When an expanded VAT was being discussed several years ago, some idiot in Congress suggested that the corporate tax rate be simultaneously increased in order to mitigate negative public reaction to the consumption tax. All the brilliant minds in the legislative branch agreed and the corporate tax rate was promptly legislated.
Henceforth, we imposed the highest corporate tax rate in the region. As a consequence, investors avoided our market like the plague. Or else, they performed creative accounting to surface their profit in another economy in order to avoid punitive tax rates.
This is one of the reasons the Philippines receives the smallest share of foreign direct investments among the core ASEAN economies. The UN World Investment Report for 2015 reports the Philippines receiving $6 billion worth of FDI in 2014. Compare that with Singapore’s $68 billion, Indonesia’s $23 billion, Thailand’s $13 billion, Malaysia’s $11 billion and Vietnam’s $9 billion.
It is expected that Vietnam will soon overtake Thailand and Malaysia in investment attractiveness. Effective next month, Vietnam will lift the 49 percent cap on foreign ownership on selected industries similar to the negative list imposed by our Constitution.
The lifting of the investment cap is the outcome of a determined effort by Vietnamese Prime Minister Nguyen Tan Dung to prepare his country for the onset of the ASEAN common market. This is an example of decisive economic statesmanship so sadly lacking here.
In order to match Vietnam’s strong move to attract investment flows, we need to amend our own inward-looking Constitution. The closest we are to achieving that is House Speaker Feliciano Belmonte’s proposed “Resolution of both Houses” which will insert the five-word phrase “unless otherwise provided by law” into the inward-looking economic provisions in the 1987 Constitution. The insertion of this phrase might be submitted in a plebiscite coinciding with the May 2016 elections.
President Aquino does not seem to understand the urgency of doing this. He has not endorsed the proposed constitutional renovation — even as the business groups and people like Bernardo Villegas who helped draft the Constitution argue the “nationalist” provisions are a mistake and caused the widespread poverty we now endure.
Some of the most recent economic figures indicate that we need to move a little more quickly on the economic policy reforms.
The NEDA reported that our merchandise exports fell 17 percent last May from a year ago. The PSA, in a separate report, says that our manufacturing production fell 3.1 percent in the same month. This is the steepest decline in our manufacturing output since the 7.7 percent decline in December 2011.
The IMF recently slashed its Philippine growth forecast to 6.2 percent from the 6.7 percent projection it made only last May. This is way below the government forecast of 7 percent to 8 percent this year and next. That unduly bold forecast forms the assumption for the hefty P3 trillion national budget submitted to Congress this week.
The investment ratings agencies have uniformly reduced their growth forecast. Standard & Poor notes the Philippine economy has run into a “soft patch” that will slow our growth. They were referring to chronic government underspending.
ING Bank economists now have a much lower growth projection of 6 percent attributable to a combination of weaker exports and government underspending.
The business community’s influence in the formation of our economic policy is probably the weakest among the emerging economies. This is the reason the country is deemed unready for the onset of the ASEAN common market.
Over the past five years, business organizations badgered the Aquino government with a to-do list of reforms that need to be done, including recasting the stringent economic provision enshrined in the Constitution. The administration was largely unresponsive to the business community’s insistent clamor.
In the month of July alone, several high-profile forums were held in Manila to underscore urgent policy reforms government needs to do. None were even noted in Aquino’s last State of the Nation Address. That is a measure of this administration’s interest in preparing for a more competitive regional environment.
Speakers in all these forums all suggested that the Philippines needs to do more to flourish in a regional common market. If we fail to do what needs to be done, we will fail to sustain the growth momentum.
Nabuo Fujii, executive director of the Japanese Chamber of Commerce and Industry, reacting to the passage of the fair competition law, said that while this is a minimum requirement for investment into domestic industry, the limitation of foreign ownership remains “a wall for us.” All the foreign chambers of commerce echo that view.
In his last SONA, Aquino made a dubious claim. He says that if our GDP grows by 6.8 percent this year, we will have registered the highest rate of five-year expansion in 50 years.
Had he listened intently to his economics teacher in college, he would have known this is a nonsensical statement to make. First, the measures for measuring GDP growth changed over time. Second, we will not make 6.8 percent this year.
This is akin to the statement Aquino made at the stock exchange when it hit an unprecedented 8,000 points. He predicted the stock index would soon hit 10,000 points. The very next day, the stock index collapsed. It has been retreating since then.
Aquino should find the time to read (and comprehend) the position papers regularly sent his office by the business organizations. Those papers list down the policy reforms that must be done quickly. He still has about 10 months to do something about those reforms before we are swamped by the regional common market.