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Manila eyes more projects on clean energy under US President Biden

THE PHILIPPINES is likely to see more clean energy investment as an offshoot of the US rejoining the Paris Agreement, the industry’s regulator said.

In a text message, National Renewable Energy Board (NREB) Chair Monalisa C. Dimalanta said she remains hopeful that a US administration led by President Joseph R. Biden would produce more direct investment in the Philippines’ renewable energy (RE) sector.

“We definitely expect positive impact from the renewed active involvement of the US in clean energy and climate risk mitigation efforts. For one, we hope to get our share of increased US direct investment as well as technical support and assistance in the RE space in the Philippines,” Ms. Dimalanta told BusinessWorld Friday.

The Paris Agreement aims to keep the rise in average global temperatures below 1.5 degrees Celsius. On Friday, Reuters reported that Mr. Biden issued an executive order on Wednesday to bring the US back into the Paris accord.

During his campaign, Mr. Biden set a target of zero net emissions by 2050. On his website, he said he planned to “marshal an historic investment in energy efficiency, and clean energy to address bottlenecks and unlock America’s full clean energy potential.”

Michael L. Ricafort, the chief economist of Rizal Commercial Banking Corp., said that RE, electric vehicles and other related industries in the supply chain “could still continue to boom in the Philippines” in a Biden administration.

“Since the campaign, Biden advocated for clean/renewable power and opposed shale oil and other energy sources with adverse impact on the environment,” Mr. Ricafort said in an e-mail Friday.

Terry L. Ridon, convenor of public policy think-tank Infrawatch, Mr. Biden’s decision to rejoin the Paris climate agreement would lead to a “renewed and wider focus on financing large-scale green projects globally.”

“In the Philippines, this should push the government to undertake more green energy projects but ensure the least cost to the public, whether through lower generation costs or lower feed-in-tariff,” Mr. Ridon said in an e-mail Thursday.

University of the Philippines political science professor Maria Ela L. Atienza said that US businesses were not the only possible source of increased financial support and assistance.

“US businesses are not the only ones present in the Philippines. EU (European Union) businesses are also pushing for cleaner and greener environmental practices so you have both the US and the EU pushing for that. Until now, there (have been) strong investments in the Philippines. These are added bargaining chips on the part of the US and the EU when it comes to additional investments and development assistance for the Philippines,” Ms. Atienza told BusinessWorld by phone Thursday.

Some of the development assistance extended by EU countries focuses on green environmental policy, including business practices, she said. — Angelica Y. Yang

RCEP seen highlighting PHL manufacturing weakness

A RECENTLY SIGNED 15-country trade deal may not significantly benefit the Philippine economy and instead expose its lack of competitiveness in manufacturing, a senior equities research executive for Regis Partners said.

“I think it will continue to highlight that we’re a lot less competitive in terms of manufacturing than our neighbors,” Regis Partners, Inc. Chief Strategist Rafael P. Garchitorena said, in response to a question at a German-Philippine Chamber of Commerce and Industry online event last week.

“If anything, it might make import prices lower which could tame inflation, but it will just highlight again the gap between our manufacturing competitiveness against the rest of the region.”

The Philippines recently signed on to the Regional Comprehensive Economic Partnership (RCEP), which the Trade department aims to ratify this year. The trade pact includes China, Australia, New Zealand, Japan, South Korea and all 10 member-countries of the Association of Southeast Asian Nations (ASEAN). 

The Trade department has been promoting the deal as advantageous for export market access, especially for garments, automotive parts, and agricultural products such as canned food and preserved fruit.

Mr. Garchitorena called the RCEP a “small net negative for the country.”

He said that Philippine participation in the trade bloc and the link with China is good for the country, but adds that it is difficult to say how it would translate to economic activity.

“The reality is (China is) now the growth engine of the world. Anything that gets us in that orbit is more likely better than none.”

The elements that reduce the competitiveness of Philippine manufacturing like the high costs of power or logistics challenges across the archipelago, he added, have nothing to do with open borders.

“RCEP is good. I don’t know if necessarily it will be a huge positive for the Philippines,” Mr. Garchitorena said.

RCEP becomes effective 60 days after six ASEAN member states and three other signatory states submit their instruments of ratification.

The Trade department is also seeking participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a deal signed by 11 countries in 2018. — Jenina P. Ibañez

ERC revises rules of procedure to allow more electronic filing, virtual hearings

THE Energy Regulatory Commission (ERC) said Friday that it added 12 new sections to its revised rules of practice and procedure (RPP), to allow the electronic filing of pleadings and virtual hearings, in order to facilitate continued operations during the pandemic.

In a statement, the ERC said the revised RPP amends the 2006 edition. It guides stakeholders appearing before the commission and participating in any proceeding before it. The revisions had not been posted to the ERC website at deadline time.

“The RPP responds to the requirements of the ‘New Normal’ setting. The new provisions on electronic filing and virtual hearings allow the ERC to continuously perform its mandate as we can remotely access and act on applications or complaints filed before our office, while protecting the health and safety of electric power stakeholders and that of our employees,” ERC Chairperson and CEO Agnes VST Devanadera said.

The updated RPP also sets out rules on prohibited pleadings, the cancellation of the notice of hearing due to force majeure; and public consultations, among others.

The ERC had posted a draft of the new rules last year, which went the rounds of public consultations.

In the statement, the ERC said that the new RPP complements two previous resolutions. One involves the implementation of legal e-processes while the other sets guidelines on electronic applications and virtual hearings.

