costing less than P600,000 were levied around 3% in excise tax, up from 2% average, while those selling for P4 million or above were taxed at a new rate of up to 50%, more than doubling the average of 22% previously.
Joint data from CAMPI and TMA show that vehicle sales in the first six months of the year dropped 12.5% year on year to 171,352 units.
The group attributed this decline to “gloomy” economic conditions for car buyers, including rising inflation.
He said the industry is struggling to maintain vehicle prices at current levels
“As long as we can maintain prices, we will. We are trying to protect the market from higher prices,” Mr. Santos added. — Janina C. Lim

Energy investors seek to retain perks amid TRAIN 2 streamlining

A NONPROFIT has asked legislators to modify certain provisions of a pending bill promoting energy efficiency to align it with the second phase of Republic Act 10963 or Tax Reform for Acceleration and Inclusion (TRAIN 2), which will repeal incentive provisions of an existing law.
“Given the parallel legislative process for TRAIN Package 2, which considers the repeal of incentive provisions of Executive Order No. 226, we now see the need to modify Section 20 on Fiscal Incentives of the EE&C (Energy Efficiency and Conservation) Bill,” said the Philippine Energy Efficiency Alliance, Inc. (PE2) in its letter to the House of Representatives’ committee on ways and means.
In the letter, PE2 President Alexander Ablaza said the pending bill should specify the recommended incentives for projects that will be needed to ensure the financial viability of energy-efficienct investments.
The energy efficiency bill should also remove its express reference to Executive Order No. 226, or the 1987 Omnibus Investments Code, he said.
It should also identify the Board of Investments (BoI) as the lead investment promotion agency to administer the fiscal incentives for energy efficiency projects, while removing restrictions on ownership by nationality.
PE2 also wants the bill to specify a minimum 15-year period to avail of the recommended fiscal incentives.
“To effectively address these needs, PE2 respectfully forwards our proposed rewording of Section 20 of the EE&C Bill,” it said.
Its proposed rewording of Section 20 states that during the first 15 years from the passage of the law, energy efficiency projects should be included in the Strategic Investments Priorities Plan (SIPP) of the government.
It also says that the application by a project proponent for registration of such project should be duly acted upon by the BoI on the basis of the endorsement issued by the Department of Energy (DoE).
A certified project should also be entitled to receive a certificate of entitlement from the Fiscal Incentives Review Board.
It said that a Filipino natural person or partnership or any other association, cooperative, or corporation organized under Philippine law, whether Filipino or up to 100% foreign-owned, which is a proponent of an energy efficiency project, as duly endorsed by the DoE, should be entitled to the following incentives: income tax holiday; zero percent value-added tax (VAT) rate; tax and duty exemption on imported capital equipment.
Specifically, for the first six years of its commercial operations, the project proponent is sought to be exempt from income taxes levied by the National Government.
The selling price, remuneration or consideration received by a project proponent is proposed to be subject to zero percent VAT, pursuant to the National Internal Revenue Code of 1997, as amended.
All project proponents should also be entitled to zero-rated VAT on its purchases of local supply of goods, properties and services needed for the development, construction and installation of its plant facilities.
Within the first 10 years upon the issuance of an endorsement by the DoE, the importation of technologically energy-efficient machinery, equipment, vehicles, spare parts and materials is to be exempt 100% from customs duties and national internal revenue tax payable.
At the end of the 15-year period, the Fiscal Incentives Review Board may suspend or cancel the grant of such incentives upon a joint recommendation of the DoE and the BoI that they are no longer required in order to ensure the financial viability of energy efficiency investments.
PE2 earlier said that energy efficiency and conservation should be treated as the “first fuel” of the economy to slow down the rise in energy prices by deferring around 45,900 megawatts (MW) of energy infrastructure upgrades through 2040.
It said consistent with the DoE’s road map, the economy will have to proactively shave off at least 182 metric tons of oil equivalent in energy demand in the next 22 years to meet the 2040 targets and save the economy around P36 trillion in energy purchases.
PE2, which describes itself as a nonprofit, nonmarket, non-state civil society organization, said the Philippines is the only country in the region without a mandatory energy efficiency and conservation policy framework or mainstreamed fiscal incentives for related investments. — Victor V. Saulon

