The economic team of President Ferdinand Marcos Jr. crafted a fiscal strategy that will lower poverty incidence, reduce budget deficit and promote fiscal sustainability to enable the economy to return to the growth levels before the COVID-19 pandemic struck in early part of 2020.
Finance Secretary Benjamin Diokno said the economic team submitted the first Medium-Term Fiscal Framework to President Marcos. The fiscal strategy will be implemented in two stages over the entire six-year term of the administration.
“This framework will set the tone or will be our game plan for the next six years. This is the first time that this government or any government of the Philippines has presented such a game plan,” Diokno said.
Diokno said the MTFF contains near-term and medium-term strategic plans for socioeconomic development, which will be presented in detail to the public by Marcos in his first State-of-the- Nation Address.
Among the targets under the framework is for the economy to expand by 6.5 percent to 7.5 percent in 2022. Economists expect this goal to be the highest growth rate among the ASEAN+3 countries, which include the 10 Southeast Asian economies, Japan, South Korea and China.
Economic growth is expected to be faster 6.5 percent to 8 percent from 2023 to 2028.
Diokno said the MTFF demonstrates the government’s holistic approach in accelerating growth and promoting the welfare of Filipinos. The MTFF will also serve as the government’s guidebook in reducing poverty incidence and lowering the country’s debt-to-GDP ratio.
“We are not only concerned with growth per se, but we are also concerned with reducing poverty. So, our target is that by the end of President Marcos’ term, poverty incidence will be down to a single digit – nine percent,” Diokno said.
The Duterte administration was able to bring poverty incidence down from 23.5 percent in 2015 to 16.7 percent before the pandemic hit.
Between the first semester of 2018 and the first semester of 2021, poverty incidence rose to 23.7 percent. The Marcos administration targets to bring the rate lower to 9 percent of the population. It also aims to elevate the country to upper middle-income status, where per capita income for Filipinos is at $4,046, by the end of the president’s term, Diokno said.
Diokno is confident that to support growth, government revenues will continue to pick up and the budget deficit will decrease in the near term. “The desire is to reduce the deficit which ballooned during the pandemic to around 9 percent deficit-to-GDP ratio to around 3 percent,” he said.
The government also aims to cut the debt-to-GDP ratio from the 63.5 percent as of the first quarter of 2022 to 60 percent by 2025.
Diokno said Marcos wants all industries to perform well. In a separate interview over a public affairs program, Diokno said the president particularly wants the agriculture sector to catch up with other sectors to reduce the country’s reliance on imports.
The government will continue importation in the meantime until domestic production increases, Diokno said. Diokno also sees the mining industry as a growth sector, especially with the current uptrend in metals prices. The government will also continue spending for key infrastructure projects.
“On the ‘Build, Build, Build’ program, we are committed to spend some 5 to 6 percent of GDP for infrastructure annually between 2023 and 2028,” he said.
The economic team is composed of Diokno, Budget Secretary Amenah Pangandaman and Economic Planning Secretary Arsenio Balisacan.
Single-digit poverty
Balisacan said the “ambitious” target of reducing the poverty level to single digit at the end of the administration of President Ferdinand Marcos Jr. is doable. He said President Marcos and the economic team were in substantial agreement on the overall goal of the new administration.
“We all agree to quickly revive job creation and poverty reduction by steering the economy back to the high-growth path while addressing government debt and the sharply rising prices of food and essential commodities,” Balisacan said.
“In particular, we aim for economic growth at least at par with pre-pandemic levels through 2028. And we are raising the bar higher: we must make this growth more inclusive and resilient. In other words, growth must be pro-poor and can weather adverse global events such as pandemics, calamities due to climate change, and geopolitical and technological disruptions,” he said.
“With quality growth and jobs, we aim to rapidly reduce poverty to a single-digit level at the end of the administration. I recognize such a target is ambitious, but I firmly believe it is achievable,” he said.
Balisacan said the reforms that the past administrations laid down made the economy’s foundations stronger. Thus, a robust economy is truly realizable—one capable of recovering lost ground and tapping into the country’s latent human and natural capital to accelerate the country’s progress and be on a par with its neighbors in the region, he said.
