Usually economic officials anywhere introduce reforms in the economy to address a crisis that beleaguers a nation. Curiously, the economic managers of the Duterte regime launched a tax reform scheme at a time the economy was on a steady growth pattern. The tax reform is now threatening to turn this growth into a domestic crisis.
The Duterte economic managers introduced the TRAIN tax reform plan supposedly to speed up economic growth and eradicate poverty by the end of the current administration in 2022.
Behind this TRAIN effort is the Duterte regime’s “Build, Build, Build” ambition of spending no less than ₱8-9 trillion on an assortment of infrastructure projects—roads, highways, bridges, airports, seaports among others. Increased tax collections and borrowings from both domestic and foreign lenders are targeted to fund this grandiose plan.
But the TRAIN scheme has also given rise to uncertainty amid an escalating rate of price increases, slumping peso exchange rate, rising cost of doing business, ballooning national debt, surging underemployment, and a diminishing interest from investors.
President Duterte, in a speech last week, pointed out that “the economy is in the doldrums, actually now. Interest rates are picking up, are getting so high so it destroys the existing [economic growth].”
It was not clear in his speech what he blames current economic difficulties on, particularly in the provinces, but he stated something about a certain item “going down” when interest rates increase. According to Malacanang’s official transcript, the president said: “Actually now, interest rates are picking up, are getting high so it destroys the existing… Eh itaas mo yung iyo, ’di bababa yung… bababa yung atin, theoretically, oo.”
When the Monetary Board, the policymaking body of the Bangko Sentral ng Pilipinas, decided to increase policy interest rates last June 20, it took note of “the risk of possible second-round effects from ongoing price pressures.” The board agreed that “follow-through monetary policy action” was needed.
The June 20 policy rates increase was the second in only 6 weeks, after being frozen at 3.0 percent since September 2014 on stable annual inflation rates that ranged from 0.7 percent (2015) to 3.6 percent (in 2014). After the 2 rate increases this year, the Bangko Sentral’s overnight lending rates now stand at 3.5 percent. These are the rates on which commercial banks base their own interest charges on borrowers.
Prior to the June Bangko Sentral rates increase, inflation had risen from 2.5 percent in January 2017 to 3.4 percent in January 2018, and surged still to 4.6 percent last May. Among basic consumer goods, food and non-alcoholic beverages increased fastest at 5.1 percent.
Additionally, the Bangko Sentral said it was watching out for such other developments as “excessive peso volatility that could affect the outlook for inflation”. The Philippine peso exchange rate now stands at around 53.50 against the US dollar, making it the Asian region’s worst performing currency since the start of this year.
Signs that high inflation rates still loom large are highlighted by the newly reported 6.3 percent increase in the April wholesale price index—it was so far the highest rate of increase this year, sustaining the upward trajectory since December last year.
Since the wholesale prices in the index are for commodities that are for further resale by retailers or for processing by manufacturers, they actually point to future movements in retail prices.
In April, the wholesale price index for mineral fuels, lubricants and related materials spurted up by 27.5 percent, indicating future costs of fuel for transport, electricity and households, along with most factory operations. Lower import prices of crude oil could temper this.
When the Bangko Sentral announced last week the second increase in policy rates, it took pains to explain that it was coordinating with other government agencies on measures “to mitigate the impact of supply-side factors on inflation”, a reference also to the inflationary effect of increased government spending (possibly due to the Build, Build, Build undertakings) as a result of higher taxes collected.
“Upside risks continue to dominate the inflation outlook,” the monetary agency said, pointing out too the potential impact of sustained price pressures on wages.
Trade war’s fallout
On a wider perspective, the retaliatory trade measures being imposed on each other by the United States, the Philippines’ second largest market for exports, and China, now the Philippines’ top source of imported goods, are also beginning to involve other major trading partners like the European Union and Japan.
The fallout from these skirmishes will eventually affect the Philippines, the likely magnitude of which will depend on local industries’ links to the global supply chain.
For instance, if China’s production of building materials becomes costlier owing to the escalating trade wrangles, the Philippines will have to cough up more to sustain the infrastructure construction under the Build, Build, Build scheme.
The Duterte economic managers will have to exercise more agility in leading the Philippine economy around all these challenges ahead. It will not be wise to stubbornly adhere to original targets anchored on the Build, Build, Build strategy. The danger is that Philippine taxpayers could end up financing China’s losses from its trade war with the US.
More modest project goals are needed, given that this grandiose ambition that is now beginning to look like an ostentatious folly amid the uncertain domestic and global settings. Lowering the cost of Build, Build, Build will also ease the pain inflicted by TRAIN on the Filipino people.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.