Farm services tie-ups touted as stopgap amid DA budget cuts

THE Department of Agriculture (DA) said budget cuts for 2019 have prompted a shift in focus for its mechanization program in favor of a private-sector service model as it moves away from providing subsidies to farmers.
Agriculture Secretary Emmanuel F. Piñol said during the department’s budget hearing on Thursday that repositioning companies to act as “service providers” to farmers is part of the department’s “strategic shift from subsidy to credit.”
“[They] are all private companies who provide farm services — tractors, planters, harvesters,” he added, noting that two such companies are operating in Mindanao.
“We are pursuing this because there are companies that like to invest in agriculture but they simply do not know where they would be able to invest.”
The DA was given P55.9 billion for its 2019 budget, P6 billion less from this year’s budget, amid concerns it cannot fully utilize its funds.
Mr. Piñol told reporters last week that the DA is reviewing a program to provide seed to farmers in order to cut costs.
“The unused stock of seed is a total waste of money and given the fact that our budget was reduced by P6 billion, we have to cut down on some unnecessary expenses,” he added.
Mr. Piñol said the DA will continue with its programs to enhance productivity of small farmers and fisherfolk through easy-access loan programs.
“This is mainly because of the fact that we cannot possible give out free support to everybody,” he added.
The DA has a loan budget of P5.1 billion, which is expected to cover 74,000 beneficiaries. The full implementation of the lending program is expected to take effect by 2020. — Arra B. Francia

Taiwan health care firms looking for Mindanao partners

DAVAO CITY — Taiwan health care companies are coming to Davao this week to look for possible partners, an official with the Mindanao Business Council (MinBC) said.
Rolando A. Torres, MinBC executive director, said the Manila-based Taiwan External Trade Development Council (TEDC) is bringing representatives from about 10 top companies that want to expand their businesses in Mindanao.
The delegation, Mr. Torres told BusinessWorld, is holding a health care industry meeting on Aug. 8 to explore local partnerships.
“There will be business-to-business matching and that the visitors will also showcase the industry developments in their country,” Mr. Torres said.
About 60 Philippine companies have confirmed participation, including public and government-owned hospitals.
They are “eager to know the latest technology in the industry,” he said.
Among the topics for discussion are pharmaceuticals, biotechnology, and modern best practices.
The Taiwan delegation will also visit medical facilities.
The event is the second organized by TEDC in the city this year.
“We expect that the event will result in new deals,” Mr. Torres added. — Carmelito Q. Francisco

The evolution of Robotics Process Automation

A recent report by Etventure, Digital Transformation 2018 highlighted that “Digitalization is getting to all parts of our lives and it is deeply disrupting how companies do and therefore structure their business. Most companies (55%) will need to change their business models due to digitalization in the upcoming years. However, the wide majority (62%) of companies state that the knowledge and capability to manage digitalization is not sufficiently available.”
Robotic Process Automation (RPA) and Artificial Intelligence (AI) have shifted from being science fiction to reality. According to the Artificial Intelligence Market Analysis report released by Research and Markets, the market size is growing at a rapid rate – from being valued at $641.9 million in 2017 to over $58.97 billion by 2025. These figures alone illustrate the importance of adapting a company’s operations and processes to integrate RPA & AI.
In this article, we will focus on RPA as one of the major disruptors in this digital age. There has been an inevitable growth in the RPA market as evidenced by the emergence of new vendors and players, the increased number of robots being implemented, and the rising demand for RPA services. For example:

• Pegasystems (a software company that develops and supports customer engagement and operations solutions) acquired RPA specialist OpenSpan to enhance its own Customer Relationship Management (CRM) application and Business Performance Management (BPM) platforms.

• Information Service Group (ISG), a research, digital, sourcing, and managed services company, acquired Alsbridge, a sourcing, automation, and transformation advisory firm to increase its presence in the RPA space

• More and more new RPA vendors are entering the market (Antworks and AutomationEdge for example) and choosing to specialize by industry or function.

RPA is certainly becoming a more established field, and the industry’s confidence in this technology is becoming more pronounced.

