The proposed 2017 budget allocates up to five percent of GDP for infrastructure spending.

To meet
this infrastructure budget, the government has filed a congressional bill granting emergency powers to
the Secretary of Transportation to bypass regulatory impediments, as well as facilitate the bidding of
contracts and procurement of materials and equipment.

But to pave the way for increasing infrastructure investment, the overall capacity of both public and
private sector contractors needs to be revved up.

In terms of the broader economy, Duterte has signed off on a P3.35 trillion budget (approximately
US$153 billion) for 2017, an 11 percent increase on the previous years budget expenditure.

This increase in spending is to be met by proposed tax reforms targeting up to P1 trillion in additional
tax revenues by 2018-2019. But so far the tax proposals that increase the tax rate have been questioned
by Congress, while tax reductions have gained support. Even if the majority of Congress becomes
aligned with the PDP-Laban party, the general lack of discipline in party politics means successful reform
is not guaranteed.

The government has also proposed a 10-point basic socio-economic agenda which aims to increase
employment, reduce poverty, improve education and health, as well as build up infrastructure to
increase efficiency and productivity. But some aspects of the agenda have not been well aligned.

With many unemployed or underemployed, stricter labor rules are being implemented to make
contractual labor arrangements illegal or difficult to obtain.

Likewise, the Philippines is rich in mineral resources, but responsible mining is not being promoted. Land
use policy is ill-defined, meaning that government agencies and local government units have
overlapping authority structures.

Uncertainties. There are also uncertainties that have been brought by remarks made by Duterte and
various Cabinet members on the Philippines foreign policy and economic reform that could affect
investments in certain areas.

The remarks have been neither confirmed nor denied by the National Economic and Development
Authority (NEDA) or Duterte. While this can be attributed to initial internal conflict in the Cabinet as part
of the learning curve, it has promoted a degree of uneasiness and uncertainty.

Creating further uncertainty is the question of what the policies of the new US President Donald Trump
will be on trade in goods and services and, of course, investment. The Philippines would be hit hard by
any economic turbulence caused by Trump or further discontent in developed countries.

Constitutional reform. Looking to 2017, the Philippine Congress is due to convene as a constituent
assembly to amend the 1987 Constitution. Dutertes administration is proposing the Philippines adopt a
federal form of government, but the exact details of a new political model remain unknown. Whats
more, the budgetary aspect of the proposal will be difficult because only a few of the proposed federal
states are fiscally sustainable.
On a more positive note, the government anticipates that a federal system could help resolve the
question of creating an autonomous Bangsamoro state, establishing a more sustainable peace and
furthering development opportunities.

The other constitutional reform proposed is to liberalize inbound foreign investment by removing
restrictive provisions in the Constitution. In terms of the ownership of land, Duterte has reiterated
that the existing law will remain, meaning that foreigners will still be allowed up to 40 percent
ownership and lease for up to 75 years.

One of the most restrictive provisions in the Constitution concerns ownership and operations of public
utilities. In 2012, the Supreme Court decided that foreign ownership cannot exceed 40 percent of a
public utilitys common stock, but did not rule on other forms of shares. In 2016, the Supreme Court
decided that foreign entities can own a majority of preferred shares without voting rights.

In other words, foreign investors voting control is limited, but not with reference to benefits from
investment in non-voting capital shares and up to four-percent of common voting shares. With this
ruling, foreign investors can invest more in public utilities such as telcos, toll roads and rail but
management and operations will remain with Filipino citizens.

With the Duterte administration presenting Congress with an agenda full of fundamental changes, a
careful and rigorous follow up on progress at these various fronts will be necessary over the coming
years.

But I focus only on five important issues which I think will have great impact on economic development
for the immediate years to come. These are as follows:

(1) The tax reform bill, now in the Congress.

(2) Going after big tax-evaders.

(3) Direct plea to the Supreme Court to lift the temporary restraining order (TRO) that has bogged down
the implementation of the countrys family planning program.

(4) Direct admonition to the Commission on Audit to review the lowest bidder requirement in public
expenditure procurement.
(5) His threat to end the negotiation with the communists.

For lack of space, I choose these topics to emphasize decisions which have significant impact on
immediate and long term economic performance.

Tax reform. I have said before that the tax reform program is an economic game changer for the
country. The House of Representatives has passed the bill.

The Senate has temporized. President Duterte directly asked the upper house to pass the version he
recommends to help his economic program.

There is a great likelihood the Senate will comply. When the bill is passed, the nation will get a major
overhaul of the tax system, making it more revenue productive.

The personal income tax rate will be reduced and will benefit many income earners with the reductions.
However, increases in indirect taxes are forthcoming and they signal sacrifice for many.

