June 2nd, 2022
The retention of the country’s credit ratings, matched with solid appointments in the economic team, should ease the concerns of investors about country-specific risks to the economy. I am particularly proud of the work that Congress and the Department of Finance have done together to enact the Comprehensive Tax Reform Program, which has improved revenue effort by around 0.5 percentage points every year before the COVID-19 pandemic interrupted its momentum.
This is among the best fiscal performances of any administration in the country’s history. The CTRP was the fiscal airbag that cushioned us from the crash that was COVID-19.
Tax reform and improvements in tax administration – partly due to the Committee on Ways and Means and its active oversight efforts – have also ensured that revenue effort did not collapse during the pandemic. The resiliency of our fiscal net means that we can expect a return to regular improvements in tax collection efficiency, barring another major economic shock.
Other prospects are rosy. Foreign direct investment performance continues to be strong, and 2022 is set to be a better year for FDI than 2021, the country’s best year for FDI ever. Our gross international reserves are also very strong, and should cushion us from any major shock in global import prices.
I am confident that the incoming Marcos economic team’s insistence on broad continuity of macroprudential policies and attitude will maintain the confidence of credit benchmarkers.
That said, there are persistent risks that we should watch out for.
First, our efforts to attract investment should continue to aggressively countervail the capital flight impacts of expected US interest rate hikes.
Second, our most basic, resource-based sectors – agriculture, mining and oil – should be boosted to allow the country to take advantage of high global commodities prices. Otherwise, there will be a significant net loss to welfare as global commodities continue to rise in prices. We remain a highly import-dependent country, after all.
Third, we must ensure that tax collection efficiency gains are sustained. Any decline in our revenue effort will be disastrous for our infrastructure and public investment program, as well as for our debt situation.
Fourth, we must build the dikes against what appears to be a looming global stagnation. If the Bayan Bangon Muli package can be intelligently crafted, it can act as something like GMA’s 2008 stimulus package which kept Philippine GDP growth positive amidst global recession.
Fifth, we must mitigate sudden increases in the country’s interest payments. I thus welcome Secretary Diokno’s pronouncement that the National Treasurer will be retained. Treasurer De Leon has kept the average interest rate on debt very manageable during her tenure. With elevated debt stock (at 13 trillion pesos by end of 2022), any small surprise increase in interest rates will be felt by our state finances.
The pronouncements of the new economic team members are reassuring. Still, Congress, the private sector, and the broader public must work with the incoming Marcos administration to ensure that these challenges are overcome.