• The IPO success of Blue Prism (one of the largest RPA vendors) is evidence that investors have welcomed the entry of RPA into the market. Blue Prism’s stock price continues to rise since its initial debut on the London Stock Exchange.

• Most vendors are focused on making RPA more accessible to their clients by offering free trial versions (e.g. UiPath, Automation Anywhere), improved training platforms including video tutorials and a cornucopia of materials, structured implementation methodologies, RPA projects quality standards (e.g. Blue Prism), and easier configuration interfaces (e.g. Workfusion).

• We’ve witnessed more clients proceeding directly into implementing pilots versus starting their RPA journey going through Proofs of Concept (POC)/Proofs of Value (POV) — an indication that more and more organizations are confident in the technology.

• RPA is likely to be included as an integrated part of larger and long-term initiatives such as ERP, Shared Service Centers, or other large transformation engagements — additional evidence of how RPA implementation projects are continuously evolving.

Vendors, therefore, are in a race to differentiate themselves from their competitors while adding more value to their clients and in the RPA space. This can best be accomplished by increasing the robots’ functionalities by:

• Integrating more intelligence, while allowing their software to be more accessible (and free, when possible) and actionable by the users.

• Incorporating more advanced generations of intelligent automation by becoming cognitive — adding RPA (which only “does”) to functions which “think & learn” and “interact” with the environment.

• Moving towards the long-term of automation via Artificial Intelligence (AI) by including, for example, the ability to autonomously drive other robots.

RPA is beginning to implement and eventually incorporate the following functionalities to keep up with the higher levels of automation:

• Connection of RPA with data analytics systems (big data) to analyze actual data and predict future trends (e.g. share price trends): The robot is able to understand, think, decide, and act (e.g. sell or buy shares) on the basis of the outcome of the analysis.

• Combination of Natural Language Processing (NLP) and cognitive: Virtual assistants (e.g. chatbots) that interact with internal or external clients or operators to facilitate their work. Chatbots will enable a better/faster adoption of RPA, making it more user-friendly and interactive.

• Combination of NLP and Machine Learning: Enabling the understanding of unstructured data received via texts or pictures (for example, unstructured data from invoices received using different formats). The robot is able to learn by itself through repetition, build patterns, and understand new formats based on what it has learned from experience.

• Robot configuration assistants (a possible next step in machine learning): The robot is capable of learning by itself by solely observing a human execute tasks on a computer, identify the tasks repeated regularly (e.g. daily, weekly, etc.), propose to robotize them by itself, and then configure them. When considering the investment in adopting RPA, the largest amount is always the configuration cost, which this functionality will drastically reduce

• Integration with AI robots (e.g. IBM’s Watson and Google’s AlphaGo). Given the current state of technology, talking about AI has to be focused on a specific, narrow topic. In finance functions, for example, finding mistakes in finance compliance audits and summarizing information out of reports spanning a thousand pages. More and more RPA vendors are working on such integration (e.g. partnership between Blue Prism and IBM Watson), but this remains in its infancy.

RPA still has many more growth areas, and with the development of other generations of intelligent automation, one can only imagine the full potential of robots as RPA continues to simplify and ease the lives of humans and their operators. To stay ahead of the digitalization curve, organizations should consider developing digital strategies that encompass a broader automation spectrum to eliminate manual processes, including RPA, AI, NLP and Machine Learning. However, organizations should also keep in mind that for RPA and other options in the automation spectrum to truly evolve and advance, organizations will also need to focus on new talent and people strategies that support and synergize with holistic digitalization initiatives. In a nutshell, let RPA take the robot out of the human, so that your people can focus on the problems that only humans can solve.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
 
Branden B. Dean is an Advisory Senior Director of SGV & Co.