There is a countervailing expenditure program designed to transfer benefits and income support to the
poor. Thus, the regressive nature of the indirect taxes on energy and the changes sought to make the
VAT (value-added tax) more revenue-productive will be mitigated by programs to help the poor.

The Duterte administration is now transitioning to its second year. Public commentary regarding the
first year of governance has been characterized by a generally positive review of its accomplishments
and the development programs on the way.

To judge how the current government is succeeding requires a longer period of time. The economic
challenges facing it in the second year would likely extend to the coming years.

Economic challenges. The feasibility of success in its goals depends on how the government deals with
the economic challenges it faces.

For convenience, I discuss the challenges in three main groups:

(1) Maintaining the macroeconomic balance of the national economy.

(2) Putting a brake on government consumption spending to achieve fast economic growth along the
investment path of Build Build Build.
(3) Expanding the economys absorptive capacity by removing structural bottlenecks due to regulatory
complications and restrictions.

Space limits me today to discuss only the first two of the challenges.

Macroeconomic management. Maintaining what economists call macroeconomic balance is very

important.

A cap on price inflation is often used as an objective or anchor of monetary policy. In the Philippines,
monetary policy tries to maintain the inflation rate within three percent per year.

The government, however, would want output or GDP growth to be sustained at close to seven percent
per year. It is possible to have both goals achievable, but economic forces might try to pull them out of
harmony with one another.

The larger goal is to keep the two the growth goal and the inflation goal to be in harmony as far as
possible.

Price stability within the three percent inflation rate could prove a challenge, if the economy
overheats when overall spending outperforms domestic output productivity.

Signs of such discrepancies appear in other prices, for instance, the peso exchange rate. When the peso
falls in value (that is, it depreciates from P49 to P50 or more), domestic inflationary pressures are
induced.Yet, that might be one further way to encourage exports to rise or imports to be discouraged.

The managers make a choice when they can and if they can!

Hidden behind such trade-offs are situations that could signal the presence of economic imbalances, e.g,
deficits of the fiscal branch or of the balance of payments, or of both.

Historically in the past, the countrys main imbalances were in the form of high fiscal deficits and also
high balance of payments deficits. In the course of recent decades, and as an aftermath of the economic
crisis of the 1980s, changes in economic policy had conspired to make fiscal deficits to be less drastic
and the balance of payments more prone to balance or to surpluses.

In Dutertes time, and reading into plans to spend more for infrastructure and other social programs, the
fiscal deficit is likely to worsen. The government wants to keep this within a deficit level of three percent
of GDP to have a lid on inflationary forces.

As far as the balance of payments is concerned, much depends on how the governments program is
able to raise exports and maintain a good surplus on non-merchandise exports and on the level of OFW
remittances.

This is less predictable in present day terms. The import requirements of the Build Build Build program
are likely to be high and exports earnings are more problematic in the current Trump era of trade
protectionism.
Controlling public consumption spending. A big plus for the Duterte administration is the likelihood of
passing a major tax reform program.

It is important that the tax reform effort has been pushed early in the first year of the Presidents term.
The main tax reform measure is likely to pass this year, the second year of Dutertes government.

This tax reform could be a game changer for Philippine development. It revamps the tax structure and
makes it more revenue productive. Success of the tax reform in pushing the development frontier
further depends on how it conserves the new revenues it gains for investment, not for satisfying
immediate wants.

While more revenues will be made available for the governments infrastructure and other
development programs, the list of subsidies being underwritten by government is expanding.

Some of the expenses are needed to keep the goals of income redistribution and fairness intact. But the
new revenues from the tax reform must open new roads for financing public investments and
strengthening the capacity to invest for the whole economy.

There is a long list of subsidies that are lined up to consume part of the new tax revenues collected.
Quite a few of these are new subsidies. Mr. Dutertes list of populist programs threaten to eat up a large
part of the new revenues.

The conditional cash transfer program (CCT) is recognized as a major transfer of money to help the poor.
The program is also designed to encourage schooling of children by the poor. It is essentially well-
targeted to the poor and deserved to be, for a time, essential. The cash component, however, is being
supplemented with a rice subsidy component.

The President has also decided to give away irrigation services free to rice farmers. As a result, the
National Irrigation Administration (NIA) has lost its revenue source and will now have to depend on the
government for its upkeep.

With no money to be plowed into maintenance of existing irrigation systems, the budget shoulders what
used to be a fee-based service. New communal irrigation system investments also will need to be
financed from government coffers.

There are moves to introduce free university public education in government-run colleges and
universities. This is likely to create a new general entitlement program.

The government must look for alternatives to reward only those who are highly capable to handle
university education through more widely available scholarships for poor students.

