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Peso may strengthen on weak US economic data

THE PESO may climb further against the dollar as the market continues to price in weak data out of the United States.

The local unit closed at P51.73 against the greenback on Friday, rising 8.5 centavos from its P51.815-a-dollar finish on Thursday.

Week on week, it strengthened by 14 centavos from the P51.875-per-dollar close on Sept. 27.

“The stronger peso can be attributed to the lower-than-expected headline inflation print for September,” Union Bank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion said in a text message.

Meanwhile, another trader attributed the weak dollar to the US non-manufacturing data.

Headline inflation eased further to 0.9% in September, the slowest in three years, amid lower food prices and electricity rates, the Philippine Statistics Authority reported on Friday. This compares to the 1.7% logged in August and the 6.7% print in the same month last year.

Last month’s inflation print fell at the low end of the Bangko Sentral ng Pilipinas’ (BSP) 0.6-1.4% forecast for September. It was also below the 1.1% median estimate in BusinessWorld’s poll of 16 economists.

For the nine months to September, headline inflation averaged at 2.8%, well within the BSP’s 2-4% target range for 2019.

Both Mr. Asuncion and the trader said that the peso’s performance this week will be dependent on how the market will react to key economic data releases.

The trader said the peso’s performance this week is likely to be dictated by key US data releases such as the nonfarm payrolls and the unemployment rate.

“If data suggests weakness, the weak dollar sentiment may continue this week,” the trader said.

US services sector activity slowed to a three-year low in September amid rising concerns about tariffs, suggesting that trade tensions were spilling over to the broader economy.

The Institute for Supply Management (ISM) said its non-manufacturing activity index fell to a reading of 52.6 in September, the lowest since August 2016, from 56.4 in August. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity.

The ISM reported on Tuesday that its measure of national manufacturing activity plunged in September to its lowest level since June 2009, when the Great Recession was ending.

The US economy is chugging along despite the headwinds it faces, Federal Reserve Chair Jerome Powell said on Friday, in remarks that gave little more away about the path of monetary policy.

“While not everyone fully shares economic opportunities and the economy faces some risks, overall it is — as I like to say — in a good place. Our job is to keep it there as long as possible,” Mr. Powell said in brief remarks introducing a “Fed Listens” event at the US central bank’s headquarters in Washington.

The Fed cut interest rates for the first time in more than a decade in July and did so again at its subsequent policy meeting in September in what Mr. Powell and some others have characterized as “insurance” against risks to the economy.

US job growth increased moderately in September and the unemployment rate dropped to near a 50-year low, the US Labor department reported on Friday, allaying concerns the economy is nearing recession.

Mr. Asuncion sees the peso moving within P51.50-51.80 versus the dollar.

Meanwhile, the trader expects the peso to range around P51.60-52.20, depending on data from the world’s largest economy. — L.W.T. Noble with Reuters

US touts dairy product to Chinese hog farmers fighting African swine fever

CHICAGO — When Beijing announced it was exempting 16 US goods from retaliatory tariffs, Chinese firms hurried to call Proliant Dairy Ingredients in the heart of American farm country.

Among the products included in China’s first batch of exemptions last month was whey permeate for animal feed, a dairy byproduct sold by Iowa-based Proliant.

While seen as a goodwill gesture ahead of talks to end the US-China trade war, the exemption from a 25% retaliatory tariff imposed last year is also a means for China to get supplies it needs. Whey permeate provides nutrients that can help baby pigs grow up faster and healthier as the world’s largest pork consumer fights African swine fever, a fatal hog disease.

China also exempted US fish meal from a 25% tariff, another ingredient in piglet diets.

The exemptions have increased demand for American products, but sales and prices remain depressed because African swine fever has decimated China’s hog herds.

“We got many calls the day of the announcement,” said Gabriel Sevilla, Proliant’s vice president of sales and marketing. “But the total amount being negotiated represents a very small percentage of the market.”

It is an amount US feed suppliers hope to increase.

US dairy companies and industry representatives plan to host two seminars in China this month to pitch permeate as a way to rebuild herds.

They will present industry-funded research to convince Chinese livestock producers to double the amount of the ingredient they use to improve piglets’ growth and health. China has traditionally fed piglets half as much permeate during their lives as US and European hog producers, according to US suppliers.

“If we’ve lost half of the pigs in China but we can get them to double the amount of permeate that they’re using, we can potentially keep the same volume demand as we had before,” Sevilla said.

Tom Vilsack, chief executive of the U.S. Dairy Export Council, also touted permeate and whey to Chinese officials as tools to recover from the outbreak when he visited China shortly before the exemptions were announced.

“I repeatedly pointed to win-win dairy solutions for the U.S. and China,” said Vilsack, a former U.S. agriculture secretary who spoke with officials at China’s ministries of commerce and finance.

Permeate is made by concentrating whey, a byproduct of cheese, into an ingredient that is high in lactose. It is fed to baby pigs before they begin to consume corn and soy, which are harder to digest.

As much as 85% of U.S. permeate is used to feed the world’s piglets, contributing to $5.6 billion in total U.S. dairy exports, according to suppliers. But exports of U.S. permeate to China have declined to less than 10% of production from about 30% before the trade war, suppliers said.

The decline has hurt profits for high-protein whey production, according to U.S. food company Land O’Lakes [LNDLK.UL], which sells cheese but does not directly export permeate.

“We do expect an increase in demand for permeate with suspension of the tariff, although we expect it to be tempered by the ongoing impacts of ASF,” Land O’Lakes said, referring to African swine fever.

Prices for U.S. permeate have halved to about 10 cents a pound because of the disease and trade war, said Richard Bradfield, a vice president for Missouri-based animal-feed company International Ingredient Corporation.