Legislation that Matters

Much drama accompanied the State of the Nation Address the other week. Hopes are high that action follows suit.
There are grounds for optimism.
We were pleasantly surprised by the President’s statesman-like demeanour as he articulated a clear legislative agenda for this Congress in its remaining months before election season. Most of them are foundational legislation for peace and prosperity.
His first ask was for the Bangsamoro Organic Law — which Congress passed and he signed forthwith. We in the Foundation for Economic Freedom vigorously welcomed it, calling it “a giant step toward peace and development in Mindanao.” We encouraged the future Bangsamoro Autonomous Government “to anchor their development efforts on free market principles but steered by a responsible elected government assisted by competent, efficient and honest bureaucracy,” noting there is “no reason why the BAR cannot be like Hong Kong and Shenzen in China,” exemplars “of free market principles combined with good governance.”
The President likewise asked Congress to urgently pass two pieces of priority legislation. One, the proposal to liberalize rice importation and shift away from quotas to tariffs, as a way to lower rice prices. The recent spike in rice prices and overall inflation owed much to the continued mismanagement by NFA. Its decades long monopoly has consistently led to cost of rice for our people being as much as twice as high as our neighbors’, as well as over P200 billion of unpayable debt guaranteed by the national government.
Two, passage of TRAIN, not just the second package on lowering corporate income taxes and rationalizing fiscal incentives, but also pertaining to tax amnesty, capital income taxation, and “sin taxes.” Package 2 is essential to make the Philippines competitive with its neighbors tax-wise and encourage investments and jobs. It will also favor the 90,000 small and medium size businesses which, unlike a small number of large firms, do not enjoy “forever fiscal perks.”
The election of the new Speaker, Gloria Macapagal-Arroyo, a Phd from the highly respected UP School of Economics, has been widely welcomed. People who have paid close attention to the economy when she was President know well how key economic initiatives then contributed critically to the improved performance we have been seeing — over 6% GDP growth for 12 straight quarters, manageable inflation, low interest rates, higher levels of public and private investments.
I underline in particular two milestone pieces of legislation, the Electric Power Industry Reform law and the Reformed VAT law.
The first reengineered our electricity sector. Competition and private sector efficiencies have made shortages a thing of the past, and at a more affordable cost of electricity. Just as crucially, it offloaded from government and taxpayers the burden of financing power sector investments, and helped improve our fiscal position.
congress
The RVAT law on the other hand is well recognized by credit rating agencies, multilateral financial institutions, and the broader financial community as a game changer in improving our macroeconomic position and ushering upgrades in our credit rating. Then-President Arroyo was very hands on in ensuring its passage in good form, without being mangled as typically happens with tax legislation.
A case study Christine Tang and I did for the ADB (Managing Reforms for Development, Chapter 2 “Political Economy of the Reformed Value-Added Tax in the Philippines,” downloadable for free at http://www20.iadb.org/intal/catalogo/PE/2013/11631.pdf), told the story of how Ms. Arroyo drove this reform effort — getting the reform on the legislative agenda, forging consensus among not just legislators but also key stakeholders (including captains of industry whom she assembled at her home and Congress leaders whom she bent to her will.)
This kind dogged persistence is needed from President Duterte, and from her as Speaker of the House of Representatives where tax legislation needs to originate, to get TRAIN 2 and the succeeding packages going. It seems stuck despite the vigorous efforts of Secretary Dominguez backed by the strong analytical studies of the technocrats in the Department of Finance, and weighing in of civil society, including eminent economists and former finance secretaries. ( ee for example columns of Prof. Raul Fabella, “TRAIN 2: The failures it addresses” and my “Eight former Finance Secretaries support TRAIN 2,” both in this column space.)
The Foundation for Economic Freedom likewise welcomes the President’s push for the passage of the Land Use Act, but with some caveats. Permit me to quote FEF Fellow Art Corpuz, a known expert in City and Regional Planning (PhD and former Lecturer, Cornell University; former Professor of Urban and Regional Planning in UP).
“The importance given by the President to the NaLUA is well-founded. This is an opportunity to pass legislation on land use that serves to increase productivity, generate employment, reduce poverty, and protect the environment. Unfortunately, current drafts of the NaLUA are focused on imposing land use restrictions that penalize efficiency, discourage investments, encourage violations and corruption, and hamper the protection of lands that need to be protected. For example,
• In rural areas, the myth of food self-sufficiency is perpetuated instead of tapping market demand to raise productivity and farmers’ incomes.
• In urban areas, the need for growth is ignored, which contributes to uncontrolled expansion and land conversion, while disregarding and thus hampering the established role of cities to lead innovation and productivity gains, attract investments and generate employment, and therefore serve as prime venues for poverty reduction.
Unlike the national land use policies of other countries that have moved forward, the current NaLUA drafts have no references to competitiveness, innovation, and technology; the critical role of connectivity, strategic geopolitical considerations, and drivers of future growth (consistent with the PDP/Ambisyon 2040) are ignored.
The drafts are outdated, mired in a shotgun protectionist mode that assumes unrealistic levels of competency in the bureaucracy.
Instead, the NaLUA should remove constraints to investments in agriculture, promote urban and economic growth, especially at densities that discourage sprawl and allow more efficient infrastructure, and provide for the immediate identification and protection of environmentally constrained lands at the ground level.”
I pray that Congress will devote its remaining months to legislation that improves productivity of the economy, generates investments and jobs, and uplifts the lives of our people, instead of allowing itself to be distracted by Federalism as the solution. As the UP School of Economics Lecture topic said — “If Federalism is the answer, what is the question?”
 
Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.
romeo.lopez.bernardo@gmail.com

The legislative agenda for business

President Rodrigo Duterte at his third State of the Nation Address (SONA) on July 23 urged lawmakers to pass Package 2 of the Tax Reform for Acceleration and Inclusion (TRAIN) law, while firmly saying no to proposals to reverse TRAIN Package 1 amid the high inflation rate recorded for the country this year (philstar.com July 26, 2018).
Package 1 of TRAIN was signed into law on Dec. 19, 2017 and officially implemented on Jan. 1, 2018. It cut personal income tax rates — no taxes for those earning P250,000/year and below — while also cutting certain exemptions to the value-added tax (VAT), increasing excise tax rates for fuel, coal and automobiles, and imposing a tax on sugar-sweetened beverages.
Package 2 concerns business taxes.
The Department of Finance (DoF) formally submitted to the House of Representatives on January 23 this second package that will reduce corporate income tax rates from 30 to 25% while “modernizing” incentives for companies to make these “performance-based, targeted, time-bound, and transparent” (www.dof.gov.ph/taxreform January 23, 2018). It is not fair that a small select group of top enterprises enjoy preferential corporate income tax rates of just six (6) to 13% while an overwhelming majority pay the regular rate of 30%, the DoF stressed.
Finance Undersecretary Karl Kendrick Chua said “tax incentives enjoyed mostly by big businesses such as income tax holidays and other perks with no time limits that are costing the government over P300 billion annually in foregone revenues not including exemptions from the payment of local business taxes and the estimates on tax leakages.” Per 2015 data, income tax holidays and special rates account for additional P86.25 billion of the revenue losses, while custom duty exemptions account for P18.4 billion more. “So on average, we gave away up to 2% of our GDP in income tax and custom duties exemptions,” Chua said (Ibid.).
And if the gut issue of an inflation rate of 5.2% (still rising) experienced after the sweet and sour offerings of Package 1 to individual taxpayers upset stomachs, incentives to certain businesses that the DoF wants to take away seem to make Package 2 unpalatable, despite the promised reduction of the corporate income tax.
Of course the Philippine Economic Zone Authority (PEZA) reacted to the cutting of investment incentives — which are the agency’s reason for being. “If the government gave away a total of P235.307 billion to PEZA companies in 2015 in the form of tax incentives, PEZA companies in return gave P3.317 trillion to the Philippine economy over its existence. In effect, for every P1 that the government gives to PEZA companies in terms of incentives, P14 is plowed back by our PEZA companies to the Philippine economy,” said PEZA Director-General Charito B. Plaza, author of the PEZA when she was congresswoman (business.mb.com.ph April 12, 2018).
It is not true, as the DoF says, that PEZA grants perpetual incentives to investors. But companies continue to add new products and technology and for that they get additional incentives, Plaza clarified. “These incentives have been supported by four administrations already and it has worked,” she pointed out (Ibid.).
“We should also look at the social progress that was created by these industries and ecozones. Like the municipalities before are now cities. The poverty index, the crime index, the insurgencies, eradicated in these areas where there are economic zones and industries. And that will happen to all other communities that will soon have ecozones” (Ibid.).
Plaza said TRAIN Package 2 “has created a cloud of uncertainty among PEZA investors.” While the existing ecozone locators are staying put, Plaza said many potential investors, mostly in manufacturing, are putting on hold their plans because of the TRAIN 2. Some are even contemplating of leaving (Ibid.).
Yet as promised by the new Speaker, Gloria Arroyo, the House of Representatives has started to process Package 2. The DoF proposal has come endorsed by eight of the country’s leading economists, who said the “deficiencies” of the current corporate income tax system have hampered the country’s growth and competitiveness — and that maintaining them could make the government miss its long-term vision of transforming the Philippines into a prosperous, high-income economy by 2040 (www.dof.gov.ph/taxreform July 24, 2018).
“We express our support for the main principle of a corporate tax system that is broad-based and competitive relative to our peers in the region. More importantly, lowering the corporate income tax rate will help entrepreneurs and small and medium enterprises thrive. However, in the interest of fiscal prudence, the lowering of rates should be in conjunction with the rationalization of fiscal incentives,” the eight said in their joint statement of support after a discussion lunch hosted by the DoF to vet their Package 2 design.
But at the Senate, no Senator wanted to take the initiative to file the counterpart bill for TRAIN Package 2.
However, last week Senate President Vicente “Tito” Sotto filed Senate Bill 1906 for reforms in the corporate income tax and fiscal incentives in Package 2 of TRAIN.
“It could be good because it would not impose new taxes,” Sotto said. “But we have to be steadfast because some big corporations have started to lobby [against removing incentives]”(The Philippine Star August 1, 2018).
Will TRAIN Package 2 pass in the House and the Senate? Business, the front-line beneficiary (or victim?) of Package 2, holds its breath and (of course) quietly “lobbies” until the final workable form and substance shapes, in the boiling cauldron set upon the political fires of current in-fighting in the House and the Senate.
 