Three weeks ago, the ERC said that the number of cases concluded last year rose 21%, aided by the adoption of videoconferencing for its hearings. It said that it was able to resolve 748 cases in 2020, compared to 617 in 2019. — Angelica Y. Yang

The Tax Reform Package 2: CREATE-ing opportunities for business

The Department of Finance (DoF) originally designed its tax reform package 2 to be revenue-neutral, gradually lowering the corporate income tax (CIT) rate while modernizing incentives and making them “performance-based, targeted, time-bound, and transparent” for companies.

However, the COVID-19 pandemic brought about unforeseen hardships and challenges to businesses. The DoF has refocused package 2 (now known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE) to make it more “responsive to the needs of businesses negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract highly desirable investments that will serve the public interest.”

SENATE BILL NO. 1357 — CREATE
According to the DoF, the changes make the proposed bill the first-ever revenue-eroding tax reform package and the largest fiscal stimulus program for enterprises in the country’s history. In this light, the Senate approved in November Senate Bill (SB) No. 1357, known as CREATE, after which the bill was forwarded to the House of Representatives in December. The provisions in the bill will still be reconciled with the House of Representatives’ version, through a bicameral conference (bicam) and may still be subject to change.

The bill aims to improve the equity and efficiency of the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages, as well as developing a more responsive and globally competitive tax incentive regime that is performance-based, targeted, time-bound, and transparent. It also aims to provide support to businesses in their recovery from unforeseen events such as an outbreak of communicable diseases or a global pandemic and strengthen the nation’s capability for similar circumstances in the future. In addition, it seeks to create a more equitable tax incentive system that will allow for inclusive growth and generation of jobs and opportunities across the entire country and ensure access and ease in the granting of these incentives, especially for applicants in the least developed areas.

CREATE seeks to lower the CIT rate from 30% to 25% effective July 1, 2020. But domestic corporations with net taxable income not exceeding P5,000,000 and with total assets not exceeding P100,000,000, excluding land on which the particular business entity’s office, plant, and equipment are situated, shall be taxed at 20%.

While this reduction in the CIT rate will significantly cut into government revenue, the DoF said all firms, especially micro, small and medium enterprises (MSMEs), can use the tax savings to fund their operations and retain employees. The DoF also adds that foregone revenue from the reduction of the CIR rate constitute an unprecedented investment that shows the government’s resolve to vigorously fight the effects of COVID-19 on the economy and get businesses back on their feet as quickly as possible.

Currently, when the minimum corporate income tax (MCIT) of 2% on gross income is greater than the regular income tax of 30% on net taxable income, such MCIT of 2% is imposed on the corporation. Under CREATE, effective July 1, 2020 until June 30, 2023, the MCIT rate shall be one percent (1%).

FOREIGN-SOURCED DIVIDENDS
Another notable change covers foreign-sourced dividends received by a domestic corporation. Dividends received by a domestic corporation from another domestic corporation are not subject to income tax. However, foreign-sourced dividends received by a domestic corporation from investments abroad are subject to income tax.

Under CREATE, these foreign-sourced dividends received by a domestic corporation shall not be subject to income tax provided that 1) the funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received; 2) the dividends shall be limited to funding working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects; and 3) the domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shares for a minimum of two years at the time of the dividend distribution.

This will encourage domestic corporations with substantial investments abroad to repatriate profits to the Philippines and use the funds to reinvest locally, helping to drive economic growth.

NON-PROFIT ORGANIZATIONS
Proprietary educational institutions and hospitals which are non-profit shall be imposed a tax rate of 1% on their taxable income from July 1, 2020 until June 30, 2023, instead of 10%. “Proprietary” is defined as a private hospital or any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

It is widely known that educational institutions and hospitals are among the entities badly affected by the pandemic. This reduction in tax rate for a limited time aims to help these hospitals and educational institutions cope with the crisis and retain employees.

ADDITIONAL CHANGES PROPOSED IN CREATE
Other salient changes proposed in the CREATE bill include the removal of exemption of offshore banking units (OBUs) and the repeal of the imposition of improperly accumulated earnings tax (IAET). In addition, the Regional Operating Headquarters (ROHQs) of multinational companies shall pay a tax of 10% of their taxable income, except that effective Dec. 31, 2021, ROHQs will be subject to the prevailing regular corporate income tax.

The sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases shall be exempt from value-added tax (VAT) beginning on Jan. 1, 2021 instead of Jan. 1, 2023.

The sale or importation of equipment, raw materials and other items necessary for COVID-19 prevention, such as PPE, medication and FDA-approved vaccines, will also be exempt from VAT beginning Jan. 1, 2021 to Dec. 31, 2023.

FISCAL TAX INCENTIVES
Under CREATE, tax incentives may generally be available to certain enterprises provided their activities qualify under the Strategic Investment Priorities Plan (SIPP) to be issued every three years. The incentives can include, among others, income tax holiday (ITH) and special corporate income tax (SCIT) in lieu of all taxes-both local and national.

The duration of the ITH can range from four to 17 years depending on the location and industry of the registered project or activity, and other relevant factors as may be defined in the SIPP.

In CREATE, the period for availing of the ITH will be followed by the Special Corporate Income Tax (SCIT) rate, equivalent to 5% effective July 1, 2020, based on the gross income earned, in lieu of all taxes, both national and local. The period for availing of SCIT after the ITH incentive is 10 years across all categories.

Furthermore, registered enterprises are exempt from customs duty on imports of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity.

Registered enterprises are also exempt from VAT on imports and are entitled to VAT zero-rating on domestic purchases of goods and services directly and exclusively used in their registered project or activity located inside an ecozone or freeport.

