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.
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.
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.