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com

Reform in the time of Duterte

“Are we in the midst of a crisis?”
For activists, that’s a valid question. Perhaps the activists’ answer is yes. A yes, mainly because this aligns with the narrative that this administration is incompetent to make sound policy decisions for the country.
It might be easy to dismiss the President’s latest State of the Nation Address (SONA) as empty rhetoric and perceive the accompanying political turbulence as indicators that our nation is completely spiraling out of control.
With the great many controversies surrounding this administration, none have been so pronounced as the blatant disregard for human rights. One can certainly make the argument that our democratic institutions are already in the midst of a crisis.
The narrative, however, is that the political crisis goes together with an economic crisis as well. Inflation is unexpectedly above the government’s own target, which people adversely feel. The recently passed first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law is blamed for the economic woes.
Concerns about the potential impact of TRAIN on the poor are valid. But it is important to make a careful and balanced analysis, and come up with specific solutions for specific problems.
Rising prices have fueled the call to suspend TRAIN. However, probing consumer price index data shows us that inflation in food items such as rice, fish, and vegetables indicates that TRAIN only contributes a small transitory part of the inflation pains. Rising global crude prices and the spike in rice prices are the bigger factors behind the higher inflation.
Nevertheless, the administration must address the higher inflation by liberalizing rice imports (shifting from quantitative restrictions to tariffs), reforming the National Food Authority (NFA), and improving overall agricultural and resource management. Rice has the biggest weight in the inflation index.
We are at a crucial stage in our economic development. Our fundamentals have indicated a positive outlook thus far: GDP growth over 5 percent for the past twenty-five quarters and an unemployment rate below 7 percent in the past fifteen quarters. Accompanying this growth is sustained confidence: an investment grade rating and growing consumption. Moreover, signs point to positive structural changes, growth driven by the industry and service sectors.
Concerns of overheating notwithstanding, sustaining this growth will be instrumental in achieving our goal of eradicating poverty. A more important goal is achieving upper middle-income country status. We have to generate and sustain revenues to meet these goals.
A major motivation of the recent TRAIN Law is to finance ambitious development projects. A boost in infrastructure spending is underway. Specifically, this administration has committed to Build, Build, Build. The Asian Development Bank estimates that the Philippines must invest about 7% of GDP in infrastructure to sustain our growth trajectory. Thus, from 3% of GDP, our infrastructure spending would have to be more than doubled by 2022.
Spending for social services is also dramatically increasing. We have made public tertiary education free, and we are nearing the realization of a truly universally accessible health care system. As the imminent passage of universal health care will require huge financing, excise taxes on tobacco and alcohol need to be raised further.
The second package of tax reform will make our business environment more competitive by lowering the corporate income tax. This will benefit the vast majority of enterprises, which are medium and small. Furthermore, rationalizing fiscal incentives will update and modernize our investment policy, doing away with redundant incentives and making incentive rules more sophisticated, transparent, and better targeted. That is why we laud the speedy approval of the bill in the House Ways and Means committee and hope that the Senate can also see the merits of this proposed measure and act on it swiftly.
We return to the question of crisis. Current inflation, aggravated by the NFA’s gross incompetence, is bothersome but by itself does not constitute an economic crisis. The economic fundamentals remain generally good.
But serious problems will arise when TRAIN is sidetracked or suspended. Investor confidence will wane, our credit rating will be degraded, and public spending will slow down.
It is the politics that has created a crisis of institutions — the violence and violation of human rights marked by immunity.
To be clear, transformative economic policies must be dissociated from the administration’s illiberal brand of politics. The latter must be opposed. The reforms on the economic front must be pursued in the face of the political challenges.
It is certainly a fine line to walk. We must struggle against a false and narrow thinking, which is we cannot fight for sound economic policies because this administration has debased democratic institutions. Economic improvement after all can also lead to political empowerment.
Keeping this in mind, we cannot postpone the economic reform work despite the bad politics.
 
