TRAIN, infra program herald even better year for PHL economy

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MANILA, January 8, 2018 — Global multilateral institutions and credit rating agencies see an even better year for the Philippines in 2018 on the back of a continuously strong economy fueled by an unprecedented infrastructure modernization program and a game-changing tax reform law.

According to Finance Secretary Carlos Dominguez III, the National Economic and Development Authority has so far approved over P1 trillion-worth of big-ticket infrastructure projects that would be rolled out in 2018. The government is planning to spend some P8.4 trillion for its “Build, Build, Build” infra program during the term of President Duterte.

A newly enacted Tax Reform for Acceleration and Inclusion Act (TRAIN), the first tax reform program approved after two decades, will finance about a fourth of the funding requirement for the government’s “Build, Build, Build” program, while the rest would be sourced mostly from Official Development Assistance (ODA), Dominguez said.

Dominguez said the TRAIN, the first package under the Duterte administration’s Comprehensive Tax Reform Program (CTRP), will significantly lower personal income taxes, providing most taxpayers with increased purchasing power that would help further rev up the economy.

An infra buildup, meanwhile, will have an “impressive multiplier effect” on the economy, creating jobs, drawing in more investments and improving production and transport efficiency throughout the country, Dominguez noted.

Fitch Ratings, for the first time since 2013, upgraded the Philippines’ credit rating  from “BBB-“ to “BBB” with a stable outlook last December, amid favorable economic conditions and a tax reform program.

It projects the Philippines’ GDP growth to remain strong at 6.8 percent in 2018 and 2019.

“We estimate the (tax reform) to be net revenue positive, reflecting an expansion of the value-added tax base and higher taxes on petroleum products, automobiles, and on sugar-sweetened beverages, which would more than offset a lowering of personal income taxes,” Fitch said.

Last December, the Asian Development Bank (ADB) released a statement upgrading its 2018 GDP forecasts for the Philippines from 6.7 to 6.8 percent, on the assumption that “growth in the government’s infrastructure program will accelerate, supported by improvements in budget execution, with more large investment projects underway.”

In an economic update released last September, ADB Country Director for the Philippines Richard Bolt said “the concerted effort by the Philippine government to improve public project implementation is bearing fruit, as public investment programs help drive continued economic expansion.”

“A strong focus on infrastructure investment and implementation of tax reform will see the country continue its growth momentum through 2018,” Bolt added.

The World Bank, meanwhile, has projected a 6.7 percent GDP growth rate for 2018, which, it said, could even be higher “if investment growth accelerates faster along with increased spending in public infrastructure.”

Tokyo-based debt watcher Rating and Investment Information Inc. (R&I) has likewise affirmed the investment grade rating of the Philippines as the economy is expected to post solid growth on the back of the government’s aggressive infrastructure buildup.

The Japanese rating agency retained the one notch above the minimum investment grade rating of BBB for the Philippines on a stable outlook.

“The Philippines’ economy is expected to post solid growth, driven by aggressive infrastructure investment under the Rodrigo Duterte administration,” it said in a statement.

London-based Capital Economics said the enactment of the first tax reform package is a net plus for the Philippine economy, as it would support increased government spending over the coming years. “The extra tax revenue, which are the equivalent of around 1 percent of GDP, will be used to fund the administration’s ambitious infrastructure spending plans,” its report read. “These projects should increase capacity, reduce bottlenecks in the economy and actually ease inflationary pressures over the medium term.”

The regional development arm of the United Nations for the Asia-Pacific region has found the Philippines as the “most ready” among the 10 member-states of the Association of Southeast Asian Nations (ASEAN) in carrying out a massive infrastructure buildup, owing to several positive factors buttressing the economy.

Finance  Undersecretary and Chief Economist Gil Beltran said these factors cited by the UN Economic and Social Commission for Asia and the Pacific (UNESCAP) include substantial financing opportunities from the Philippines’ development partners, the government’s tax reform program (TRAIN) and rising revenue collections, and the declining debt service ratio, which all contribute to an adequate fiscal space that would allow the country to pursue an expansionary policy on the Duterte watch.

Japan’s Nomura said a host of positive factors, including Package Two of the TRAIN on corporate income tax cuts,  and the  relaxation of the Foreign Investment Negative List, will keep foreign direct investments (FDI) flowing to the Philippines.

In its Asia Economic Outlook report, Nomura noted that FDI inflows were on a structural uptrend, with inflows for the first nine months of 2017 totaling $5.83 billion and the BSP keeping a full-year net FDI forecast of $8 billion.

The US-ASEAN Business Council, for its part, said potential investors from the United States view the Philippines’ moves to ease foreign-ownership rules and ambitious infrastructure plans as the key elements of the country’s attractiveness as a place to do business.

In a statement issued by the Philippine embassy to Washington, ABC chairman Alex Feldman was quoted as saying: “The impressive economic growth that the Philippines has experienced over the last year and the predictions that it will continue into 2018 are the types of economic fundamentals that have attracted over $3.3 billion in American foreign direct investment to the Philippines and which will continue to attract US companies to the Philippines in the months and years ahead.”

“Major initiatives to improve the business environment, such as the ‘Build, Build, Build’ infrastructure development program and efforts to ease restrictions on foreign ownership in key sectors, will only make the Philippines an even more attractive destination for American corporations,” he added.

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