KEYNOTE SPEECH OF SECRETARY RAMON M. LOPEZ
AMERICAN CHAMBER OF COMMERCE GENERAL LUNCHEON
14 August 2019, Dusit Thani Hotel, Makati City
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Ladies and gentlemen, good day!
Thank you for inviting me to speak before you today. We regard the American Chamber of Commerce as one of our strongest partners of the government, especially the Department of Trade and Industry, in creating inclusive growth and shared prosperity in the country. As such, I would be glad to talk to you about the Philippines’ continuing growth story.
More importantly, I want to discuss how we’re improving the Philippines’ competitiveness and ease of doing business, especially given the rising global trade tensions.
Presently, the US—aside from being a longstanding friend and ally—is one of the Philippines’ biggest trading partners. In 2018, the US was our 3rd major trading partner, our top export market, and our 4th top import supplier. Balance of trade between our two nations registered a surplus for the Philippines of over US$2.7B. Our exports grew by 9.13% from US$9.66B in 2017 to US$10.5B in 2018.
Despite the trade downturn this year, trade engagements between our two nations is still going strong. As of June 2019, the US was still ranked the same as in 2018 with our balance of trade registering a surplus of US$371.4M. Our exports were at US$974.4M, and our imports at US$603.0M.
We are thankful that our country still enjoys the Generalized System of Preferences (GSP) program, were around 3,200 products from the Philippines can enter the US duty-free. Based on US trade data, Philippine exports to the US under GSP increased by 16% from US$ 1.49B in 2017 to US$ 1.73B in 2018.
At the Philippines and US work on the Trade and Investment Framework Agreement (TIFA), we are gearing up for the eventual commencement of our talks on having a Free Trade Agreement (FTA) with the US. As of the first half of this year, the US is our 5th largest foreign investment partner with Php2.4B according to the Board of Investment’s (BOI) list of approved investments from foreign investment partners.
In terms of foreign direct investments (FDIs), the US was our 4th top investment partner in 2018 with US$160.4M. For January to May 2019, the US became our 2nd top investment partner with US$84.9M.
Of course, this strong trade between our two countries is helped by the fact that the Philippines is still one of the fastest growing economies in Asia and the 2nd fastest in ASEAN. Just to put this in context, from the first quarter of 1991, the Philippines has experienced 82 consecutive quarters that saw positive GDP growth. From 2012, we’ve seen 7 consecutive years wherein our GDP was above 6%.
As many of you know, the first two quarters of this year is affected by the delayed passage of the budget, we were hitting something like, 5.6% or 5.5%. But we are still optimistic to hit the 6% growth full-year for 2019. This is indicative of our GDP’s resiliency to withstand the present global demand downturn. Among the major economic sectors, Services had the fastest growth with 7.1% even as Industry registered close to 4% growth in the second quarter of this year.
Despite the global manufacturing slowdown, our Manufacturing sector posted a 4.4% growth in the first half of 2019. This meant we fared better as compared to our peers in ASEAN and the rest of the world. I think it’s a bit of a blessing that our trade structure is less dependent on what’s happening out there with only 15% of our GDP accounted for by exports. That’s the reason why we are still growing and many of our products are going to China and the US, which are still exhibiting positive growth for the Philippines.
In fact, for the past two or three months, we are posting positive growth, quite the reverse of what’s happening in other trading economies. We monitor about 11 trading countries and for the past two months, only two out of 11 trading countries posted positive growth, and the Philippines is one.
But if you try to recall the last quarters, we posted a low negative growth, less than 1%. There’s also a bit of–whenever they measure the GDP for the year, it’s always understated because at the end of the year, they still have to add the documents that are coming. Up to 5 months after the year, there will be an adjustment in our exports and it will turn out that our performance like last year, we thought we have negative growth, only to be told last May or June that we have improved by more than 1%. These exports, once all the documents are accounted, still gave us positive growth despite the global challenges.