Investments registered before the effectivity of CREATE will be governed by the following rules: 1) registered enterprises whose projects or activities were granted only an ITH prior to the effectivity of the CREATE will be allowed to continue availing of the ITH for the remaining period of the ITH as specified in the terms and conditions of their registration; 2) those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of CREATE may use the ITH for the period specified in the terms and conditions of their registration; and 3) registered enterprises whose projects or activities were granted an ITH prior to the effectivity of CREATE and are entitled to the 5% tax on gross income earned incentive after the ITH will be allowed to avail of the 5% gross income earned incentive for 10 years.

Registered enterprises currently availing of the 5% tax on gross income earned granted prior to the effectivity of the CREATE will be allowed to continue availing of the 5% tax incentive for 10 years.

Given the devastating impact of the pandemic, passing the CREATE bill into law now appears even more urgent. It is hoped that its implementation and execution will play a key role towards economic recovery and eventual national economic resurgence.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

 

Allenierey Allan V. Exclamador is a Tax Partner of SGV & Co.

COVID-19 cases near 514,000 with 10,242 deaths, says DoH

THE DEPARTMENT of Health (DoH) reported 1,949 coronavirus infections on Sunday, bringing the total to 513,619.

The death toll rose by 53 to 10,242, while recoveries increased 7,729 to 475,612, it said in a bulletin.

There were 27,765 active cases, 83.3% of which were mild, 9.1% did not show symptoms, 4.4% were critical, 2.7% were severe and 0.53% were moderate.

Davao City reported the highest number of infections at 99, followed by Quezon City at 98, Cavite at 74, Baguio City at 73 and Leyte at 63.

The agency said eight duplicates and one case that tested negative had been removed from the tally, while two recovered cases were reclassified as deaths. Five laboratories failed to submit their data on Jan. 23.

About 7.1 million Filipinos have been tested for the coronavirus as of Jan. 20, according to DoH’s tracker website.

The coronavirus has sickened about 99.4 million and killed about 2.1 million people worldwide, according to the Worldometers website, citing various sources including data from the World Health Organization (WHO). About 71.4 million people have recovered, it said.

On Friday, the Health department reported 16 more infections with the more contagious coronavirus strain that was first detected in the United Kingdom. Three of the patients had recovered, it said.

DoH said 12 of the cases were from Bontoc, Mountain Province and two patients were returning migrant Filipinos from Lebanon who arrived on Dec. 29.

The two other cases were detected in La Trinidad, Benguet and in Calamba City, Laguna. Both had no contact with any confirmed cases or travel history, the agency said.

A 29-year-old Filipino who arrived from the United Arab Emirates  (UAE) on Jan. 7 was the first patient reported to have been infected with the coronavirus strain.

DoH said it was continuing surveillance and expanding capacities to detect all coronavirus variants. It also called on local government units (LGUs) to ensure strict monitoring and compliance with health protocols.

TAX-FREE BILL
Meanwhile, a senator has filed a bill seeking to exempt coronavirus vaccines imported by local governments and the private sector from tax.

Senate Bill 1988 by Senator Imee R. Marcos will exempt the vaccines from duties, value-added and excise taxes.

The exemption would help the government deliver a “clear, proper and immediate vaccination program for Filipinos,” she said in the bill’s explanatory note.

Some local governments and private companies are in talks with drug makers for vaccine orders.

The Food and Drug Administration (FDA) has approved Pfizer, Inc. and BioNTech’s coronavirus vaccine, which has a 95% efficacy, for emergency use.

The Philippines is expected to get 40 million doses of free vaccines in the first quarter of the year under a global program meant to give all countries equal access.

Senate President Vicente C. Sotto III said in a mobile phone message he would support Ms. Marcos’s bill. A similar bill has been filed at the House of Representatives. 

Vaccine Czar Carlito G. Galvez, Jr. earlier said the government plans to buy 148 million doses of coronavirus disease 2019 (COVID-19) vaccines for as many as 70 million Filipinos this year.

Unilab, Inc. and Faberco Life Sciences, Inc. on Friday signed an agreement that will give the private sector access to its Covovax coronavirus vaccine.

In a statement, Unilab said Faberco, the distributor of Covovax in the Philippines, had appointed it as an authorized partner.

“Unilab and Faberco share the same vision and advocacy in terms of providing access to as many Filipinos at the soonest possible time,” Faberco founder Kishore Hemlani said in the statement. “We are prepared to help the Philippine government in protecting the people by enabling more access to COVID-19 vaccines through the private sector.”

“This initiative is not for a business purpose but to help the country secure more vaccine allocations,” Unilab Senior Vice President Jose Maria A. Ochave said. “The vaccines will be made available to the private sector, especially hospitals and essential industries, with the condition that they be made available at no cost to their employees.”

The vaccines may also be extended to employees’ families and their selected communities depending on the company’s financial capability, he said.

The government on Jan. 9 signed a term sheet with manufacturer Serum Institute of India and local partner Faberco for the supply of 30 million doses of Covovax. The vaccine is developed by US biotechnology company Novavax and manufactured by Serum Institute. — Vann Marlo M. Villegas and Charmaine A. Tadalan

Analysts urge Duterte to push extension of Bangsamoro council

By Kyle Aristophere T. Atienza

PRESIDENT Rodrigo R. Duterte should push lawmakers to extend the terms of Bangsamoro Region in Muslim Mindanao officials to prevent the armed conflict there from intensifying, political analysts said.

The President, who is from Mindanao, should certify as urgent several bills seeking to extend the life of the Bangsamoro Transition Council for three more years, Marlon M. Villarin, a political science professor from the University of Santo Tomas (UST), said by telephone on Sunday

“That is the pragmatic thing to do right now since Congress has few sessions left before it adjourns this year,” he added.