Demand should increase by the second half of 2020 as Chinese farmers rebuild their herds, said Qingping Liu, the company’s Asia director. For now, though, buyers are expecting lower prices due to the exemptions, Liu said.

“While North China demand picked up some, South China demand is very weak with only 20% of pigs left,” Liu said.

The deaths of millions of hogs is also limiting sales of U.S. fish meal, according to Virginia-based producer Omega Protein, a unit of Canada’s Cooke Inc.

“While there may be increased interest now that China has exempted fish meal and oil, other factors still remain such as African swine fever and high port stocks that we considered challenges to increasing sales to the Chinese,” spokesman Ben Landry said. — Reuters

Style (10/07/19)

Tesoros holds design talk

TESOROS, the store chain that focuses on Filipino crafts and design, will be holding a lecture as part of its Disenyo at Talento series of talks. This time the talk will feature Malu and Letlet Veloso, the successors of the Veloso Fashion House, who will discuss their decades of experience creating delicate and romantic dresses, wedding ensembles, and the latest styles on the local scene. The talk will be held on Oct. 17, 5:30 p.m., at the Tesoro’s Bldg., 1016 A. Arnaiz Ave., Makati. Tesoros launched the Disenyo at Talento Talks in an effort to preserve and inform the public about our national heritage. Invited to give lectures are creators of and expert in crafts that are identifiably Filipino. Recent talks have included: Inabel by Al Valenciano and Rene Guatlo, the Icoño Fan Series by Monchet Olives, ANTHILL Fabric Gallery by Anya Lim, Philippine Fashion icon Patis Pamintuan-Tesoro, Crystal Seas by Mae and Carmaela Alcantara, and Awit at Laro with Bambi Mañosa.

Penshoppe sale

PENSHOPPE.COM will be holding its 10.10 Shop-A-Thon to mark its 2nd birthday on Oct. 10 at Penshoppe’s online shopping site. Shoppers who make a minimum net purchase worth P1,500 between 10 a.m. and noon that day will receive a free Penshoppe tote bag. Visitors who buy two Beauty Pop by Penshoppe lipsticks can get the second for P99. Shoppers who make a minimum net purchase worth P2,500 will get P500 off. There will also be bundle promos for tops and bottoms for P899. These are just some of the promos that will be offered on the site on Oct. 10.

Rustan’s opens Christmas shop

IT’S that time of year when Rustan’s opens its Christmas Shop, with set-ups that cater to different tastes for Christmas decor. Add a touch of whimsy with a bubble-gum inspired Christmas tree in pink that’s decorated with plush donuts, cupcakes, tinsel, balloons and snow globes. Channel a white Christmas with a “snow-covered” tree made with frosted tips, silver tinsel, glittery snowflakes and décor in shades of blue, silver and white. For a touch of luxury, go gold with golden eggs, gilded candelabras, and round tables from Dome Deco. Or keep it cozy with the usual bells and mistletoe, but play with proportion with oversized stars, ribbons and such. Build onto the Christmas scene with toys and other décor that in signature red. Exude romance and refinement with a pastel pink and white holiday tree, decorated with oversized ornaments, gold and pink blooms with delicate swans. Those who like a bit of wit and humor, check out the Santa inspired tree with a cute climbing Jolly Old St. Nicholases, pine cones painted white like his bears, Christmas stockings, and pompoms in red and white make for a cheery set up. All one needs to create one’s own stunning Christmas settings are available in all Rustan’s stores, located in Makati, Shangri-La Plaza, Alabang Town Center, Gateway, and Cebu.

Longchamp’s La Voyageuse

LA VOYAGEUSE, the stylish woman who travels, is the inspiration for Longchamp’s FW 2019 new line that it has named after her. The line includes the large La Voyageuse tote, in calf leather or cowhide debossed with Longchamp’s all-over LGP monogram. This spacious bag has structured sides and generous gussets, with a long zipper and a removable, and an adjustable shoulder strap which wraps around the bag inspired by vintage luggage. There is also a small tote, identical in every detail to the larger version; and the LGP Jacquard whose compact shape and detailing evoke a vanity case of yesteryear. There is also a small crossbody bag with a removable shoulder strap, which doubles up as a clutch. And, inspired by vintage newspaper bags, a minimalist vertical tote with removable handles, which can be rolled up and buckled with a strap.

Porsche 911 RSR takes one-two finish on its race debut at the 4H of Silverstone

FIRST RACE. First win. The new 911 RSR has secured one-two victory at its race debut at the season-opening round of the FIA World Endurance Championship at Silverstone in Great Britain. Drivers Gianmaria Bruni and Richard Lietz crossed the finish line first in the No. 91 car and the reigning world champions Michael Christensen and Kévin Estre claimed second place in the No. 92 sister car.

“We experienced a lot in the short qualifying: spin, tire defect, damage to the front. That was really intense. I was able to turn my laps normally after the repairs. Ultimately, fourth place was possible — a position that is absolutely fine for the first outing of the new Porsche 911 RSR,” said Mr. Lietz. A perfect tactic from the world champion team, strong driving performances, swift pit stops, and a reliable and fast car in both dry and the wet conditions were the key factors for this one-two win.

After a mediocre qualifying performance, the two Porsche 911 RSR run by the factory squad took up the four-hour race from positions four and six on the grid. In sunny conditions in the early phase, the two new GTE racers from Weissach initially made up very little ground. A heavy shower after around 90 minutes of racing changed the situation significantly. In contrast to the rivals, the Porsche GT Team opted for rain tires — an ideal choice. The drivers made perfect use of the improved tire grip on the wet track and managed to pull well clear of the field in the new 911 RSR, which is based on the high-performance 911 GT3 RS. This impressive margin, however, disappeared when the safety car was deployed after two hours of racing. In the remaining 120 minutes, the drivers staved off attacks from the competition on a drying track and crossed the finish line in first and second place, separated by 3.802 seconds.