There are many good things to improve the wage bill for government employees, for soldiers and
policemen and for the government to spend on essential improvement of defense and national security.
In this age of vigilance against terrorism, there are also new expenses to be incurred to assist in making
the war on drugs a success.
The challenge is how to keep the lid on excessive demands on tax resources so that we have room for
growth in investments to be achieved.

What can we expect to be the macroeconomic path of the Duterte administration?

Useful hints can be pieced together from recent developments. It is possible to deduce whats next to
come, what consequences these programs could bring on key macroeconomic numbers (prices,
exchange rate, debts and balances) and what uncertainties remain.

Hints from the Eight-Point Economic Program and the warm bodies in the Cabinet. The key economic
managers chosen by the new President come from highly qualified quarters. Together, these managers
will oversee and guard the macroeconomic performance of the Philippine economy.

Three critical government departments, namely, Finance (under Carlos Dominguez, a businessman with
experience in government), NEDA (Ernesto Pernia, economist) and Budget (Benjamin Diokno,
economist, formerly undersecretary of Budget) will work with the central bank (under BSP Governor
Amando Tetangco), who is serving a separate term of appointment.

Aside from their individual, powerful economic mandates as heads of economic institutions, they
compose the important Budget Development Committee of the government which sets
macroeconomic targets and plans.

These managers will help reconcile the various claims of government agencies and departments with
the help and consent of Congress. Guiding their expenses are programs that are supported under the
eight point plan proposed by the administration.

The President, guided by the work of his key managers, will help reconcile the limits of resources which
are determined by the balance of payments, by fiscal capacity and by monetary feasibility.

Duterte inherits sound macro-fundamentals. The Duterte administration inherits sound macro-
fundamentals from the previous Aquino administration. This achievement has also led toward good
marks in terms of investment grade credit rating.

During the six years of the Aquino presidency, the countrys fiscal, balance of payments and monetary
sectors operated under less stressful conditions. This was achieved because of strong balance of
payments position brought about by steady growth of exports of goods and services as well as the
continued inflow of OFW remittances, the product of early economic reforms.

This also arose from a tight management of the fiscal sector that the government undertook. The tax-to-
GDP ratio rose to 13.6 percent from 12 percent during the Aquino presidency, a situation that led to the
increase in spending on social services, notably education, health and social services.

The fiscal discipline led to a relative fall of total debt to the GDP ratio. In 2010, the debt to GDP ratio was
52 percent, just a little about half of the GDP. By 2015, total debt was 45 percent of the GDP. This fall by
seven percentage points was a significant reduction of total debt, some of which was achieved through
the retirement of some external debt.

The reduction of the fiscal deficit during the Aquino presidency demonstrates these developments.
When it took over the government, the deficit was at 3.5 percent of GDP. By 2015, the fiscal deficit was
0.9 percent of GDP.

But Duterte also inherits Aquinos poor performance in public infrastructure investment. The fiscal
deficit as a percent of GDP provides another view of this picture. When the Aquino administration took
office in 2010, the budget deficit was 3.5 percent of GDP. By the time it was leaving office, the same
number was 0.9 percent of GDP.

(Comparative figures in 2015 in other countries in East Asia tell a different story. Thailands was 2.5
percent of GDP; Indonesia, 2.5 percent, Malaysia, 3.2 percent; South Korea three percent, and even
Singapore and Hong Kong had deficits amounting to 1.5 percent of GDP.)

The prudential effort to achieve good-looking macro-ratios for the economy on the part of the Aquino
government had masked a poor accomplishment in public infrastructure

The obsessive tightening of public spending was matched by poor appreciation of critical measures that
could have perked up economic investments. Aquinos stance against liberalizing the amendment of the
constitutional restrictions on foreign direct investments further constricted its accomplishments in
raising the investment rates in the economy.

Philippine total investment was 20.8 percent of GDP in 2015. But the ASEAN-Big5 countries had an
average investment rate of 28.3 percent of GDP. Philippine investment rate pulled down the average
ASEAN investment rate as a percent of GDP.

These were the relevant investment-to-GDP ratios in 2015 by countries: Thailand, 24 percent; Malaysia,
25 percent; Indonesia, 34 percent; and Vietnam, 27.6 percent.

President Dutertes macroeconomics challenge: bigger expenditure. The rise of President Rodrigo
Duterte is likely to change the speed with which public investment decisions will be made.

There are many signs this will happen: First, the eight-point economic roadmap as highlighted by the
newly appointed economic managers is tantamount to an announcement of accelerated programs of
government.

There is a stepped-up infrastructure investment plan. Some of these are designed to remove the traffic/
transport mess choking Metro-Manila. Some are intended to encourage the transfer of investment
directions to other growth centers.