Poverty incidence among Filipinos in the first semester of 2021 increased by 2.6 percentage points to 23.7 percent from 21.1 percent in the first semester of 2018, based on data from the Philippine Statistics Authority.
Balisacan said to achieve these targets, NEDA will push for necessary measures to raise the country’s economic performance. He said the reforms in the past two decades, including under the Duterte administration, encouraged stakeholders to expect greater things from the economy.
“As such, despite all the headwinds and economic pains confronting us in the near term, we can aim to do even better and surpass the country’s previous performance, bringing it closer to its long-term development anchor: the AmBisyon Natin 2040,” he said.
Debt sustainability
Diokno is not bothered by the country’s debt that ballooned to a record P12.76 trillion as of end-April 2022, driven by the Duterte administration’s borrowings to finance COVID-19 response efforts and infrastructure projects. “While our debt-to-GDP ratio is above the 60-percent limit, I don’t think that is a cause of concern,” he said in a briefing.
“As long as the economy grows 6 to 7 percent, we can outgrow our debt… So it is important to look at the sustainability of the debt… We must [also] show that we are serious in consolidating our resources,” Diokno said.
Diokno said he would look at the fiscal consolidation plan proposed by the Department of Finance under former Secretary Carlos Dominguez III that includes raising taxes, deferring personal income tax reductions and expanding the value-added tax coverage to pay for the debts incurred during the Duterte administration.
“[But] we have a better tax system now than during the previous administration… The focus should be on tax administration. We need more money to service our public debt,” Diokno said.
Diokno also said it is very important to raise the level of economic growth because “the higher the growth of the economy, the more revenues that may be generated.”
The national government debt reached P12.76 trillion as of end-April 2022. This was 8.83 percent higher than the end-2021 outstanding debt. As of the first quarter, the debt-GDP ratio reached 63.5 percent, up from 60.4 percent recorded in 2021.
The DOF said trimming down the debt-GDP ratio means growing the economy at a faster rate than the build-up of debt. It said there are higher odds of achieving these investment-led growth targets given the infrastructure spending in prior years, the lowering of corporate income taxes and the recently-passed structural reforms.
Optimistic but cautious
The Development and Budget Coordination Committee on July 8 adjusted its 2022 GDP growth projection to a range of 6.5 percent to 7.5 percent from 7 percent to 8 percent previously, taking into account the domestic and external headwinds that may impact the economy.
“This growth will be sustained and expanded to 6.5 percent to 8.0 percent in FY 2023 to 2028,” it said.
The DBCC said the average inflation rate assumption for 2022 remained elevated and is projected to range from 4.5 percent to 5.5 percent, following the uptick in prices of fuel and food as a result of the Russia-Ukraine conflict and disrupted supply chains. It was slightly adjusted to 2.5 percent to 4.5 percent for 2023 and was forecast to return to the target range of 2 percent to 4 percent by 2024 until 2028.
Meanwhile, the assumption for the price of Dubai crude oil was $70 to $90 per barrel for 2024 to 2028 as oil supply is expected to catch up and stabilize over the medium-term.
The peso-dollar exchange rate assumption for 2023 to 2028 was projected at P51 to P55 on heightened global uncertainty such as the aggressive monetary policy tightening by the US Fed, market aversion amid Russia-Ukraine conflict and increased global oil prices.
The goods import growth is forecast at 8.0 percent for 2024 to 2028, while the goods exports growth is projected at 6.0 percent for 2023 to 2028.
Revenue collections are projected to show a gradual, upward trend over the medium-term from P3.633 trillion (15.3 percent of GDP) in 2023 to P6.589 trillion (17.6 percent of GDP) in 2028. This will be achieved through the continued implementation of existing tax policy and tax administration reforms, bolstered by a robust economic growth.
Meanwhile, government disbursements for 2022 to 2023 will be maintained above 20 percent of GDP at P4.955 trillion and P5.086 trillion, respectively, to ensure continuous implementation of priority programs on infrastructure and socio-economic development, among others.