AJ Montesa and Karla Michelle Yu are research associates of Action for Economic Reforms (AER).

The Bangsamoro Organic Law and peacebuilding processes in the democratic space

By Alladin S. Diega
PEACEBUILDING in the country has reached another milestone — the enactment of an organic law that will formally create the Bangsamoro territory.
Of course, it would still need to hurdle expected legal challenges, including the actual plebiscite. More than eliciting euphoric jubilation, the exercise should have resulted in a sobering realization that peacebuilding is a process — it is difficult, but it can be done. The fact that the Organic Law for the Bangsamoro Autonomous Region in Muslim Mindanao (OLBARMM) advances the current Autonomous Region of Muslim Mindanao (ARMM), which was also a peace effort in its own right, should serve as a footnote to this process.
There are things that still need to be clarified within the law. Let us not be tempted to think that since it is signed, everything will progress into what is expected. As in everything that went through a process, the OLBARMM is just another step, albeit a big step. In the first place, the entire negotiations — the amendments and counter-amendments to all provisions — signify the meeting of differing expectations.
Foremost, the OLBARMM is a result of years of effort from peacemakers on both sides of the warring parties. The government of the Philippines has extended its hand in peace, and the Moro Islamic Liberation Front (MILF) reciprocated. For those not in the know, the long-standing armed conflict in Mindanao has been a struggle for the right to self-determination. The clear exclusion of Muslim Mindanao from the economic gains of the whole area for more than three decades now has legitimized this demand for self-determination. The organic law therefore is a political settlement and not an ordinary piece of legislation.
It is vital that Muslim Mindanao be politically drawn within the domain of the state and Muslim Filipinos feel that they are an important stakeholder of the Philippine nation, not a separate people.
In time, their sense of separateness will heal as perceptions are not permanent in nature, provided there is material condition for the change to grow and flourish.
The 1987 Constitution provided material condition under Section 18 of Article 10 which instructs Congress to enact an organic law for two autonomous regions, the other one being the Cordilleras. Article 10 itself is titled “Local Government” but sections 1 to 14 deals with local government creation which resulted in the enactment of the 1991 Local Government Code, while Sections 15 to 21 with a separate sub-title, deals with the autonomous regions. These were the basis for the enactment of R.A. 6734 on August 1, 1989 which created the ARMM and its later amended form, R.A. 9054 on February 7, 2001.
The ARMM had been based on an earlier peace agreement between the government and the Moro National Liberation Front (MNLF) signed in 1996, but when the bill went to Congress, the MNLF had no participation in crafting it, believing that the peace deal was not fully respected. This time, the MILF was involved in crafting the Bangsamoro Basic Law (BBL) through the 15-member Bangsamoro Transition Commission (BTC), with three members coming from the MNLF.
The first requirement for the Bangsamoro realization is its territory. Unfortunately, those who are uncomfortable if not outright against the creation of a meaningful autonomy for Muslim Mindanao invoked Section 10 to challenge the inclusion of the six municipalities and 39 barangays under the proposed BBL, basically the opt-in provision. Section 10, which deals with local government, prohibits the creation, merger, abolition and division of any province, municipality and barangay, except under plebiscite with affected political units voting.
On the other hand, section 18, which specifically deals with autonomous region, stipulates for “geographical areas” which can be accommodated to the autonomous region along with provinces and cities, provided the residents in these areas voted for inclusion.
The use of “geographical areas” clearly intends for a greater latitude of interpretation for the territory of the future autonomous region for Muslim Mindanao. The six municipalities in Lanao del Norte and the 39 barangays in North Cotabato can be categorized as geographic areas, hence eligible to join the Bangsamoro.