Then, there are new demands that could arise as a result of the war on drugs, criminality and
corruption. Such spending would represent spillovers of new expenditures in public health and other
social programs.
Most important is the expected rise of investments designed to fill in the backlog in infrastructure. As
expected in present plans, most of the infrastructure investments will be through the public-private
partnerships.

Prices, the peso, debt, and finance. During the six years of the Aquino presidency, prices and the peso
exchange rate remained basically stable. This happened also during a period when world interest rates
were at their lowest.

However, the country missed its opportunity when the financing of major investments in infrastructure
did not push through and much increase in economic capacity was forgone.

In the prospective future with the Duterte government, higher levels of investment spending could lead
to some price inflation, peso exchange rate adjustments and public and private debts to rise. The task of
responsible economic management is to moderate such pressures, if not neutralize them.

The trade-off from this extra volatility is that the economy will strengthen its capacity to create more
solid economic growth because investments will be there to fortify the countrys productive capacity.

TAX REFORM TARA SA TRAIN

BUILD BUILD BUILD

The countrys governors, councilors support TRAIN

Two of the countrys national organizations of local government executives have separately expressed
their full support for the proposed Tax Reform for Acceleration and Inclusion Act (TRAIN) on the belief
that it will make the tax system more equitable, progressive and efficient while raising more funds for
infrastructure development and social services outside Metro Manila.

In separate resolutions, the League of Provinces of the Philippines (LPP), which groups together the
countrys 81 provincial governors, and the 16,500-strong Philippine Councilors League (PCL) said the
TRAIN will help fulfill President Dutertes 10-point socioeconomic reform agenda and at the same time
keep the Philippines fiscally stable.

The TRAIN, the first package of the Duterte administrations Comprehensive Tax Reform Program
(CTRP), was approved by an overwhelming majority of the House of Representatives as House Bill No.
5636 on May 31 and is now under consideration by the Senate.

HB 5636 and Senate Bill 1408, the tax reform bill filed by Senate President Aquilino Pimentel III both aim
to significantly lower personal income tax rates by making the first P250,000 in income of compensation
earners tax exempt.
Both bills also contain revenue enhancing provisions such as broadening the value-added tax (VAT)
base, and adjusting the excise taxes on fuel and automobiles, among other measures.

The LPP, which has Ilocos Gov. Ryan Luis Singsong for president and Albay Gov. Al Francis Bichara for
chairman, said in its resolution that it was endorsing a more equitable, progressive and efficient tax
reform program to accelerate infrastructure development, generate jobs and livelihood, equitably
distribute wealth and income among our people, and ensure regional and provincial growth all over the
country.

In Resolution No 2017-006 certified by the LPP secretary general, Bohol Governor Edgar Chatto, the
League also said a reform[ed] tax system will ensure the strengthening of the (countrys)
macroeconomic fundamentals, secure financial stability and enforce a simpler and equitable tax
regime.

A separate resolution adopted by the PCL said , meanwhile, that while the lowering of income taxes
would lead to a reduction in government revenuesthe lifeblood of the governmentthe expansion of
the VAT, if legislated separately, would mean additional sources of funds for vital rural development
projects of our respective Local Government Units, including the needed investments in health,
education, and infrastructure for the Filipino people under Ambisyon 2040, which is the Duterte
administrations blueprint to eradicate extreme poverty, transform the country into a high-middle
economy by 2022, and to high-income one by 2040.

The PCL, chaired by Councilor Danilo Dayanghirang of Davao City, said in its resolution that the League is
backing TRAIN because it recognize[s] the need for infrastructure and social programs for urban and
rural development.

We hope that this simple gestures of expressing our approval will help the upper house to decide on
this urgent bill, said the PCL in a letter attached to the resolution. The letter was signed by
Dayanghirang and PCL national president Luis Chavit Singson of Narvacan, Ilocos Sur.

The version of the TRAIN approved by the House is a consolidation of HB 4774 the original bill
endorsed by the Department of Finance (DOF) and authored by Quirino Rep. Dakila Carlo Cua with
54 other tax- related measures.

President Duterte has certified the TRAIN as an urgent and priority measure while the executive
committee of the Legislative-Executive Development Advisory Council (LEDAC) has included the bill in its
priority list that it wants approved before the yearend.

Aside from local government executives, the TRAIN has also garnered the support of 19 former
secretaries and undersecretaries of the DOF and heads of the National Economic and Development
Authority(NEDA).
The tax reform package also has the backing of the countrys local and foreign business chambers,
domestic and multilateral financial institutions, civil society organizations, health advocates, and
economic advocacy groups.