PH - PROGRESO Philippine Program for Recovery with Equity and - - PDF document

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Turning the crisis into an opportunity

A proposed economic recovery program

Draft proposal for discussion purpose only as of 19 May 2020

“PH-PROGRESO”

Philippine Program for Recovery with Equity and Solidarity

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

• 1. Overview
• 2. Where are we now?
• a. Real economy: GDP, income, and jobs
• b. Fiscal position: revenue, expenditure, deficit
• c. Survey results: consumers, MSME, farmers
• 3. DBCC-proposed phased and adaptive economic recovery program

(PH-PROGRESO)

• a. Bayanihan II (expenditure side)
• b. CREATE: Corporate Recovery and Tax Incentives for Enterprises

Act (tax incentivesside)

Contents

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Phased and adaptive recovery approach

Period March to May 2020 June to Dec 2020 2021 onwards Analogy Intubation in ICU Dextrose in regular room Vitamins at home Law Bayanihan I Bayanihan II, CREATE 2021-22 GAA and other reform laws Pillar Pillar I and II Pillar III and IV Plan for a Healthy and Resilient PH Key features

• Budget and procurement

flexibility.

• Subsidy to poor and low income.
• Small business support

(grace period, wage subsidy)

• Support to key sectors (e.g. agri

and OFW).

• Health system, capacity,

and insurance.

• Support front-liners.
• Budget and procurement flexibility
• Reprioritization of 2020 budget.
• Priority BBB resumption.
• Demand side to raise income

and create jobs: better targeted and implemented Bayanihan I programs.

• Supply side to support firms:

Liquidity and equity infusion, and guarantee thru the financial sector.

• Targeted tax incentives.
• Reprioritization of the 2021 and

2022 budget.

• Structural reforms to turn crisis

into opportunity to prepare for the new normal.

• Support Balik Probinsya, Bagong

Pag-asa (BP2) Program.

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Overview

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Key messages

• 1. The Philippines entered 2020 with strong growthprospects.
• a. Building on past reforms and solid macroeconomic management to deliverbetter.
• b. Among the fastest growing economies (average of 6.6% from 2016 to 2019).

c. Likely to become upper middle income country in 2020 (USD 3,512 per capita).

• d. Low and stable inflation (average of 3.0% from 2016 to 2019).
• e. Among the lowest ever rates of unemployment (5.3%), underemployment

(14.8%), and poverty (16.6%). f. Strong fiscal position (revenue of 16.1 percent of GDP, highest since 1997).

• g. Falling debt to GDP ratio (39.6 percent of GDP, lowest since 1986).
• h. High gross international reserves (USD 89 billion or 7.9 months of import).

i. BBB+ credit rating (one notch below the A-rating) i. Illustration: for every one trillion pesos in borrowing, a 1% lower interest rate due to good credit rating translates to a savings of 10 billion pesos per year.

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Key messages

2. This strong foundation is dueto...

• a. Conservative and responsible fiscal management.
• b. Tax reform (4 tax laws, 3 more packages to go).

c. Structural reforms (rice tariffication, ease of doing business, national ID, UHC, universal access to tertiary education, etc.).

• d. BBB program (infra spending exceeded 5% of GDP in 2018).

3. But we have faced totally unexpected shocks in 2020:

• a. Taal volcano eruption in January.
• b. Decline in tourism and trade due to global pandemic starting February.

c. ECQ starting March to contain the virus.

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Four-pillar strategy to respond to the COVID-19 crisis

P595.62 billion

• r $11.72 billion

(3.1% of GDP) P1.09 trillion

• r $21.44 billion

(5.7% of GDP) P58.63 billion

• r $1.15 billion

(0.3% of GDP)

Grand total: P1.74 trillion or $34.32 billion (9.1% of GDP) as of May 18,2020

P846.59 billion

• r $16.65 billion

(4.4% of GDP) To be funded in largeby pillar III, not includedin total

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Note: Due to rounding, percentages may not precisely reflect the absolute figures.