In the GTE-Am class, the best-placed Porsche 911 RSR achieved fourth place. Right up until the final pit stop, the all-British driver lineup of Michael Wainwright, Ben Barker and Andrew Watson were on course for a podium result in the No. 86 vehicle fielded by Gulf Racing. Fifth place went to the No. 77 car run by Dempsey-Proton Racing with Porsche Young Professional Matt Campbell (Australia), Christian Ried (Germany) and Riccardo Pera (Italy). The sister car with the starting number 88, in which Porsche Young Professional Thomas Preining (Austria) had his first outing, finished on eleventh. The two Porsche 911 RSR campaigned by Project 1 yielded positions six (No. 56) and ten (No. 57).

After the one-two victory at the opening round of the 2019/2020 season, Porsche leads all categories of the GTE-Pro class. Next up on the calendar is the race in Fuji (Japan) on Oct. 6.

“At its race premiere, the new Porsche 911 RSR clearly exceeded our expectations. Congratulations to the drivers and the team for a perfect performance at Silverstone. This great success was only possible because the entire Porsche Motorsport team did such excellent work. Many thanks to everyone who contributed to this project and made the new car into a winner,” said Fritz Enzinger, vice-president of Porsche Motorsport.

RACE RESULT: GTE-PRO CLASS

1. Lietz/Bruni (A/I), Porsche 911 RSR, 115 laps

2. Christensen/Estre (DK/F), Porsche 911 RSR, + 3.802 seconds

3. Lynn/Martin (GB/B), Aston Martin Vantage, + 6.286 seconds

4. Calado/Pier Guidi (GB/I), Ferrari 488 GTE, + 16.054 seconds

5. Thiim/Sörensen (DK/DK), Aston Martin Vantage, 114 laps

Fed to pump liquidity into repo market

THE FEDERAL RESERVE announced that it will extend through October the ad hoc liquidity lifeline that it’s been offering to US funding markets since a spike in rates in the middle of last month.

The Federal Reserve Bank of New York said Friday that it will conduct operations for overnight repurchase (repo) agreements through Nov. 4, having previously only scheduled them through Oct. 10. The central bank also announced eight new term offerings to provide additional funding through this month.

The central bank has been injecting liquidity into the funding markets since Sept. 17, when the rate on overnight general collateral repo jumped to 10%, about four times greater than usual levels, as cash reserves were out of alignment with the volume of securities on dealer balance sheets.

“This tells me that they’re serious about providing liquidity through the end of the month,” said Mark Cabana, Bank of America‘s head of US interest-rate strategy. “This type of announcement, just like a couple of weeks ago, is a ‘whatever it takes’ type of announcement.”

These measures are officially aimed at keeping the fed funds rate within the central bank’s target range. While those measures did bring the market more in line with this, there was a brief move upward in repo rates at the end of September as participants fulfilled quarter-end funding needs.

Bank of America’s Mr. Cabana said the measures announced by the central bank had exceeded his expectations.

“The fact that they are willing to roll this deeper into November and to commit for such a long schedule suggests that they want to provide transparency,” he said. “They’ve heard that from the market and the Desk is being responsive to concerns.” — Bloomberg

Investment in Tim Ho Wan brand drives Jollibee’s stock price

By Mark T. Amoguis Senior Researcher

NEWS on Jollibee Foods Corp.’s increased investment in the owner of the Asia Pacific master franchise for Tim Ho Wan drove market activity for the former’s stock last week.

A total of 3.251 million Jollibee shares worth P714.269 million exchanged hands from Sept. 30 to Oct. 4, making it the 13th most actively traded issue in the local bourse, data from the Philippine Stock Exchange showed.

Jollibee’s share price remain unchanged at P220.20 apiece last Friday from its Sept. 27 finish. For the year, however, its share price was down 24.8%.

“We think that its recent disclosure of increasing investment in [Titan Dining LP] contributed to Jollibee’s stock performance, in addition to the slower inflation rate since Jollibee is one of the consumer stocks that would benefit on higher spending,” Philstocks Financial, Inc. research associate Claire T. Alviar said in an e-mail.

AP Securities, Inc. research analyst Rachelle C. Cruz noted that following the negative feedback from the acquisition of The Coffee Bea & Tea Leaf (CBTL), the stock has been trading sideways since then.

“People are expecting if they (Jollibee) deliver the numbers, which they said that they will turnaround CBTL by next year, then that would be the catalyst for the price to go up again,” she said in a phone interview last Friday.

To recall, Jollibee bought the California-based CBTL for $350 million last July. According to the company, the CBTL brand will be the second largest business after the Jollibee brand, while the coffee business will contribute 14% to Jollibee’s worldwide system sales.

The transaction was completed last Sept. 24 after securing government approvals from the United States.

This was the company’s largest acquisition to date after it took over American fast-food chain Smashburger for $210 million last year.

However, market watchers had said that CBTL acquisition could pose a risk to Jollibee’s operating income as the coffee chain has been in the red in the recent years. It plans to turn around the loss-making CBTL to profit in the next 12 to 18 months.

Moreover, Jollibee announced last Wednesday that it will be hiking its investment in the private equity fund Titan Dining LP — the Asia-Pacific master franchise holder of Tim Ho Wan restaurants — by 120 million Singaporean dollars (S$), or equivalent to P4.5 billion.

This will increase the fund’s size to S$200 million from S$100 million. Jollibee now accounts for 60% of the fund from 45% previously.

According to the deal’s agreement, Titan’s fund’s term will end after seven years, after which Jollibee will be eligible to buy substantial ownership in Tim Ho Wan Pte. Ltd. It will be franchising the brand in Shanghai to prepare for the transition.

Established in Hong Kong in 2009 and known for its affordable food choices, dim sum restaurant Tim Ho Wan was awarded a Michelin star in 2015.