Congress adjourns indefinitely on June 4. The first regular elections for the Bangsamoro Parliament is set for May 2022.

Bangsamoro Chief Minister Ahod B. Ebrahim on Friday warned that splinter Muslim rebel groups might increase their resistance if the government fails to extend the council’s term until 2025.

He said the council needs more time to implement the region’s programs, including bringing Moro Islamic Liberation Front (MILF) fighters back to civilian life. It also seeks to win over more armed groups in southern Philippines.

The Bangsamoro Organic Law that took effect in 2019 established the new autonomous region that replaced the Autonomous Region in Muslim Mindanao. It was meant to increase Mindanao’s share in the country’s resources.

Once their terms are extended, Mr. Duterte should consider appointing people from other rebel factions to dissuade them from overthrowing the autonomous government, Mr. Villarin said.

Maria Ela L. Atienza, a political science professor from the University of the Philippines (UP), said she also supports the extension. “There is a limited time but we have to consult the people, peace builders and other stakeholders in Bangsamoro areas,” she said by telephone.

While Congress debates on the extension, Bangsamoro officials should consult local leaders and other splinter groups so the peace deal doesn’t go to waste, she added.

“There are what we call spoilers of the peace process,” Ms. Atienza said. “These spoilers do not only include factionalist rebel groups, but also politicians in Mindanao who don’t want to be part of the Bangsamoro. They also don’t want the Moro Islamic Liberation Front (MILF) to be running the Bangsamoro government.”

“If they are going to postpone the elections, they should consult the people,” she said. “We want the peace process because the area has suffered for a long time. MILF members of the council also need to prove that they can run a government,” she added.

Ms. Atienza said the public should be skeptical about moves to postpone the elections in the Bangsamoro region since politicians might use this to push the postponement of national and local elections next year.

Some politicians might also use the coronavirus pandemic as an excuse to defer the polls, she added.

Samira A. Gutoc-Tomawis, who heads a group representing evacuees, urged the government to look at systemic problems that have plagued Mindanao for decades.

The National Government should also investigate corruption allegations against Bangsamoro officials, she said by telephone. “Congress, and other institutions can investigate while talks on the extension are ongoing.”

Basilan Rep. Mujiv S. Hataman has sought a probe after allegations of corruption including “anomalous disbursements” in the region’s infrastructure projects worth P107 billion.

Nationwide round-up (01/24/21)

Over 500 foreigners, mostly Chinese, arrested last year

THE Bureau of Immigration (BI) arrested more than 500 foreigners alleged to have violated the country’s immigration laws in 2020, lower than the more than 2,000 arrested in 2019. In a statement, the bureau said its intelligence operatives arrested 510 foreigners last year, including 332 Chinese nationals who were nabbed in Tarlac last December for illegally working in the country and involvement in cybercrimes. Immigration Commissioner Jaime H. Morente said the drop in number is attributed to the travel restrictions related to the coronavirus pandemic. “Because of the pandemic and community quarantines imposed, there was a decrease in the movement of aliens,” Mr. Morente said in a statement. “A lot of foreign nationals also joined repatriation flights back to their home countries,” he added. Immigration intelligence chief Fortunato S. Manahan, Jr. reported that the other foreigners caught included 44 overstaying and improperly documented Indians, and 14 Koreans and two Vietnamese who were engaged in unauthorized business activities. Immigration agents also assisted in catching foreign terrorists in Mindanao, including the Indonesian wife of a suicide bomber in Jolo, Sulu. — Vann Marlo M. Villegas

Foreign business chambers, economic managers to attend House hearing on constitutional amendments

THE ADMINISTRATION’S economic managers and representatives from foreign chambers are expected to attend the House of Representatives committee on constitutional amendments’ Tuesday hearing on the proposed lifting of foreign equity provisions in the 1987 Constitution. Based on a committee agenda dated January 24 obtained by BusinessWorld on Sunday, among those invited to attend the discussions are Finance Secretary Carlos G. Dominguez III, Trade Secretary Ramon M. Lopez, and members of the Joint Foreign Chambers. Meanwhile, AKO-BICOL Party-list Rep. Alfredo A. Garbin, Jr., who chairs the committee, asserted that introducing constitutional changes at this time is the “right thing to do” after 10 local business groups on Friday called it a “divisive” move. “We support initiatives to liberalize the restrictive economic provisions of the Constitution to enhance the country’s competitive position globally. However, we are strongly opposed to any initiative at this time to amend the Constitution,” the groups said in a joint statement. The House aims to bring the measure up for debate at the plenary next month. — Gillian M. Cortez

Regional Updates (01/24/21)

Bontoc steps up COVID measures, seeks national gov’t help for more testing

THE Bontoc local government has taken measures to contain the spread of the coronavirus in the mountain town, where 12 cases of the more contagious UK variant has been confirmed. Mayor Franklin C. Odsey, in a message posted on the town’s official Facebook page late Saturday night, listed six action points that are being implemented. These are: Putting the town’s four central barangays under strict quarantine; converting three hotels and two public schools as additional treatment and monitoring facilities; requesting the national government to help in setting up an additional testing site and kits, send auxiliary contact tracers and medical personnel; and provide additional relief goods for affected families; and coordinated with other local governments in Mountain Province for stricter border control.