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Strong fiscal and financial position to address the crisis.

The Economist ranks the Philippines 6th among selected emerging economies in the world, and the best among those ranked from Southeast Asia, in terms of economic, fiscal, and financial management.

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Source: Economist, “Debt in developing countries: next in line,” 2 May 2020.

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Where are we now

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Macro-fiscal framework has weakened, but fundamentals still strong

Key variables 2019 2020 (approved by DBCC as of March 26) 2020 (approved by DBCC as

• f May 12)

GDP real growth (%) 6.0 0 to -0.8

• 2.0 to -3.4

Nominal GDP revised (trillion pesos) 19.5 19.8 19.3 Revenue (% GDP) 16.1 16.8 13.6 Expenditure (% GDP) 19.5 22.1 21.7 Deficit (% GDP)

• 3.4
• 5.3
• 8.1

NG debt (% GDP) 39.6 44.4 49.8

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The range of analysts forecasts is wide, with some analysts forecasting that the Philippines could experience as low as -4.8 percent growth in 2020

Institution 2020 PHL GDP growth forecast Date of forecast

After Q1 2020 GDP release

Fitch

• 2.0

May 2020 RCBC

• 2.0 to -4.0

May 2020 ING

• 2.9

May 2020 PHL as of May 12

• 2.0 to -3.4

May 12, 2020 DBCC UOB

• 3.5

May 2020 Nomura

• 4.8

May 2020 Sources: Various news articles, ADB, IMF, and WB

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Key variables Consumer survey MSME + large survey Agriculture survey Respondents 389,859 44,097 6,863 Period of survey April 5 to 8, 2020 April 4 to 8, 2020 April 3 to 8, 2020 Estimated revenue/inc

• me impact

44% say income is not enough to meet basicneeds

• 87.2% in March vs

February (extrapolated: 767billion) (66% zero sales, 33% decreased sales) 65% were able to sell 35% were not able to sell (108.5 million in losses) Estimated job loss 44% (of non-government worker respondents lost their job or source of income)

• 10.5% in March vs February

(extrapolated: 2,240,610workers) (74.4% no lay-off, 25.4% with lay- off) 86% continued to farm Estimated firm closures N/A 33,041 firms (74.9%) 35% were not able to sell Top 3 needs Sources: NEDA and DOF Access to food supply and essentials More efficient health system Transportation Payment deferment to government, banks, andutilities Tax discounts or tax credits Low interest loans from government and banks Cash assistance Production support (seeds, planting materials, fertilizers, etc.) Machinery and equipment (tractor1s2, cultivators, pumps, etc.)

Survey results corroborate the economic decline

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Rank Sector Count of firms

• pen during ECQ

Average lossesin % of sales for firms

• pen during ECQ

Count of firms closed during ECQ Assumed number

• f months

closed in 2020 1 Arts, entertainment, and recreation 1,874

• 82.3

18,661 9 2 Tourism 2,686

• 81.9

29,147 9 3 Repair of other items 652

• 77.0

6,872 6 4 Education 1,059

• 76.8

12,244 6 5 Construction 2,282

• 74.6

14,075 3 6 Repair of motor vehicles and motorcycles 1,696

• 73.4

12,536 6 7 Finance and insurance activities 4,047

• 71.2

5,703 6 8 Sports and fitness 773

• 70.4

16,345 9 9 Real estate 2,883

• 68.6

6,750 6 10 Professional, scientific, and technicalactivities 3,739

• 67.1

13,105 6 Total 21,691

• 74.3

135,438 Source: DOF MSME survey Note: Count of firms is estimated using weights calculated from the survey sample.

