“Philippines and UK can be powerful partners for prosperity”

Makati Business Club 11 December 2012 – “It is clear that future prosperity (in the Philippines) will be based on partnerships,” said Hugo Swire, Minister of State at the Foreign and Commonwealth Office of the United Kingdom. Addressing members of the Makati Business Club, Management Association of the Philippines, British Chamber of Commerce, and the Philippine-British Business Council. Swire also said that these days are exciting times for the continued partnership of the Philippines and the UK and that both nations are taking steps to further cement diplomatic and economic ties.

Earlier in the day, Mr. Swire had a dialogue with President Benigno Aquino III to tackle areas of cooperation. He also reported that a joint plan of action had been signed with Foreign Affairs Secretary Albert del Rosario, as well as a new air services agreement with Transportation and Communications Secretary Emilio Abaya, which he hopes would further expand trade and tourism.

In his keynote, Mr. Swire emphasized that the United Kingdom stands as one of the Philippines’ key partners in the goal of mutual prosperity. He said that British ICT specialists have been assisting in the expansion of the Philippine Stock Exchange’s fiber optic network, experts have been sharing their experience in Public-Private Partnerships, and that the UK has played a key role in the crafting of the Bangsamoro Framework Agreement as part of the International Contact Group.

Recognizing the limitations of governments and the crucial role of the private sector in globalized trade, Swire said that “international trade and investment is not just the best route to development; history tells us it is the only one.” Thus, in working towards mutual prosperity he invited the local business community to explore partnerships with British companies, highlighting the United Kingdom’s competitive advantage of a strong legal system.

“We as governments can only do so much. Ultimately, it is business that will drive growth,” he said.

Editor’s note: The Makati Business Club is the foremost Club of senior business executives in the Philippines. The Makati Business Club supports the growth of the Philippines economy and transparency within all aspects of government. The Makati Business Club meets regularly in Manila and holds events of particular interest to the Philippines and international business community.

Report by the Makati Business Club.

Great news for the UK Drinks Industry. The introduction of a WTO-compliant regime on alcohol and tobacco taxes will end discrimination against imported spirits that was a concern and financial handicap to many UK manufacturers. Wider benefits for the Philippine economy and health sector. This represents a further sign that President continues to push his economic reform priorities.

On 20 December 2012, President Aquino signed in to law a new regime covering increased the so-called “Sin Taxes”. The previous measures date from 2005 and led to a WTO ruling in 21 December 2011 that the Philippines regime discriminated against imported alcohol and tobacco products. The Philippines was given until March 2013 to pass new legislation.All parties will breathe a sigh of relief, or perhaps raise a glass of something suitable.

The major UK interest was in the spirits sector where companies wanted to end the discrimination. Despite the WTO ruling, the legislative process was complex with strong protectionist and political forces at play .  The focus was initially almost exclusively about impacts on the domestic tobacco sector, and the original ruling was quickly lost sight of, with the House of Representatives adopting new, WTO non-compliant, legislation.

The result of the new legislation is that approximately £500 million (2/3rds from tobacco) will be generated in new tax revenues, ear-marked for healthcare related spending. The IMF has welcomed the broadening of the tax base and investment in the health sector.

The competitiveness of British drinks exporters in the market has thus been increased in line with WTO requirements. The bulk of the UK’s imports of spirits will see a reduction in tariffs, while the price of low-end domestic products will go up. A small percentage of the most expensive British brands will see a modest increase (caused by an ad valorem element in the new tax structure). However, these products are not marketed on price.

The “sin tax” bill is important for the Philippines. It will further enhance fiscal stability while strengthening a health sector that is in need of much development. It is a further sign of positive economic reform implemented by president Aquino.

President Aquino has signed the two-trillion peso Philippines 2013 budget (GBP 30 billion and approx. 16% of GDP) into law. Main priority areas are infrastructure development, health, education and support to the conditional cash transfers programme. Growth and increased revenue allow for extra spending while also reducing debt as a percentage of GDP. No pre-election splurge, but some in civil society still see too much discretionary spending by legislators and a lack of transparency. Overall, the Philippines 2013 budget shows the government’s credentials for strong management of the economy are likely to remain high. Moody’s indicated the possibility of an credit rating upgrade to PHL’s first investment grade.

Detail

The macro picture

The Philippines 2013 budget was passed on time and with little controversy. It assumes significant growth in revenues of 14%. This should be realised, although it is dependent on increased “sin taxes” (Aquino has just approved a separate bill) from alcohol and tobacco generating an additional P40 billion. The national Philippines 2013 budget assumes a 14% increase in imports, making the Philippines a larger net importer of goods. The Philippines 2013 budget also assumes a reduction in tariff revenues (in line with policy). These will lead to a 2% of GDP deficit. However, with growth likely to remain above 6%, the level of government debt will reduce as a percentage of GDP to its lowest since 2001, maintaining the government’s focus on achieving investment bond rating, something unimagined in the Philippines even a few years ago. A slightly higher inflation rate is assumed confirming central bank’s comments on allowing higher inflation to counter expected global economy headwinds.

The winners 

Social and economic services get the biggest increases in line with anti-poverty objectives and investment in infrastructure. The government will continue to invest heavily in publicly procured infrastructure, mainly on building and maintaining roads. Health and education are the other winners. Infrastructure and social service spend now account for more than a quarter of the total budget, up from when Aquino came to power.

And the rest

Half of the Philippines 2013 budget will go to government departments while a quarter will go to automatically appropriated items (mainly debt service). The final quarter will go to special purpose and unprogrammed funds. A good portion of this is uncontroversial consisting of support to state enterprises and  disaster relief funds. However, PhP436 billion (up from PhP233 billion in 2011) will be allocated to unprogrammed and special purpose funds, which includes countrywide development funds to be disbursed by individual legislators and a new fund called priority social and economic fund. The increase on 2011 is accounted for by the social and economic fund.

The money allocated to legislators has often in the past been a source of poor governance.  Many in civil society view the amount allocated as lacking in transparency, poor practice and still too high. Each member of Congress gets over £1 million of discretionary spending, a Senator nearly three times that.

Reactions from commentators

The Philippines 2013 budget has been generally well received. Some local commentators were hoping for a long-term government employment programme, arguing that employment creation has been private-sector led. But this has been resisted. Most view the budget as continuing the recent trend and priorities.

Opportunities for UK trade and investment

Infrastructure, health and education will continue to be strong growth areas, although the ability of government to spend the money allocated will continue to be variable. The growth in imported goods will also see a larger consumer-driven market in the future, with the UK well placed in the mid-priced and luxury goods sectors, entertainment and contracts in the services sector. Demand for innovative systems and high-tech infrastructures will also grow, with local firms looking for foreign partners. Defence spending will be supported through the allocation of PhP10 billion for modernisation of the armed forces.

The speed of PPP roll out will also be a significant factor for UK companies. PPPs are mostly funded outside of the national budget and have been moving slower than the government would like due to capacity issues. Mr Swire talked about this with the Finance Minister in mid December and we will continue to engage / support by sharing UK skills, training and experience.

UKTI Comment 

The Philippines 2013 budget seeks to use growth to address deep rooted poverty and development issues whilst maintaining strong financial discipline.  On 19 December Moody’s released a report on the Philippines which many local experts think suggests a possible upgrade to investment grade in the foreseeable future.  If that materialises it will be the first time that Philippines sovereign debt has ever reached investment grade, a very positive indicator.

This summary of the Philippines 2013 budget approval was published by UKTI.