The brand will complement Jollibee’s three Chinese cuisine stores, namely Chowking, Yonghe King, and Hong Zhuang Yuan.

AP Securities, Inc.’s Ms. Cruz said that while there’s not much movement in Jollibee’s share price following the news on its investment on the Tim Ho Wan franchise, investors would still want to confirm whether or not Jollibee can “turn around its recent acquisitions.”

Philstocks’ Ms. Alviar noted that in the first half of 2019, Titan incurred losses of P50.12 million, 45% of which weighed on Jollibee group’s equity in net earnings of joint ventures (JV) and associates.

“If Titan continues to report losses, then it may somewhat reduce Jollibee’s earnings from JV and associates… [b]ut the decision… to increase investment would support its objective to further grow internationally and good for the long term, especially if Titan is able to generate income,” Ms. Alviar said.

In the April to June period, Jollibee’s attributable net income dropped by 50.2% to P1.12 billion hindered by losses recorded by Smashburger as well as lower sales from Red Ribbon.

This brought the attributable profit in the first semester to P2.66 billion, 34.4% lower than the P4.05 billion in last year’s comparable six months.

“We forecast Jollibee’s 2019 net income at P6.420 billion considering the possible losses it may incur from CBTL and Smashburger, but it may be boosted by the domestic income given the slowing inflation in the Philippines,” Philstocks’ Ms. Alviar said.

Inflation decelerated to 0.9% in September, the slowest in more than three years. This brought year-to-date inflation to average 2.8% in the nine months to September, against the central bank’s 2-4% target range and the downward-adjusted 2.5% forecast average for the entire 2019.

AP Securities’ Ms. Cruz expects Jollibee to continue trading sideways this week. She sees the stock to trade with support and resistance prices of P217 and P230, respectively.

For Philstocks’ Ms. Alviar: “It may continue to move sideways given the slower inflation rate, while some investors are still concerned over the profit/loss contribution of CBTL and Smashburger.”

“Support is around P217 to P220 while resistance is around P238 to P240. If it breaks P217, P210 is the second support,” she added.

PHL stocks to move sideways on weak sentiment

By Arra B. Francia
Senior Reporter

SHARES MAY move sideways in the week ahead amid generally weak investor sentiment, although some may continue bargain hunting after last week’s sell-off.

The benchmark Philippine Stock Exchange index (PSEi) jumped 2.11% or 159.05 points to close at 7,704.60 on Friday, snapping a five-day losing streak as investors returned to the market just as prices got lower.

Friday’s rally, however, was not enough to pare the week’s losses, as the main index ended the week down by 1.47%.

Trading volume stood at P37.88 billion overall for the week, while net foreign outflows hit P5.84 billion.

“Despite (the recovery on Friday), the general investor sentiment remains extremely cautious which means we may not see the market start to go higher,” AAA Southeast Equities, Inc. Research Head Christopher John Mangun said in a market report.

“We may see some excitement from retail investors as Axelum lists on the exchange on Monday. Investors may see a good opportunity in this company as the demand for coconut products abroad is picking up at a rapid pace and because of the performance of the last IPO that we saw last month,” Mr. Mangun added.

Integrated coconut products manufacturer Axelum Resources Corp. will list its shares on the stock exchange today following its P4-billion initial public offering.

This week will also see the listing of Villar-led home improvement and construction supplies retailer AllHome Corp., with an IPO size of up to P14.878 billion. Its shares will be listed at the Philippine Stock Exchange on Wednesday.

Meanwhile, Papa Securities Corp. Sales Associate Gabriel Jose F. Perez said investors will look to Wall Street’s performance for guidance this week.

“Movement next week for the PSEi should still be highly likely influenced by US market movement. Support remains at May’s low of 7,475,” Mr. Perez said in an e-mail.

Markets in the United States mostly ended in positive territory on Friday following the release of the Labor Department’s monthly employment report, which kept hopes up for an interest rate cut this month.

The Dow Jones Industrial Average climbed 1.42% or 372.68 points to 26,573.72. The S&P 500 index jumped 1.42% or 41.38 points to 2,952.01, while the Nasdaq Composite index also went up 1.40% or 110.21 points to 7,982.47.

For his part, Mr. Mangun placed the market’s support at 7,500 to 7,630, with resistance from 7,750 to 7,920.

“If we do not see heavy selling next week, there is a chance that the PSEi may end in the green, but a lack of buying pressure at the beginning of the week will signal bargain hunters from last week to go back into cash as investors may not believe that the market is ready to rally,” Mr. Mangun said.

How PSEi member stocks performed — October 3, 2019

Here’s a quick glance at how PSEi stocks fared on Friday, October 4, 2019.

 

Citira, Pifita: Now na!

Congratulations are due to House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the swift passage of the Corporate Income Tax and Incentive Rationalization Act and Passive Income and Financial Intermediary Taxation Act in the House of Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is now being heard in the Senate Ways and Means Committee which is most ably chaired by lawyer and economist Senator Pia Cayetano.

At the last hearing, I was privileged to read the statement of support of former Finance Secretaries and noted economists in favor of these pending tax reform packages. Signatories included former Prime Minister Cesar Virata, former Senator and Finance/Executive/Foreign Affairs Secretary Alberto Romulo, Former Finance Secretaries Roberto de Ocampo, Jose Isidro Camacho, Margarito Teves, and Former Planning Secretaries Cielito Habito and Arsenio Balisacan.

The collective wisdom and experience of this group in the field of fiscal and economic governance is unparalleled, gained not only during their years in office, but also in the leadership positions they now occupy. Our full statement can be accessed on this link — www.dof.gov.ph/index.php/former-dof-secretaries-eminent-economists-join-top-legislators-in-seeking-urgent-passage-of-remaining-tax-reform-packages/.