WEARY
“I know the news regarding the UK variant has come as a huge shock to everyone here in Bontoc, in Mountain Province, and in the whole country. After almost a year in varying levels of lockdown, people are already weary about COVID and all its negative effects… But we have to keep on fighting,” wrote the mayor from his home where he has been in isolation since testing positive for the coronavirus disease 2019 (COVID-19) on January 15. Of the 12 patients with the UK variant, six have already been tagged as recovered but still under quarantine, three are in hospital, and three are on home isolation. As of January 23, data from the Department of Health (DoH) Cordillera Administrative Region office show Mt. Province had a total of 581 cases, of which 274 are active, 305 recovered, and two died. Bontoc, the provincial capital, accounts for most of the total cases at over 340. — MSJ

Solon proposes to have ICT officer in every local gov’t to lead digital shift

A SENATOR is proposing to have an information and communication technology (ICT) officer in each local government who will be in charge of digital transformation, citing that only 30% of localities have started to digitize their system. There are over 1,715 local government units (LGUs) in the country, broken down into 1,488 towns, 146 cities, and 81 provinces. Senator Juan Edgardo Angara said the lack of digital systems affects the delivery of public services, which has become more pronounced during the coronavirus pandemic. “We witnessed how thousands of people had to go out of their homes and line up at designated areas in their respective LGUs to apply and receive their cash assistance. This was not only a labor-intensive and tedious process, but also created significant health risks on both the recipients and the government workers,” he said. Mr. Angara had filed Senate Bill No. 1943, the Local Information and Communications Technology Officer Act. The officer will be tasked to formulate and execute digitalization plans as well as develop information and communications programs and services for the LGU. “Digital transformation, I believe, requires that we rebuild our organizational structures, work processes, and cultural mindsets,” he said. — Charmaine A. Tadalan

‘Cha-cha’ at this time is a waste of time

We just cannot party and dance the Cha-cha (Charter Change) when many are getting sick or dying. The current mood is not celebratory; it’s funereal. Cha-cha is simply dissonant.

Besides, the tremendous energy that Cha-cha entails is better spent to protect our lives from COVID-19. Yet, the congressmen, led by the Speaker himself and some senators, are eager to do the shuffle. They will do the Cha-cha to ease the Philippine Constitution’s economic restrictions.

The resolution introduced by Honorable Lord Allan Jay Q. Velasco (note, “honorable na, lord pa”) states that easing the economic restrictions will “transform the economic growth into inclusive and solidary progress among Filipinos.”

Resisting Cha-cha is not just because the nation is not in a healthy mood, but also because the proposition itself is dubious.

The restrictive economic provisions in the Philippine Constitution are undeniably constraints. That’s the obvious part.

The question policy-makers have to ask, however, is whether these restrictions are really binding constraints. This is a crucial question because deliberate policy-making of such nature — changing the Constitution at that, requires “getting the diagnosis right.” (“Getting the Diagnosis Right” is the title of a paper authored by Ricardo Hausmann, Dani Rodrik, and Andrés Velasco. This was published in the International Monetary Fund’s magazine, Finance and Development, March 2006.)

Getting the diagnosis right is about identifying the binding constraints. This is to say that not all constraints are equal; some are binding and the rest are non-binding. The binding constraints are a few bottlenecks at a particular point, and resolving these bottlenecks would have sizeable, significant, and direct effects on investments (and hence growth).

To quote Hausmann et al., “go for the reforms that alleviate the most binding constraints and, hence, produce the biggest bang for the reform buck. Rather than use a spray-gun approach in the hope that we will somehow hit the target, focus on the bottlenecks directly.”

The Philippines has been quite adept at using the diagnostics approach and identifying the binding constraints. The binding constraint during the time of Gloria Arroyo was bad governance. Thus, Noynoy Aquino’s daang matuwid triumphed.

During Aquino’s term, a binding constraint was the narrow fiscal space. His administration addressed this by passing a difficult piece of legislation then — the reform of the tobacco and alcohol excise taxes. The sin tax reform increased tax effort and made the Philippines creditworthy again.

This in turn created the momentum for a series of tax reforms, which happened during Rodrigo Duterte’s term. Duterte’s tax reforms have enabled the country to finance “Build, Build, Build.” “Build, Build, Build” is a response to another binding constraint — the inadequacy and deterioration of infrastructure.

From the narration above, economic or non-economic measures can address the most binding constraints.

Today, we ask, what is the principal bottleneck? The obvious answer is the pandemic. How Cha-cha can help fight the pandemic — the biggest problem confronting not only the Philippine economy but all other aspects of Philippine society — bewilders me.

Thus, in relation to reviving growth, the government must focus on beating the pandemic. Economic policy cannot be distracted, and it must serve the primary objective of saving lives and flattening the infection curve. Economic policy, specifically through aggressive fiscal policy, must enable an effective vaccination strategy, which in turn should be part of a broader health and development strategy.

Here, Cha-cha is simply off at a tangent. But we do accept that the economic restrictions found in the Constitution are constraints. In Douglass North’s definition, institutions by themselves are constraints.

We can debate whether these constraints are acceptable or desirable. Nevertheless, those favoring the easing of such constraints can do so without having Cha-cha. The Constitution’s economic constraints, non-binding that they are, can be tackled through other means.

Specifically, this administration and even its political opponents support several economic bills that will essentially address the Constitution’s economic restrictions. These bills intend to amend the Public Service Act, the Foreign Investments Act, and the Retail Trade Liberalization Act. The leaders of Congress support these bills and in fact consider them priority bills.

Similarly, BusinessWorld (Jan. 18, 2021) reports that Senator Koko Pimentel “urged legislators to focus on the economic reform bills instead of pushing for Constitutional amendments, citing the limited available time to amend the Charter.”

It is odd, too, that Speaker Velasco, has stalled the passage of the bill called CREATE (Corporate Recovery and Tax Incentives for Enterprises Act). Speaker Velasco has delayed convening the bicameral conference committee, which will reconcile the bills of the House of Representatives and the Senate. The passage of CREATE will end the investors’ uncertainty, but Speaker Velasco is more fixated on a Cha-cha that will go nowhere.