Meanwhile, the latest inflation rate eased to just 2.4%, the lowest in more than two years. This was the lowest inflation recorded since January 2017 after hitting a peak of 6.7% in October last yaer. We tried to address it, of course it is affected by the world oil price affecting the world economy. That has gone down, and now the inflation rate has also eased down to 2.4%, which is well within the—now it’s actually closer to the low end of the inflation target for this year. At the start of the year we were saying that we’ll have an inflation rate of about 2-4%, so we are reaching closer to the lower end of that target.
Signalling the strong confidence in the Duterte administration, the total approved investments remains steady on the upside, PHP312 billion. It just got it this morning, the January to July 2019 record for Board of Investments approvals grew 24% in January to June 2019 from the same period last year. And approved foreign investment is PHP 69.6 billion, which posted a 342% growth. Domestic still counts for majority of the approved investments, but in terms of growth, it is the foreign side that is posting a larger growth. Also for the investment are now going outside of Metro Manila. Just for this, January to July, the investments outside of Metro Manila accounted for 96% of the total. This used to be just about 85%, so you could see faster preparation, or growth in the areas outside of Metro Manila. You can see more of these in the months and years to come through the Build Build Build infrastructure development outside Metro Manila.
To face the challenges in global trade, we must diversify our markets by identifying new destinations for more opportunities. We also have to ensure that our domestic base remains strong and on the upswing to soften the impact of these trade disputes.
We are completing the negotiations with South Korea, and we hope to sign this November, when our President visit to Korea for the 50th or 70th anniversary of the Philippine-Korea trade relationship.
We are also reviewing the Philippine-Japan Economic Partnership Agreement (PJEPA) to avail of more market access for our agriculture products—banana, mango, pineapple—which are popular in Japanese and Korean markets. But our tariffs remain to be on the high side compared to the tariff rates that they give to other countries.
So that’s what we’re trying to negotiate. In Japan, we have 8% tariff, but for bananas coming from South America, they have close to 5% tariff. In South Korea, there’s still a tariff rate of 25-30% for agriculture products. But for some countries like Vietnam, 5% and Peru, 0%. So we’re trying to renegotiate and tell them that in the Philippines, we give your fruits a tariff rate of 5%, there should be reciprocity.
We also believe that innovation is the key to improve our country’s competitiveness. That’s why we’re glad to hear that the Philippines jumped to 54th place among 129 countries in the Global Innovation Index (GII) 2019 from 73rd place last year. This is proof that our efforts to boost the creation of an innovation and entrepreneurship ecosystem and accelerate and globalize our startups is working. This will also prepare both our industries and our Micro, Small, and Medium Enterprises (MSMEs) for the 4th Industrial Revolution.
It also helps that President Rodrigo Duterte recently signed Republic Act No. 11293, or the Philippine Innovation Act, as well as RA No. 11337, or the Innovative Startup Act. Altogether, we are confident that with innovation at the front and center of our policies and initiatives, the Philippines can fully advance to become an innovative culture while becoming globally competitive.
Ease of Doing Business
To sustain our country’s economic growth and improve our competitiveness, we’ve committed to improving ease of doing business in the country. We’ve also been pushing policy reforms that would create a more attractive business climate for investors.
The importance of ensuring ease of doing business cannot be stressed enough. Not only will this attract more investments for our country and promote investor confidence, it also provides a better and comfortable life for our countrymen by creating jobs.
The President himself was clear in a recent address that government transactions must be streamlined, simplified, responsive, and client-friendly to deliver services without delay. This was also one of the Priorities in his 10-point Socioeconomic Agenda when he first took office in 2016.
Before you file your complaints this afternoon, we’re just happy to tell you that at this time last year in the Amcham, we’re still looking for a Director-General. Finally, we have one, four or five weeks ago. And he started to really perform his duties. In his first week, we launched officially the Implementing Rules and Regulations (IRR). But even prior to the launch of the IRR, the law was executory, or in other words, in effect in receiving complaints. The ARTA, which was then headed by the Deputy Director-General has been receiving complaints and addressing them. There’s a quick and positive response form the agencies being are called to. The law is finally in full implementation.