The last two sentences read: “All these reforms are necessary if the Philippines is to move forward to a future with no extreme poverty by 2040. Together, we stand ready to support these reforms in any way we can. We urge both houses of Congress to recognize the great merits of the Comprehensive Tax Reform Program and pass the remaining packages at the soonest possible time.”

Urgency is truly called for, since this congress has less than a year before election fever grips the nation and everything is pushed back for at least three more years. And the country, especially the poorest citizens, cannot wait. Philippine poverty incidence stands at over 21% vs. 11% for Indonesia, 9% for Thailand, 7% for Vietnam. (Source ASEAN Key Figures, 2018, aseanstats.org)

Moreover, the world does not stand still. This is especially relevant for CITIRA which will affect the behavior of investors, the job creators. In the ASEAN, our corporate income taxes (CIT) rates stand out uncompetitively at a high 30%, even as our ASEAN peers, which now average 22%, are moving swiftly to further lower them. (See the column of Atty. Benedicta Du-Balabad, “CITIRA and the ASEAN Tax War,” Philippine Daily Inquirer.)

To lower the corporate income tax to 20% faster, quick action is likewise needed to rationalize fiscal incentives to cover for foregone revenues from there. The strongest objections are coming from locators in PEZA (Philippine Economic Zone Authority) zones, championed by the Joint Foreign Chambers of Commerce, and the PEZA Administrator (though disowned by its Chairman and Board). Though unsubstantiated by specific data, the apprehension has been sown that any departure from the status quo of “forever incentives” will lead to huge job losses.

Recent data suggest otherwise. That as literature and research finds, incentives are not what drives FDI (foreign direct investment). And the fears of massive exit of FDI due to recent initiatives of the Department of Finance on incentives rationalization may be exaggerated.

On this, the remarks of Prof. Renato Reside of the UP School of Economics during the Senate hearing is worth quoting. He and his UP colleague, then-former Planning Secretary and now Monetary Board Member Philip Medalla, separately did the seminal work on the case for rationalising fiscal incentives as early as the mid-1990s. (See “Reside, Towards Rational Fiscal Incentives (Good Investments or Wasted Gifts),” 2006. http://www.econ.upd.edu.ph/dp/index.php/dp/issue/view/42.) These have informed bold but sadly failed efforts of five administrations.

“… based on global experience with tax incentives, certain investors get benefits they may not need, certain incentives are redundant. And while certain benefits cannot be attributed to them, there will certainly be costs to granting them. But CITIRA aims to substitute inefficient for more efficient incentives, not take them away so the question is how adjustment will take place when shifting to lower tax rates, tax credits and tax allowances and accelerated depreciation to reward marginal additions to R&D, employment and investment levels. For sure, additional investment and hence employment will also be spurred by more efficient incentives, lower tax rates and more targeted incentives.”

A possible compromise has been mentioned by Department of Trade and Industry Secretary Ramon Lopez. A UP and foreign trained economist, he served as a Director in NEDA (National Economic and Development Authority), as a top corporate executive, and as champion of SMEs at Go Negosyo, and is thus well placed to see all sides. He is recommending a longer phase-in period for the new incentive scheme for well-defined PEZA locators.

The thinking of the Foundation for Economic Freedom (FEF) is aligned with this:

“We support the phasing out of all incentives except temporarily for a small subset of labor intensive industries which unless the CIT is 25% or lower are likely to move out to other countries without incentives. Such exemptions can be phased out when the CIT is aligned with the lower CIT rates in our neighboring countries.”

Now a note on PIFITA. This well-studied bill crafted by the Department of Finance officials and consultant team, goes a long way in simplifying, harmonizing taxation of financial instruments, towards developing our capital market. The FEF has a reservation on the proposed presumptive capital gains tax of 0.1 percent per trade, as this will create friction costs that will impair liquidity and trading, and at the end hurt issuers, especially government, the biggest issuer, as well as savers. Taxing capital gains from debt securities trading as regular income would be more efficient and friendly to the development of the market.

The other tax reform packages, including Package 2+ on Sin Taxes for Universal Health Care, and Package 3 on Real Property Valuation Reform, were likewise fully endorsed by the former Finance Secretaries and the FEF.

Hopes are high that under the committed leadership in the House and the Senate, the resolute Duterte team will succeed where their predecessors have floundered — just as they did in getting the game-changing rice tariffication law passed that has lowered inflation now and for the long haul, and is en route to upgrading Philippine agriculture and reducing poverty. On the other hand, further delay will mean more uncertainty; arguably the heaviest tax — on investments, job creation, and the public good.

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations He is Philippine Adviser of GlobalSource Partners, a New York-based network of independent analysts.

romeo.lopez.bernardo@gmail.com

Do fiscal incentives predict foreign direct investments?

The prolonged trade war between the US and China, the world’s two largest economies, is hurting both countries and it is thus seen as a threat to the global economy. Yet for developing countries, especially in Southeast Asia, the ugly trade war is an opportunity, for this economic war translates into a redirection of trade and investments. Indeed, having been affected by the trade war, many companies with global value chains based in China have moved out or are seriously considering their exit.

A survey done by the Nikkei Asian Review in early September and reported on Oct. 4 says that at least a fourth of Japanese companies with a supply chain centered on China, are considering the reduction of their “China footprint.” This spells trouble for China, but this is welcome news to other emerging economies. Will this be the new version of a Japanese wave of investments in Southeast Asia?

So far, the main beneficiaries of new investments, Japanese or not, resulting from the exit of companies in China are Vietnam, Thailand, and Cambodia.

The question is: Will the Philippines be able to capture a hefty share of investments leaving China?

What seems odd is that the Philippines — despite its good economic performance, accentuated by stunning economic reforms leading to an investors’ vote of confidence through a credit upgrade (a notch below A grade) — has not been able to attract the exiting investments from China.