The lawmakers decided to use section 10 for their interpretation instead of section 18. Nothing can be said further about the earlier contention that if the BBL has an opt-in proviso, it should also have a corresponding “opt-out” proviso.
Another territory-related provision, the periodic plebiscite was aborted very early and did not reach the discussion proper even at the committee level in both Houses. The opt-in proviso and the periodic plebiscite were seen as “creeping” provisions.
We see how peace accords are always political in nature; hence they should not be limited to a narrow legalistic view.
Aside from the territory, the pre-conditions on the release of the block grant have been a serious concern, because fiscal independence is the heart of autonomy. The automatic block grant appropriation is one of the most important improvement made to the OLBARMM. We recall that the conditional release of the annual budget had been ARMM’s main problem in the past.
In the signed final version of the law, the bicameral conference committee removed the preconditions for the release of the block grant.
However, the mechanism of control survived in section 21, on review of block grant formula, which will be conducted not annually but every five years. The Intergovernmental Fiscal Policy Board (IGFPB), with national government representatives, is empowered to, among others, review the fiscal needs of the Bangsamoro and the actual revenues it is able to generate to ensure “all block grant expenditures are transparent and performance-based”.
Even if the preconditions to the release of the block grant were removed, there is no telling that the national government through IGFPB will not exercise undue intrusion into the fiscal management of the Bangsamoro.
For instance, under the Local Government Code, 40 percent of BIR’s annual collection should be automatically released to local government units (LGUs). However, during a Senate Committee hearing on Constitutional Amendment early this year, the League of Municipalities of the Philippines testified that previous administrations “had withheld the IRAs (internal revenue allotments) and unduly punished LGUs” because of unmanageable fiscal deficits. A similar thing could happen to the block grant in the future.
Another important part of the financial aspect of the OLBARMM is the Special Development Fund (SDF). More than the amount the bicam decided, which is P50 billion for 10 years instead of the BTC proposal of P100 billion for 20 years, the significance of the funding is in its intent to support the rehabilitation and normalization process that will address not only the situation of the former combatants but also the internally displaced persons, widows and orphans, and poverty-stricken communities. The SDF is an indemnification fund — a catch-up fund that indemnifies because most of Mindanao has improved economically, except for the Bangsamoro area.
The adoption of the House version on land management and distribution including agricultural land use reclassification, which the Bangsamoro has the power to initiate and recommend, is also a positive development in the OLBARMM. This recognizes Bangsamoro’s capacity to govern itself and will allow them to use alternative land dispute resolutions which are proven effective.
In the end, modern governance is a matter of democratic rule where the people’s sovereignty is respected. Enacting the organic law for the Bangsamoro people and other similar laws is a test of whether power is ultimately held by the people through their legislators as their true representatives. If a law will constrict such expression and practice of democracy, then people have the right to create a more expansive law that would really reflect their hopes and aspirations, because laws should be tools of liberation and not of oppression.
 
Alladin S. Diega is a political mapping officer at International Alert Philippines, an independent peacebuilding organization.
(A previous version of this piece, which was also published in the print version on the same date, indicated that the Local Government Code was passed in 1995. It was enacted in 1991. The editor regrets the error.)

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