Yes, it will go nowhere. Because the Congress’s version of amending Cha-cha merely introduces general phrasing that says: “unless otherwise provided by law.”

What a waste of time and political capital. Having the above-mentioned economic reform bills passed has much more value than this empty exercise of Cha-cha.

 

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph

Data watch: Gross international reserves

 

Last year, gross international reserves (GIR) surged 25% to end the year at close to $110 billion. This is remarkable considering the unprecedented global scale and severity of the COVID-19 crisis.

While short-term capital exited emerging markets as in past crises, this time around in the Philippines, the balance of payments (BoP) remained in surplus and even ballooned to nearly $12 billion in the year to November. The latter mainly reflects collapsed imports as the economy went into recession and, as tax revenues buckled, increased government borrowings with the overall external debt estimated to have risen by around $10 billion last year.

In an interview with the editor of the country’s leading business paper last week, BSP Governor Benjamin Diokno highlighted this atypical but positive upshot of the crisis that kept depreciation pressure off the peso and allowed monetary authorities to aggressively cut policy interest rates. He added that he expects the GIR to continue growing this year, possibly reaching $120 billion.

OUR VIEW
Pre-pandemic, the Philippines already had one of the highest foreign exchange stockpiles based on the IMF’s assessment of reserve adequacy (ARA). The ratio of reserves to ARA at end-2019 was at 2, higher than the 1-1.5 ratio considered adequate and above most countries’ reported ratios. Last year, the additional reserve buildup unarguably gave economic managers more wiggle room to manage the crisis, not least by helping to anchor the sovereign’s credit rating and giving the government continuing access to international capital markets at relatively tight borrowing spreads. By the end of 2020, GIR could amply cover over 5.4x short-term debt plus principal payments on medium to long term loans due in the next 12 months, up from 3.9x at the end of 2019.

Going by this, the GIR will continue to amply cushion any external shock in the near term. Moreover, given our dimmer view of the economy’s growth prospects, we think the current account will still register a modest surplus this year with moderate import growth, while private capital outflows are unlikely to be as massive as last year, with portfolio flows starting to return in 4Q20. We note too that although GIR was in large part boosted by increased government borrowings, these consisted of long-term loans, a significant portion of which is owed to official creditors who also provided long grace periods on principal repayment. One downside risk given BSP’s (Bangko Sentral ng Pilipinas) decision last year to actively trade its gold holdings, is lower gold prices.

However, holding excess reserves is not without cost. From a consolidated public sector viewpoint, the collateral value of these highly liquid assets needs to be weighed against the negative carry associated with their low returns as well as foregone productivity-enhancing domestic public investments. As pandemic risks subside with improved health management and the promise of vaccination, one could argue that keeping such high precautionary cash is no longer warranted.

Too, with the peso having appreciated by 5% in real, trade-weighted terms last year, many in policy circles would argue for a more proactive government response to support the export sector. Realizing that the BSP could only do so much with its foreign exchange market interventions, the suggestion is for the government to perhaps forego external commercial market borrowings altogether. As the argument goes, at a time when the government is looking to pass more of the burden of spurring economic growth to the private sector, raising the purchasing power of dollar earners, particularly overseas and BPO workers, will help significantly in reviving domestic consumption which accounts for about 70% of GDP. Government may also fret less about the impact on domestic interest rates of more local borrowings considering last year’s aggressive monetary easing that injected close to P2 trillion of liquidity into the financial system, weak loan market (both demand and supply), and a two-year window to directly tap an additional P280-billion loan from the BSP.

There is thus scope for the government to nudge the GIR down this year rather than allow it to climb some more. For now, there are no signals that it intends to do so. 

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. This column was a post to subscribers of GlobalSource Partners (globalsourcepartners.com) a New York-based network of independent analysts. He and Christine Tang are their Philippine partners.

romeo.lopez.bernardo@gmail.com

Must we ‘Cha-cha’ in the pandemic?

In the languor and lassitude forced by the unabating 10 month-long COVID-19 quarantine, it adds insult to injury to make the anxious, near-catatonic people dance like pitiful puppets to the cha-cha-cha of autocratic governance.

Granted that some autocratic firmness must be employed in herding the people to follow recommended procedures to safeguard public health and survival in the pandemic, it would still be incumbent upon leaders to observe and respect democratic rights, particularly the peoples’ rights to know, to choose, and to speak. “Emergency powers” are for the management of the pandemic, and do not sweep out human rights. Yet it may also be that the lethargy of forced isolation and restrictions has dulled the senses to a stupor in the mind — how many strange happenings have there been in the past almost-a-year that by political sleight of hand, are now part of our laws and social-political mores, entrenched in the fearful, sluggish collective consciousness?

On the first Sunday after New Year’s Day weekend, House Speaker Lord Allan Velasco announced that the House of Representatives will immediately commence debates on constitutional amendments (Charter Change or Cha-cha), which changes will be presented for the public’s ratification alongside the 2022 national elections.

“Days after taking over the House leadership in October last year, Velasco said there was ‘no more time’ to pursue charter change as government should focus on the COVID-19 pandemic,” ABS-CBN News reminded all in a newscast on Jan. 10. It was news indeed that the House turned around and now pushes for Cha-cha again, even while the pandemic is still raging, and the country has not even made up its mind on the vaccine to be used to control the rising contagion of the coronavirus.