Disbursement will further increase over the medium-term from P5.402 trillion (20.7 percent of GDP) in 2024 to P7.712 trillion (20.6 percent of GDP) in 2028.
Given the revised revenue and disbursement program, the deficit will be gradually reduced by at least 1.0 percent every year starting at 6.1 percent of GDP in 2023 to 3.0 percent of GDP in 2028 to ensure debt sustainability over the medium-term.
This will be achieved through improved spending efficiency and alignment of budget priorities that are anchored on the administration’s two 8-point socio-economic agendas, one for the near-term and another for the medium-term.
The government is targeting an infrastructure spending-to-GDP ratio of 5.0 to 6.0 percent annually between 2023 to 2028 and a 9.0 percent poverty rate by 2028. The targets will be anchored on the implementation of coherent strategies, policy discipline and fiscal sustainability.
Creating more jobs
The economic team knows fully well that there is more to be done to reinvigorate the economy, particularly creating more jobs to counter the impact of external headwinds such as the rising global oil prices and other commodities and rising interest rates.
Latest data from the Philippine Statistics Authority showed that the unemployment rate increased to 6 percent in May from 5.7 percent in April, but declined from 7.7 percent in May 2021.
Balisacan said increasing the employability of the current and future workforce will translate into more job creation and better employment outcomes in the medium term.
“Amidst external shocks, the government has sustained the economy’s growth momentum and steered it towards a higher growth path. Now, the immediate challenge is the full reopening of the economy. Over the medium term, the government will focus on creating more jobs, quality jobs, and green jobs through productivity-enhancing investments,” Balisacan said.
Addressing inflation
Diokno knows the importance of reining in inflation that has been notably on the rise since the Eastern European turmoil erupted in February when Russia invaded Ukraine. This development impacted the global prices of oil and other major commodities, resulting in elevated inflation elsewhere in the world.
To lessen the impact of inflation to consumers, Diokno said he would officially recommend to President Marcos the continued implementation of the Rice Tariffication Law. The measure, enacted as Republic Act 11203 on Feb. 14, 2019, lifted the quantitative restriction on rice imports and imposed a minimum of 35 percent tariff on imported rice, effectively opening the Philippine rice market.
“[The RTL] really is a good law. It has a major contribution to our desire to control inflation, so I think it’s not smart to go back to the old system,” Diokno said during the recent 182nd Development Budget Coordination Committee briefing.
Inflation in June accelerated to a 43-month high of 6.1 percent from 3.7 percent a year ago, driven by higher prices of food, non-alcoholic beverages and transport fares, the Philippine Statistics Authority said.
“The uptrend of inflation for June 2022 was primarily brought about by the higher annual growth rate in the index for food and non-alcoholic beverages at 6.0 percent, from 4.9 percent in the previous month,” the PSA said in a statement.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said the sources of second-round inflation effects include higher wages, hikes in transport fares, series of fuel pump price increases that led to higher transport costs, elevated global commodity prices and weaker peso exchange rate that increased import costs.
He said inflation “could still pick up further with some lagged effects in the coming months, as could be offset by competition and pricing power as the economy is still reeling from the adverse effects of the pandemic.”
Bangko Sentral ng Pilipinas Governor Felipe Medalla said the favorable conditions arising from the strong rebound in growth in the first quarter suggested that the domestic economy could accommodate a further tightening of monetary policy settings.
The BSP so far raised its policy rate by 125 basis points this year to 3.25 percent to catch up with the aggressive adjustment by the US Federal Reserve and prevent the further depreciation of the peso against the US dollar which was became a source of inflationary pressures.
Full recovery
Diokno said the country is on its way to “full recovery” despite risks emanating from both the domestic and external fronts.
The economy grew by 5.7 percent last year and sustained its robust momentum with an 8.3 percent growth in the first quarter of 2022 after the pandemic-driven recession in 2020.
“One thing is sure: economies with strong fundamentals tend to handle crises better. In the case of the Philippines, it entered the pandemic with strong macroeconomic fundamentals. Its healthy external accounts and hefty gross international reserves served as a buffer during the pandemic,” Diokno said.