Marcos inherits an economy poised for recovery

President Ferdinand R. Marcos Jr. inherited a government and a country that is on its way to a full recovery despite a weak peso, elevated inflation and a bigger but still manageable debt and deficit profiles.

This was the pronouncements of both the Duterte and Marcos economic teams, which happen to be the extension of one to another, considering the Secretary of the Department of Finance, Benjamin E. Diokno, just vacated his old post as Bangko Sentral ng Pilipinas (BSP) Governor under the previous administration.

On the day Marcos Jr. took his oath of office, on June 30, the peso had already hit a 17-year low of P55 to the US dollar and the next day, the BSP forecasted that June inflation could hit a peak of 6.5 percent, way above the government target of two percent to four percent for 2022, which may prompt monetary officials to lift the key interest rates higher from 2.5 percent to three percent by August.

GDP and others

Climbing out of a pandemic-induced recession in 2020, the economy grew by 5.7 percent in 2021 and was able to ride on that momentum to grow by 8.3 percent in the first quarter this year. Most economic indicators point to a sustained recovery in 2022, enough to achieve the growth target of seven percent to eight percent this year.

It is doable, according to Diokno, because the economic team expect the second quarter GDP to be equally strong with the easing of mobility restrictions and an unemployment rate of 5.7 percent that is close to its pre-pandemic level of 5.5 percent.

Despite the lockdowns, a stalled economy in 2020 and huge borrowings to fund anti-pandemic response, the Duterte government under former DOF Chief, Carlos Domingues III, was able to exercise fiscal management and implement tax reforms which allowed enough fiscal space during worst period of the pandemic.

As such, Marcos will get a government that has a resilient revenue effort to collect taxes to fund the deficit since with the pandemic. There were a lot of unplanned spending to fight the health crisis, resulting in budget deficit-to-GDP ratio to 7.6 percent in 2020 and to 8.6 percent in 2021.

The higher budget shortfall which as of end-May was at P459 billion, resulted in a higher public debt of P12.50 trillion as of end-May. In March of this year, the national government (NG) debt hit 63.5 percent debt-to-GDP ratio, past the 60 percent global benchmark that multilateral creditors want to see in a debtor country like the Philippines. This was so much bigger than the 39.6 percent debt-to-GDP ratio in 2019.

The increase in public debt was also because the Duterte administration pursued its Build, Build, Build program amid the pandemic, and much of its six-year run. The last administration’s infrastructure spending averaged at five percent of GDP.

“One thing is certain: the incoming administration will inherit a better state of infrastructure to help in its socioeconomic agenda,” said Diokno on June 9. He also noted that the Marcos administration will also get a “robust pipeline of implementation-ready infrastructure projects” of some 88 infrastructure flagship projects which are due for completion by 2023 and onwards.

The Philippines’ external accounts position also remain healthy and could be relied on as another source of strength. The US dollar reserves have declined after paying maturing foreign loans, but still considered adequate at $104 billion as of end-May, equivalent to 8.7 months’ worth of imports.

The country’s balance of payments position as of end-May was still in shorfall of $1.53 billion due to outflows as NG settled its foreign currency debt obligations and pay for its various expenditures.

The country’s outstanding external debt has ballooned to $109.75 billion as of end-March 2022, and it is larger than the gross international reserves. The Duterte administration has borrowed $12.71 billion to fund infrastructure projects and Covid-related expenses.

Still, Diokno said the country’s outstanding external debt “remained manageable” at 27.5 percent of GDP. This ratio which is a solvency indicator, is however higher compared to same time in 2021 of 26.6 percent. The external debt-to-GDP ratio continue to be one of the lowest in the ASEAN region and “indicates the country’s sustained strong position to service foreign borrowings.”

Laws, tax, fiscal environment

The Marcos administration also inherits game-changing reforms to stimulate the economy, generate more jobs, improve basic services for consumers, and the exchange of skills and technology, said Diokno.

There was the CREATE law which cut corporate income taxes and rationalized fiscal incentives, also the amended Foreign Investments Act, the amended Public Services Act, and the amended Retail Trade Liberalization Act as well.

These laws and others, and most importantly an improvement in revenue collection efficiency, will help Marcos achieve his economic team’s goals of reducing the deficit-to-GDP ratio to three percent, achieve upper-middle-income status, and bring poverty incidence to single-digit levels by 2028.

Dominguez said that over the past six years, the DOF has ensured adequate funding support for infrastructure development, and to modernize the tax system through the enactment of the various components of the comprehensive tax reform program (CTRP), as well as to further deepen the domestic capital markets and and to protect the Philippines’ sovereign credit ratings.

“We will balance the requirement of supporting economic recovery, while keeping our debt-to-GDP ratio within the sustainable threshold,” said Diokno.

He also said that with a recovering economy intact, the Marcos administration will have enough ammunition to pursue an A-level credit rating by crafting a medium-term fiscal consolidation framework. “We are working on said framework that will map out our fiscal profile – everything from revenue assumptions to financing programs,” he said.

“These goals are all anchored on sustaining the growth momentum,” Diokno added. “Grow the economy and almost everything else will follow. It will help reduce the deficit, so we don’t have to borrow as much. A growing economy also means more taxes and revenues. We all know that revenues are responsive to economic growth,” he also said.