Top 10 hardest hit sectors per the MSME survey (revenue loss)

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Top 10 hardest hit sectors per the MSME survey (job loss)

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Source: MSME survey, LFS2019

Rank Sector Jobs lost in 2020 full-year Percent change from total employment 1 Construction 689,974

• 1.6

2 Education 130,514

• 0.3

3 Repair of motor vehicles and motorcycles 74,758

• 0.2

4 Tourism 51,446

• 0.1

5 Finance and insurance activities 41,027

• 0.1

6 Arts, entertainment, and recreation 39,446

• 0.1

7 Sports and fitness 31,547

• 0.1

8 Professional, scientific, and technical activities 24,579

• 0.1

9 Repair of other items 23,364

• 0.1

10 Real estate 20,964

• 0.0

Total 1,127,619

• 2.6

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Proposed (PH-PROGRESO) Philippine Program forRecovery with Equity and Solidarity

Turning the crisis into an opportunity

An economic recovery program

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Phased and adaptive recovery approach

Period March to May 2020 June to Dec 2020 2021 onwards Analogy Intubation in ICU Dextrose in regular room Vitamins at home Law Bayanihan I Bayanihan II, CREATE 2021-22 GAA and other reform laws Pillar Pillar I and II Pillar III and IV Plan for a Healthy and Resilient PH Key features

• Budget and procurement

flexibility.

• Subsidy to poor and low income.
• Small business support

(grace period, wage subsidy)

• Support to key sectors (e.g. agri

and OFW).

• Health system, capacity,

and insurance.

• Support front-liners.
• Budget and procurement flexibility
• Reprioritization of 2020 budget.
• Priority BBB resumption.
• Demand side to raise income

and create jobs: better targeted and implemented Bayanihan I programs.

• Supply side to support firms:

Liquidity and equity infusion, and guarantee thru the financial sector.

• Targeted tax incentives.
• Reprioritization of the 2021 and

2022 budget.

• Structural reforms to turn crisis

into opportunity to prepare for the new normal.

• Support Balik Probinsya, Bagong

Pag-asa (BP2) Program.

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Recovery stage

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Recovery phase: three instruments (three bills)

• 1. Spending and capital support (BayanihanII)

2. Tax incentives (CREATE: Corporate Recovery and Tax Incentives for Enterprises Act) 3. 2021 GAA preparation

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Recovery phase: three instruments

A. Spending and capital support (Bayanihan II): extend Bayanihanlaw

• a. Extend Bayanihan I to end-2020.

i. This is simplest mode.

• b. This will:

i. Continue budget and procurement flexibility

• ii. Allow reallocation and reprioritization of the 2019 savings and

2020 budget to meet health and recovery needs.

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Demand side priority is to create jobs and restore income levels We can use Bayanihan II to stimulate private consumptionthrough: 1. Health system capacity and infrastructure 2. Food value chain: agriculture, food manufacturing, logistics, and foodtrade 3. Restart the most impactful BBB projects.

Recovery phase: three instruments

1.B Spending and capital support (Bayanihan II): restore income and jobs ofconsumers

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Reprioritization of Build, Build, Build (BBB): criteria

Primary criteria (in this order, yet iterative)

• 1. Available fiscal space for infrastructure projects in 2020 to 2022
• 2. Project readiness and implementation capacity of line agencies
• 3. Economic growth and jobs impact of projects

Additional criteria

• 4. Interest and risk level of private sector
• 5. Inclusion of health and digital economy projects to address emerging needs

from COVID-19 and the new normal

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Recovery phase: three instruments

1.C Spending and capital support (Bayanihan II): provide liquidity tofirms

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Objective: Provide liquidity and prevent insolvency This will limit fiscal exposure as capital subsidy from NG can be leveraged upto 8.5x for loans and up to 20x for guarantee (TBC) Size of firm Supply sideintervention Remarks on supplyside Micro firms Borrowings from microfinance, cooperative, rural, and thrift bank lending, supported by wholesale banking of LBP and DBP (to buy loans to free up lending envelope) Need to work with BSP, LBP, DBP, and SBC Small and medium firms Credit guarantee through PhilGuarantee and wage subsidy Need to work with BSP and PhilGuarantee Large firms Joint venture to provide targeted, time-bound equity infusion to match bank lending, with conditions Need to work with BSP, LBP, and DBP; and multilaterals and private sector

DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

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Recovery phase: three instruments

2. Tax incentives (CREATE: Corporate Recovery and Tax Incentives for Enterprises Act)

a. For all firms: i. Across-the-board immediate lowering of CIT rate from 30% to 25% startingJuly 2020. ii. Enhanced net operating loss carryover from 3 to 5 years. Losses in 2020 canbe credited to future tax payment.