Is it because the investors are repelled by Rodrigo Duterte’s authoritarianism? But then the countries that they are attracted to — Vietnam, Thailand, and Cambodia — are likewise authoritarian. Vietnam and Cambodia are one-party states. Thailand is run by a military junta.

On the other hand, Indonesia, which arguably is now the freest country in the region (despite the rise in religious fundamentalism), has not been on the radar of investors moving out of China.

The type of rule or government is secondary to investors. Their main concern is certainty, ceteris paribus.

In this context, for the Philippines, the delay in the resolution of the reform on fiscal incentives does cause uncertainty. The existing and potential investors do not know what the final design and features will be. The intense lobby against the reform, principally coming from the Philippine Economic Zone Authority (PEZA), and the attendant fearmongering fuel the uncertainty.

The main question in the debate is whether fiscal incentives — and in the Philippines, the incentives are perpetual! — are a predictor or a significant determinant of foreign direct investments (FDIs)?

The survey of the literature says it is not a significant variable of FDI stock or inflow. I limit my citations to studies done by the multilateral organizations.

A working paper of the International Monetary Fund (IMF) written by James Walsh and Jiangyan Yu titled “Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach” (2010) analyzes the various macroeconomic, developmental and institutional/qualitative determinants, using a sample of both developed and emerging economies. The co-authors state that investments in manufacturing and services are affected by income levels, exchange rate valuation, financial depth, school enrollment, judicial independence, and labor market flexibility.

A World Bank policy research working paper written by Harinder Singh and Kwang W. Jun titled “Some New Evidence on Determinants of Foreign Direct Investment in Developing Countries” (1995) empirically analyzes political risk, business conditions, and macroeconomic variables that influence direct investment flows to developing countries. The significant determinants are: a.) sociopolitical instability (work hours lost in labor disputes, as proxy), b.) business operation conditions, c.) tariff and non-tariff barriers, and d.) export orientation.

Another paper from the World Bank authored by Maria R. Andersen, Benjamin R. Kett, and Eric von Uexkull titled “Corporate Tax Incentives in Developing Countries” in the Global Investment/Competitiveness Report 2017/2018 states: “Tax incentives are generally not cost-effective. The costs include fiscal losses (tax expenditure), rent-seeking, tax evasion, economic distortions, and retaliation from tax competition. Further the effectiveness of tax incentives is seen when applied to efficiency-seeking sectors (as against market-seeking and resource-seeking sectors).

The Asian Development Bank’s Asian Economic Integration Report, 2016 points out the major factors that attract global chain value (GCV) FDI. These are: labor abundance, low trade barriers (specifically, expedited trading procedures and low costs of exporting and importing), and existing network of domestic firms with input-output relations. Good governance and quality of institutions also matter.

A 2019 working paper from the Organization for Economic Cooperation and Development (OECD) authored by Fernando Mistura and Caroline Roulette titled “The Determinants of Foreign Direct Investment: Do statutory restrictions matter?” offers an interesting perspective. In gist, it says that easing restrictions by 10%, measured by a certain index, can increase the FDI stock for manufacturing and services by 2.1%.

The point is, there are better ways to attract FDI like easing restrictions. And given the determination of the leadership, this is not difficult. In the Philippine case, we have seen the passage of several significant laws that lower investment barriers and make doing business easier. A landmark bill that has become priority legislation is the amendment of the antiquated Public Service Law, which will ease or lift the nationality restriction on power generation and supply, transportation, telecommunication, and broadcasting, among other things.

The long and short of it is that fiscal incentives are not a significant determinant of FDI. Recent Philippine figures confirm this. The graph mentioned from the Department of Finance illustrates this fact. Total FDIs (black curve) have risen since 2010 (black line), but the pledged (not even actual) FDIs in PEZA (red curve), which is obsessed with fiscal incentives, have followed a downward slope since 2012. The FDIs approved by Board of Investments (BoI), represented by the blue curve, registered a slight increase in 2018, even outperforming PEZA. The takeaway from this figure is that FDIs in the Philippines are not dependent on fiscal incentives.

To be sure. the Philippine level of FDIs, despite the rise, is still low in comparison to our counterparts in the region. But it is not fiscal incentives that will mainly attract new investors. The World Economic Forum’s Global Competitiveness Report 2017-2018 says that the main concerns of businessmen in the Philippines are the inefficient bureaucracy (20% of respondents), inadequate infrastructure (18%), corruption (14%), tax regulation (11%), tax rates (9%) and political instability (8%).

Note the lower ranking for tax-related issues, but even here, reforms are forthcoming. The bill on rationalizing fiscal incentives goes hand in hand with a gradual lowering of the corporate income tax rates from the current 30% to 20% (given certain reasonable conditions on tax effort and national government deficit).

To summarize, fiscal incentives cannot be the main instrument for FDI promotion. The country has to focus on the significant determinants. In this regard, government has to pay attention to managing the macroeconomy well, like having a competitive exchange rate, price stability, and fiscal space and to providing public goods like infrastructure and human development.

At the same time, government must support winning sectors, which it is doing through its investment priority plan, through various means, including the prudent use of fiscal incentives.

Suffice it to say that these issues have been addressed through laws or are in the process of being resolved.

Fiscal incentives still play a role, albeit they have to be rationalized to curb abuses and reduce tax leakage. Such fiscal incentives address market failure and must be aligned with the government’s investment priority plan or its industrial or technology policy. The menu of incentives must be responsive to the specific needs of the sector or the firm. This suggests that the incentives are not mainly about tax incentives.

Tax incentives must be performance-based, time-bound, and transparent. Government can steer incentives towards addressing job creation and technological innovation (e.g., tax deductibility on additional labor costs, human development costs and research and development costs).

We want to modernize our fiscal incentive regime. Ultimately, once it becomes certain, we can expect that together with the other reforms, it will contribute to the promotion of FDIs, job creation, and prosperity.