The EODB Law will help promote good regulatory practices by reengineering government systems and procedures. The law also advocates government processes that are customer-centric and uses GovTech. We’re streamlining, going into automation.
The EODB Law covers all government offices and agencies in the Executive Branch. These range from national government agencies (NGAs) to Local Government Units (LGUs), government instrumentalities both here and abroad, and Government-Owned and –Controlled Corporations (GOCCs).
We were just in Paranaque last week and the City of Manila the week before and Quezon City, and all of them have been doing their own contribution by setting up their own Business One-Stop Shops (BOSS). Quezon City as well is working on improvements to accelerate all government transactions and strengthen their efforts to improve ease of doing business. Particularly, to incorporate the Barangay Clearance in the application for the city business permit. So you don’t have to go separately to the barangay if you are to register a business. This is also being done by Paranaque. The barangay clearance is applied simultaneously with the city business permit. It cannot be removed technically, because it’s in the law, so what they did is they synchronized the computers of all the barangays, even if the barangays have different fees, the actual transaction will be real-time and the approval will be at the city-level, and the fees will just be transmitted eventually to the respective barangays. It becomes part of this one-stop-shop in Paranaque City.
There are other things you’ve heard here, the Zero-Contact Policy, and eventually the Department of Information and Communications Technology (DICT) will help us in automation, as much as we can, in all these government permitting processes.
We have a reduced processing time, what used to be 5-10 days, now it’s mandated to be completed in three days maximum. As they automate, some can do it in one hour. It’s a bonus, their commitment is on day. The law also tells us that these range from 3 working days for simple transactions, 7 working days for complex transactions, and 20 working days for highly-technical transactions.
There is also further streamlining to include fire safety as part of the BOSS. You are no longer required to buy the fire extinguishers being offered to you. And it’s serious the penalties are no joke. It’s a two-strike policy. For the first offense, six months suspension and for the second strike, termination, no retirement, imprisonment, and you still have to pay a penalty. We would probably lose a lot of government employees, so we weed out those guys.
Again with the new Director-General, you may have heard him addressing issues with the TNVS and LTRFB. He’s a young guy working on these and he seems to be effective. I think you can see more and more of these imporvements in ease of doing business.
WB Doing Business Report
There’s a lot of improvement happening. In the 2018 report, though they call it the 2019 report, while we improved in the 7 out 10 indicators, there was one indicator that gave us a headache, that’s Getting Credit.
For some technicalities, the World Bank survey team didn’t record the base as it is to be recorded. So they gave us a bad grade in Getting Credit that moved down our rank to 11 notches. If only they got the correct number, we would have improved by 5 notches. That’s what the story is.
Unfortunately, they will not change the score. We just move on to this year again. And they just do the correction on Getting Credit, plus the other reforms that we submitted. We hope to gain back and even be better that where we came from. Overall, we submitted 43 reforms and 10 data corrections, covering nine out of 10 topics in the lifecycle of a business.
Among the new laws enacted by Congress that can help us in ease of doing business is the RA No. 11057, or the Personal Property Security Act of 2018, which will impact our Getting Credit indicator after we establish a one-collateral registry. Third was RA No. 11232, or the Revised Corporation Code of the Philippines, which would impact two of the indicators—Starting a Business and Protecting Minority Investors.
Down the road, we are trying an end-to-end processing. Right now, we do it physically to pilot-test it. But down the road, it is a preview to our end-to-end process, meaning SEC, DTI, Philhealth, local government, and the BIR for now will be in an office, but hopefully soon in one smartphone. So that’s the end goal. That’s what we call the One Business Portal.