• b. For new investors: Targeted, timebound, and tailor-fitted tax incentives to proactively

attract the right types of investment (demand driven led by BOI, not supply driven,to attach investors leaving China,etc.). c. For existing investor: No change in present incentives for the next 4 to 9 years.

• d. For countryside investor: Targeted and timebound tax incentives to support theBalik

Probinsya, Bagong Pag-asa (BP2) Program (geographic and sectortargeting). e. In all these, FIRB to manage and decide the grant of tax incentives to improvegovernance: performance-based, targeted, timebound, transparent.

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• a. Agency budget submissions that prioritizes health, BBB, agriculture and

food value chain, and other new normal priorities.

• b. This will ensure that the recovery stage is adequately supported should the

Bayanihan II be insufficient, or if the recovery takes a longer time.

Recovery phase: three instruments

3. 2021 GAA preparation

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Resiliency stage

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Resiliency stage

• a. Use the crisis as opportunity to do structural reforms.
• b. They don’t cost much but economic returns are very high.
• 1. 2021 and 2022 budget

2. Structural reforms

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• 1. Economy
• a. BBB program - strongest impact on growth, jobs, poverty, and multiplier effect
• n economy, can promote confidence in economy
• b. Digital infrastructure
• 2. Health
• a. Health infrastructure and capacity
• b. Housing under new normal

c. Water and sanitation

• 3. Consider procurement and budget allocation flexibility to move deliveryfaster.

Re-prioritize the 2021 and 2022 budget to build health and economic resilience

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

Reprioritization of Build, Build, Build (BBB): criteria

Primary criteria (in this order)

• 1. Available fiscal space for infrastructure projects in 2020 to 2022
• 2. Project readiness and implementation capacity of line agencies
• 3. Economic growth and jobs impact of projects

Additional criteria

• 4. Interest and risk level of private sector
• 5. Inclusion of health and digital economy projects to address emerging needs

from COVID-19 and the new normal

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DRAFT FOR DISCUSSION ONLY. SUBJECT TO CHANGE.

• 1. Health: health infrastructure, production of pharma-grade medical supplies,

strategic inventory of medicines and equipment, UHC implementation, R&D, virology center, pharma development center

• 2. Agriculture: productivity enhancement and consolidate land management to

enhance production and food security, and progressive idle land tax

• 3. Digitalization: online transaction with government and private sector
• 4. Investments: passage of three economic liberalization bills, and modernize IPAs

to proactively seek out the desired investors and give tailor-fitted incentives

• 5. Businesses: ease of credit, regulatory reforms to improve competition, industry

4.0 (innovation, digitalization, and entrepreneurship)

Structural reforms options (each can be a bill)

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• 7. Education: flexible learning options
• 8. Social protection: digital delivery of social protection, unemployment

insurance, and financial inclusion (one bank account per family)

• 9. Labor: labor market policy to keep employment, temporary and targeted wage

reduction to keep jobs, skills retooling, pension portability

• 10. Public transport: route rationalization and supporting structures (e.g., BRT, bus

stops, prioritized right of way), PUV modernization, automated fare collection, promote non-motorized transport (i.e., walkways and bike lanes)

• 11. Logistics: rationalization of freight system, establishment of strategic

warehousing, cold-chain systems, and food terminals

• 12. Disaster and emergency response to include health-related disasters

Structural reforms options (each can be a bill)

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Thank you.