But like the forward-backward dance steps of the cha-cha-cha, lawmakers had gone yes-and-no on proposing the charter changes. Due to expressed public suspicions that Cha-cha was a ruse to extend elective positions, President Rodrigo Duterte’s 2016 campaign promise to shift to federalism by amending the constitution has been whittled down to proposals to change only some economic provisions. In July 2019, Velasco had filed a bill to amend Articles II, XIV, and XVI, which are provisions in the Constitution that prevent foreign ownership of land and businesses in the country. The easing of restrictions on the ownership and management of mass media, public utilities, educational institutions, investments and capital to foreign investors is also proposed by HB 2.

Lawyer-economist and civic leader Christian Monsod said this is the fourth time that it has been proposed to change the economic provisions of the Constitution. The first try was the Constitutional Correction for Development (Concord) under former president Joseph Estrada, then the Sigaw ng Bayan under former president Gloria Arroyo, then another initiative by former House Speaker Feliciano Belmonte. In a Teleradyo interview on Jan. 8, Monsod, one of the framers of the 1987 Constitution, called fresh moves to change the constitution “very dangerous and insidious.”

“It is a sin to be even talking about changing the Constitution when there is still no end in sight to the pandemic, when the government is struggling to secure funding for COVID-19 vaccines, and when the country is still reeling from the continuing impact of the pandemic and the recent typhoons,” Senate Minority Floor Leader Franklin Drilon said in a news interview on ABS-CBN on Jan. 7. But the “sin” was perhaps absentmindedly permitted by an emotionally numbed people, diverted from pandemic fears by the welcome break of Christmas and the New Year. Senators Francis Tolentino and Ronald dela Rosa (alleged allies of President Duterte) had already filed in December a resolution for both houses of Congress to convene as a Constituent Assembly (Con-Ass) in lieu of a people-participative Constitutional Convention (Con-Con) to discuss limited amendments to the Constitution.

“This is really not the time to talk about this,” Opposition Senator Francis “Kiko” Pangilinan said. But the Senate has already been effectively drawn into the Con-Ass way of fast-tracking the proposed Cha-cha on at least the economic provisions. And if the House of Representatives has its way, the Con-Ass will be voting as one instead of the 304-man House of Representatives and the 24-man Senate voting separately for approval of the proposed changes, as consolidated and distilled in the plenaries. In joint voting (as one), does the Senate really have a say, with its disproportionately small number?

Ay, Senators Drilon and Pangilinan, even voting separately might not mean the Senate will chorus your vehement “No” to Cha-cha on economic provisions. “After the 2019 (mid-term) polls, the ruling party PDP-Laban (Duterte’s party) and its allies take both the Senate and the House,” Rappler noted on July 2, 2019. “But you need three-fourths vote to approve Consti amendments,” Senate President Vicente “Tito” Sotto quite uselessly reminded, careless of the arithmetic. And in the daze of the depressing COVID isolation and social distancing, will there be enough energy for a groundswell of people protesting?

The implications of the proposed economic amendments to the 1987 Constitution are indeed heightened by the COVID situation. If, before COVID, it was a matter of weighing costs against the economic benefits of allowing foreign ownership of land and businesses in the country and easing of restrictions on the ownership and management of mass media, public utilities, educational institutions, investments and capital to foreign investors — now all previous assumptions and projections must be restated; analyses and calibrations must be reviewed and perhaps even totally junked. There is a “New Now” after COVID-19. Have we not heard the New Now repeatedly called upon by economists and politicians, theorists and practitioners, as the reason (or their alibi) for why things do not now work out the way they did, using the same tools and techniques?

In the long drawn-out and economically draining pandemic, land and indigenous natural resources have been confirmed as the most basic resource for survival, given that economic activity derives from this without dependence on external sourcing that will extort costly competitive pricing. Why, when the world has shrunk inwards in the pandemic, when countries must think of conserving what they naturally have, do we even think of opening to foreign ownership of our scarce (and shrinking vis-à-vis increasing population growth) resources? Do we allow foreigners to poach what is ours, as they increase their wealth using our natural capital?

House Speaker Velasco counters: “Foreign investment plays a crucial role in the Philippine economy by supporting domestic jobs and the creation of physical and knowledge capital across a range of industries. The need to attract foreign capital is critical to support our economy’s recovery from COVID-19” (ABS-CBN, Jan. 10, 2021).

Prof. Monsod points out deep socio-economic costs: “Even the foreign chambers of commerce admit that when you open the land, the prices of land will go up and will be beyond the reach of the poor,” he said. “Those who support it are big businessmen who have the money and corrupt lawmakers making it easy to do transactional legislation. The Philippines has a serious problem of mass poverty and inequality,” he said (ABS-CBN News, Jan. 8, 2021).

And inequality among nations will be even more marked in the exacting New Now, in a world decimated to the bare bones and weakened into sinking to its supplicating knees by the COVID-19 pandemic.

We must not Cha-cha in the pandemic.

 

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

ahcylagan@yahoo.com

Eco ‘Cha-cha,’ now!

The funny things about our politicians are that most of them know exactly what’s wrong with the country and the reforms needed to neutralize them. Sadly, however, vested interests get in the way and these reforms never see the light of day. For example, they all know that political dynasties work against national interests since they concentrate power in a narrow elite and make it nearly impossible for outsiders to win an election no matter how capable they are. Yet, the law banning political dynasties has been in legislative limbo for 35 years simply because the very people tasked to pass the law are themselves members of dynasties.

The same is true for the economic provisions of the constitution. We all know that by reserving certain industries exclusively for Filipinos (or Filipino majorities), we deprived the nation of valuable forex investments, technology transfers, tax revenues, export earnings and employment opportunities. Yet, amendments to the economic provisions of the constitution (Eco Cha-cha) have never made it to law simply because certain families stand to lose their stronghold on industries and the lingering doubt that once the constitution is opened for amendment, dubious legislators would push for lifting term limits.