Policies & Reforms
DTI is pushing for its Inclusive Innovation Industrial Strategy (i³S) that will help those in manufacturing to adapt smart manufacturing process by providing incentives and other support. We provide free training, through other agencies that can help, like TESDA, and many other support that can improve human capacity.
The other topic of interest to you is the Corporate Income Tax and Incentives Rationalization (CITIRA) bill, which used to be the TRABAHO bill. And the nice story there is the overall reduction of the corporate income tax from 30% to 20%, but along the way it has to be balanced by putting the incentive system into a time-bound, performance-based kind of system.
It’s always a concern for those existing in ecozones, on how we can really manage the transition. Our friends from other agencies agreed to a longer transition, what used to be two years, right now we are in the vicinity of 5 to 7 years. But also by that time, you will have an overall income tax rate that is close to 20%. If you really convert your 5% GIE, this is equivalent to 15% on the net. So 15% on the net and 20% as a regular tax rate will not be that far at that time.
So we’re working on that and my promise is really to work hard on finding a good landing zone and transition period by those affected by this change in system. But we’ve talked to a lot of investors and those that are about to undertake new projects and they see the new proposed tax reform is really advantageous. Because right now, what’s being discussed is not ony that the incentives are being rationalized, but we are adding more incentives. R&D, 100% more so 200% deduction, so 200% deduction, labor, 200% deduction, domestic/local content, 150% deduction. There will be NOLCO which will help you in having a lower tax rate down the road.
Other reforms that we are working on in this new Congress is the Public Services Act which is now certified urgent. Of course the Foreign Investment Negative List (FINL) and the Retail Trade Liberalization Act. Of course with the new Innovative Startup Act, this will all create a better environment for investors, especially those in innovation and moving toward smart manufacturing.
On the Security of Tenure (SOT) bill, another hot topic, we initially gave our support. Because I believe, it provided better security of tenure for the workers by ensuring their regular status, either from the contracing company side or from contractor side. This was my proposal early on for a win-win proposal. At the same time, it also still allows legitimate contractualization. So it allows some kind of flexibility for the need to outsource some parts of the business.
However, as you know that that bill was vetoed. And we heard the voices business sector of the Joint Chamber and all the chambers of the world, to keep the flexibility in selecting which part of the business can be contacted out. Because that’s the only thing that really matters to many of the companies. And in the vetoed bill, this was supposed to be determined by the tripartite council, and on the new bill that’s being proposed by DOLE, it is still being determined by the Department Secretary.
I told the Department Secretary that the President has spoken that this is really the one provision that is the basis for the veto, so we have to keep the flexibility. We will try to keep that in the new SOT bill. We will bring that back so we will have flexibility. But we’d like to improve on it.
Because the complaints we hear is in the Philippines, there is no ease of hiring and firing. What we try to inject is to have that ease of hiring and firing. But it will still have to be judicious, based on just cause and with due process. And at the same time, work on a separation/termination pay that will be fairly automatic.
Lastly, we can study the portability of retirement benefits, usually we have benefits in the SSS. Either we increase the retirement benefit,which will also increase the contribution. Or have a separate retirement benefit that can be portable. That is also being studied right now.
To conclude, DTI is committed to improve the Philippines’ ranking in World Bank’s DB survey and boost the competitiveness of our industries to make them attractive in terms of investments. This is also important if we want to maintain the strong trade ties between the US and the Philippines despite the prevalent global trade uncertainties.
But I also want to reiterate that the President himself had given the order that investors should have an easy time in doing business in the country. And you always hear him assure that for any problem that you are experiencing, please tell him. Please file a complaint.
This is the realization of President Duterte’s promise of Tapang at Malasakit: his administration’s uncompromising stance on safety and security, combined with his determination to give Filipinos a better life and also an uncompromising stance against corruption. We hope that you can join us to take part in our country’s economic growth story as we create inclusive growth and shared prosperity for all.
Thank you for listening and mabuhay tayong lahat.