 

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

www.aer.ph

The beginning of the end of Hong Kong

The entire Hong Kong subway network — which carries some four million passengers a day — was suspended on Friday night, leaving protesters, locals, and tourists stranded. “Shopping malls were closed, supermarket chains said they would not open and many mainland Chinese banks, which were targeted in Friday night’s violence, stayed shuttered, their façades sprayed with graffiti. In some locations, long lines formed at supermarkets as residents stocked up, fearing further clashes,” Agence France Presse News (AFP) reported.

There have been four solid months of active street protests, first about the now-scrapped plan by Hong Kong Special Autonomous Region (SAR) authorities to allow extraditions to mainland China, which then burgeoned into fears of an erosion of liberties promised under the “one country, two systems” Central Government policy that rules Hong Kong.

But if the protesters were probing and pushing for their special rights and privileges under the “two systems” policy, Hong Kong Chief Executive Carrie Lam made quite a definitive move to clarify the limits of those entitlements. The night the subway was closed, Lam announced a ban on pro-democracy protesters wearing masks in protest rallies, with a one-year jail sentence plus fines. Angry protesters read this as allowing more drastic police action against them, and identifying protesters for possible punitive sanctions. The ban was imposed under emergency powers not used in more than half a century, AFP noted in its news report. Lam claimed it was not an authoritarian move, but necessary considering the alarming rise in violence in the massive rallies.

“This marks the beginning of the end of Hong Kong,” democracy activist Joshua Wong bemoaned on world news television and online media. Wong was 18 years old when he led students participating in the 2014 Umbrella Movement that clamored for truly free election reforms, particularly that candidates for the Hong Kong SAR local government include not only those in the short-list from Beijing. Wong and other pro-democracy activists were convicted and jailed for eight months in August 2017 for the 2014 Occupy Central protests, and three months in January 2018 for the Mong Kok protests in 2014.

Millions of people have been protesting (2 million on June 16 asking Carrie Lam to resign, and 1.7 million on Aug. 18 to push for electoral reforms), mostly young like Joshua. Misha Ketchell, Editor of The Conversation, says surveys showed that about 60% were under 30 years old and almost one-fifth were 45 or older.

Are the protestors not concerned about the effects of these 18+ weeks of slowed or stopped business activities on Hong Kong’s present and future as a SAR? The airport alone contributes about 5% to Hong Kong’s GDP, with the travel industry employing about 250,000 people, or about 7% percent of the total working population, Aljazeera reported on Aug. 10, when demonstrators stopped flights for two days.

National Public Radio (NPR) USA interviewed Daniel Ten Kate, Hong Kong-based editor for Bloomberg News, about the economic costs of the protests. “The biggest cost to Hong Kong is the undermining of its reputation for the rule of law and order and just being a safe, stable place to put your money if you’re a foreign company and you want to have a foothold in China but you don’t really trust the Chinese laws. Hong Kong is just known for its independent legal system, and that’s part of what sparked the protests to begin with,” Ten Kate said.

DAVID DILBERT

Hong Kong’s stock market is the fourth-largest in the world, bigger than London’s. Chinese companies and state-run Chinese companies look to the Hong Kong market to raise money. China’s own capital controls makes it difficult to move money in and out, while Hong Kong companies can easily set up shop and have access to a lot of the world’s investment market. But the stock market has gone down $500 billion in value in the first two months of protests, and shrinking some more, Ten Kate pointed out.

Indeed, Hong Kong, the conveniently capitalist SAR, has been very useful to communist mainland China since the 1997 Handover from Britain, for synchronizing the socialist economy of the PRC with the global economy. Bloomberg notes that 58% of China’s outbound investment, including for the “Belt and Road” initiative policy of President Xi Jinping, has been channelled through Hong Kong. Unhappily, there is the ongoing debilitating trade war between the US and China that has been weighing down China (and the US, and affecting the rest of the world). So the diminished economy into Hong Kong and GDP in the city itself fell by 0.3% in the second quarter.

China’s GDP growth was 6.2% year-on-year in the second quarter, the lowest rate in nearly three decades. Its trade surplus also dropped sharply in August to $34.83 billion, from $44.58 billion the previous month, with the 25% tariffs on $250 billion in imports, in the year-long US-China trade war. In September the US imposed new tariffs to force Beijing into a new trade deal. Does the PRC need the aggravation of the Hong Kong protests at this critical time?

“I never thought that a country with two different systems can really work for any length of the time, and sure enough this has happened,” Malaysian Prime Minister Mahathir Mohamad said in The Straits Times of Sept. 6. Hearing of Lam’s ban on masks announcement last Friday, Mahathir said she should resign because “her conscience says that the people of Hong Kong are right in rejecting the law. But on the other hand, she knows the consequence of rejecting the law.” The Straits Times of Oct. 4, further quoted Mahathir as saying that China will put an end to the protests with harsh action, like it did in the bloody 1989 Tiananmen Square crackdown in Beijing.

Maybe not at this critical time — China will not blink, nor focus elsewhere in the trade standoff with the US. The situation will just have to be “dribbled” by Carrie Lam for as long as it takes. The Hong Kong protesters will then just wear themselves out, as Joshua Wong so pathetically accepted when he said, “This is the beginning of the end of Hong Kong.”

But Mahathir is right that “a country with two different systems cannot really work for any length of the time.” Remember that Hong Kong was a British colony since 1842, ceded in perpetuity by China to the UK at the end of the First Opium War. With the expansion to include Kowloon in 1860 and the 99-year treaty lease of the New Territories in 1898, the British ruled Hong Kong for more than 150 years until after the World Wars. With the Sino-British Joint Declaration of 1984 it was mutually agreed that China will regain the expanded Hong Kong in a formal Handover in July 1997. And in the anticipated drastic shift of mindset and culture for Hong Kong, the so-called “one-country, two systems” principle was embedded in that handover — where China recognizes Hong Kong’s ability to administer its own governance, legal, economic and financial systems, as both sides have agreed that Hong Kong is part of one, re-unified China.