The good news is that Eco Cha-cha is presently being deliberated in the legislature, thanks to the leadership of Speaker Lord Allan Velasco. This is a rare but welcome development which we should all support. Not only will Eco Cha-cha accelerate our economic recovery, it will also increase our competitiveness relative to our regional neighbors.

The restrictive provisions of the constitution have held back the country’s development for more than 30 years. From the 1980s up to the close of the century, countries like Singapore, Malaysia, and Thailand leapfrogged economically on the back of a deluge foreign direct investments (FDIs). During that period, the Philippines share of regional FDIs was a paltry 3% in good years and 2% in normal years. The flawed economic laws of the constitution are largely to blame for this. Lately, Vietnam has taken the lion’s share of FDIs, leaving the Philippines in the dust.

See, embedded in the 1987 constitutions is a list of industries in which foreigners are precluded from participation. These industries include agriculture, public utilities, transportation, retail, construction, media, and education, among others. (For those unaware, these industries are collectively known as “the negative list”). Apart from depriving the country of forex investments, technology transfer and job opportunities, the lack of competition from abroad has created monopolies and oligopolies owned by a handful of families. These families earn scandalous profits even though they are inefficient.

Our flawed economic laws are the reason why our agricultural sector has not industrialized and why food security eludes us. It is why our manufacturing sector has not fully developed. It is why we lost the opportunity to be Asia’s entertainment and production capital despite our Americanized culture (Netflix located its Asian headquarters in Singapore, Disney in Malaysia, MTV in Hong Kong, and Paramount Studios in Taiwan). It is why our education standards have remained embarrassingly behind the rest of the world.

The constitution limits foreigners from owning more than 40% equity share in corporations. In addition, foreigners are barred from owning land. These provisions have caused us to lose-out on big-ticket investments which would have made all the difference in job and revenue generation. Not too long ago, we lost a multi-billion dollar investment from a US auto manufacturing company which instead went to Thailand. We lost a multi-billion smartphone plant by Samsung which went to Vietnam. Limiting equity ownership to a minority stake and prohibiting land ownership is a great disincentive for companies investing in large manufacturing plants with a useful life of more than 50 years. Land is used as equity for business financing and to take this away from the business model is enough reason for investors to take their business elsewhere.

Speaker Lord Velasco hopes to finish Eco Cha-cha debates before the end of 2021. The intention is to insert the phrase “unless otherwise provided by the law” in the constitution’s economic provisions that restrict foreign participation. This insertion will give us the flexibility to accept foreign investors involved in the negative list of industries. The bill may also relax the extent of foreign ownership.

The manner by which Eco Cha-cha will be effected is via a constituent assembly. In other words, it is the congressmen and senators themselves who draft and vote on constitutional changes. A three fourths vote will get the amendments passed. Assuming there is no difference between the House and Senate versions, the final draft of the amendment will be set for ratification through a plebiscite during the 2022 national elections.

Although time is tight for deliberations, there is a good chance that Eco Cha-cha will succeed since the political parties in the House have all expressed their support. This should make the deliberations move faster.

Earlier this month, Representatives of PDP-Laban, the Nationalist People’s Coalition, the Nacionalista Party, the National Unity Party, Lakas-NUCD, Hugpong ng Pagbabago, the Liberal Party, and the Party-list Coalition Foundation signed a manifesto to support the proposed amendments.

The impediments I see is if members of the House attempt to tinker with the political provisions of the constitution to extend or lift term limits. The other impediment is if Congress and the Senate get caught up in procedural details like whether to vote on the matter jointly or separately. These hiccups can derail the process.

As for the concern on political amendments, House committee on constitutional amendments chairman, Alfredo Garbin, Jr., gave his assurance that Congress will limit discussions to provisions relating to the economy and will not touch the political sections of the Charter. Senate President Tito Sotto said that charter change will succeed in the Senate only if economic provisions are changed. Even President Duterte himself said that even if they handed him a fresh six-year term on a silver platter, he will reject it.

Still, as we have learned through experience, numerous Congressmen cannot be trusted to keep matters free and clean of political interest. Hence, we must remain vigilant.

There is an urgency to this. US-based banking giant Citigroup said that if nothing changes, the Philippines will be the last to recover from the pandemic in Southeast Asia. The pandemic has already relegated 8.7% of our countrymen to unemployment and 26% of the population to poverty. It is also estimated that as much as 25% of all MSMEs have closed due to bankruptcy. The entry of foreign investments will provide the jobs we need to fill the poverty gap.

Times have changed and so must our basic laws. Our laws must keep up with the ever-shifting global order, new technologies and globalization. Our economic laws must change if we are to keep up with our neighbors and not fall further behind. Even former NEDA (National Economic and Development Authority) Secretaries Ernesto Pernia and Gerardo Sicat agree that Eco Cha-cha is long overdue.

Back to my first example, unlike the Anti-Dynasty Bill which has the same chances of being passed as the eradication of the pork barrel fund, we are fortunate that Eco Cha-cha has a fair shot of being ratified at this time. We have a small window and we must make sure we do not squander the opportunity. If Eco Cha-cha fails this time, it will take years before this important piece of legislation will be revisited again. Meanwhile, the opportunity losses will mount and we will fall further behind the region’s development race. I ask our legislators to treat this with the utmost priority and to please make Eco Cha-cha happen.

 

Andrew J. Masigan is an economist

andrew_rs6@yahoo.com

Twitter @aj_masigan

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