The Handover promised that Hong Kong’s previous capitalist system and its way of life would remain unchanged for a period of 50 years, until 2047. But even before that, the Hong Kong people would have to accept that they are Chinese under the one country system, and that there is no such thing as a workable two-system country.

 

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

ahcylagan@yahoo.com

Maynilad and Manila Water’s Conundrum

Following the enactment of the Clean Water Act (CWA) of 2007, the two water and wastewater services providers of Metro Manila, Maynilad and Manila Water Company (MWC), were given five years to connect the existing sewer lines of homes and commercial establishments to the main sewerage system of the city. Both companies failed to meet the deadline due to various reasons which I will explain later. Suffice it to say, the Supreme Court ruled against the two companies and slapped each of them with a P921.5 million fine, plus rolling penalties until the interconnection is completed.

It will be recalled that back in 1997, the government-run Metropolitan Waterworks and Sewerage System (MWSS) turned over its operations to the private sector following an acute water crisis. Maynilad won the concession for the western zone of Metro Manila while MWC won the concession for the east. Their concessions are valid until 2037.

Both companies assert that the Supreme Court’s decision is unfair. I looked into the matter and this is what I found.

First, the five year deadline for 100% interconnection of sewer lines was apparently superseded by another directive of the Supreme Court. In the case of the MMDA vs The Concerned Residents of Manila Bay, the Supreme Court mandated both concessionaires to submit (before a deadline of June 30, 2011) their plans for the construction of wastewater treatment facilities, including its network of sewer lines, up to the year 2037. This directive effectively moved the deadline to 2037.

Secondly, The Supreme Court itself pointed out that full compliance of the CWA cannot be done by the concessionaires alone. It requires a collaborative effort between the Department of the Interior and Local Government (DILG), the Department of Environment and Natural Resources (DENR) and the Department of Public Works and Highways (DPWH). These government agencies were assigned specific tasks to effect the Clean Water Act.

The DENR was designated as the lead agency to implement the CWA. Hence, it was ordered by the Supreme Court to formulate the Water Quality Management Area (WQMA) Action Plan within 12 months from the enactment of the law. The WQMA should contain the goals, targets, and timetable for the sewerage program for the eastern and western zones of Metro Manila.

For its part, the DPWH was mandated to come up with the National Sewerage and Septage Management Program (NSSMP). This program should provide, among other things, a priority listing of sewerage and septage for local government units.

As for the DILG, its part was to compel the local governments to inspect wastewater treatment facilities and piping works in their respective constituencies. The DILG was ordered to provide the concessionaires with a list of factories, commercial establishments and private homes that have not yet complied with the CWA and those without proper sewerage lines.

The plans and lists from these government agencies were to serve as the guide for the concessionaires as they plot their respective construction plans to comply with the CWA.

Problem was, neither the DILG, DENR nor the DPWH delivered what they were ordered to do. How, then, could the concessionaires fulfill their part within the timeframe given? In this sense, I agree with the concessionaires — the Supreme Court’s decision is unfair.

Exacerbating the situation is that both concessionaires are being fined a rolling penalty of some P320,000 per day until 100% interconnection is accomplished. This puts both Maynilad and MWC in a conundrum.

See, assuming the concessionaires rush to lay down some 1,000 kilometers of sewerage pipes within the city, the traffic they will cause will be cataclysmic and they will be blamed for it. Worse, the massive capital needed to pull this off will necessitate an adjustment in water toll rates. This will be unfair to Juan dela Cruz, not to mention be a politically contentious move.

On the other hand, should they go about laying the pipes based on a reasonable work plan and timetable, it must face the P320,000 fine per day.

It is a damned if you do, damned if you don’t situation.

This is why the concessionaires are appealing to the Supreme Court to reconsider its decisions. They are asking the high tribunal to reverse its decision declaring the concessionaires solely responsible for failing to meet the deadline and for the reversal of the steep fines slapped upon them.

Notwithstanding this, both concessionaires continue to connect sewer pipes to the main sewer network. However, the effort is stymied by the willingness (or refusal) of the homeowners or business owners to interconnect. The concessionaires cannot enforce mandatory connection as it is only the DENR that can do so and lawfully impose sanctions for non-compliance.

In compliance with the directive of the Supreme Court, both concessionaires submitted their timetable of work to achieve 100% connection by the year 2037. As far as Maynila is concerned, they are ahead of schedule with 20% connectivity as of today. By 2021, they should achieve 47% connectivity, 68% by 2026, 87% by 2032, and 100% by 2037. This is a far cry from only 6% connectivity before Maynilad took over.

As for MWC, they are spending P115 billion from hereon to complete its sewerage program by 2037, which includes laying down 500 kilometers of underground pipes and interconnecting them. MWC, too is on track.

Again, the full implantation of the CWA can only be achieved if both the government and the private sector fulfill their parts. It is unjust to pin the blame solely on the private sector (and fine them severely) when in fact, their work was contingent on the DENR, DILG, and DPWH.

And lets not forget, per the Supreme Court ruling of 2011, the concessionaires were given until 2037 to complete their respective wastewater treatment programs and interconnectivity of sewerage pipes. It is not fair to penalize them for something they have 18 years more to do?

I stand in defense of the private sector as I think decisions like these — decisions that compromise private investors while indemnifying equally culpable government agencies — that give our justice system a horrid reputation. It only validates the notion that the justice system is inhospitable to private investors.

Instead of being a obstacle to the success of private businesses, the justice system should be an enabler. Lets hope the Supreme Court will be magnanimous in this instance.

 

Andrew J. Masigan is an economist.

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