On improving the business climate and attracting foreign investment How do you assess the net effect of the first package of the Tax Reform for Acceleration and Inclusion (TRAIN 1) programme on the wider economy?
HELEN Y DEE: The idea of TRAIN 1 was to combine an increase in excise tax on certain products, including fuel and coal, with a reduction in income tax rates. However, the inflation rate has grown, partly due to these tariffs, but also as a result of the rice shortage: the limitation of rice imports, combined with the miscalculation of available domestic stock by the National Food Authority, pushed up prices. Typhoon Ompong (Mangkhut), which landed on September 15, 2018, produced the second biggest damage in agriculture and also increased food prices. The government did not foresee the global rise in oil prices and imposed an excise tax on fuel that ranges from P1.65 ($0.03) to P3 ($0.06) per litre, so the government agreed to suspend the scheduled increase in the excise tax on fuel for three months in 2019. However, due to the decline in the price of crude, they are reversing their stand.
How do you think the rules and regulations of the Ease of Doing Business Act will affect the business climate in the Philippines?
DEE: The new law aims to establish a single-stop office that handles all the different permits and procedures. If the government manages to consolidate all the protocols into a uniform requirement, it will significantly speed up the process of opening a business. Parallel to this, the introduction of the national ID will simplify identification processes. This measure is very positive for the banking sector, as it will remove barriers to opening a bank account related to compliance and documentation, and it will also facilitate the integration of small and medium-sized enterprises (SMEs) into the banking system, as many SMEs currently operate outside it. However, the fact that it is not compulsory raises concerns about the broader impact of the plan.
In what ways can the country attract sufficient foreign direct investment flows while trade protectionism increases worldwide and rationalisation of investor incentives is being proposed at home?
DEE: The regulations on foreign investment, established by the constitution enacted in 1987, need to be reviewed. There have been calls for this change to be undertaken, and hopefully formal discussion will begin on this soon. The question of whether companies relocate to the Philippines from China as a result of tariffs imposed by the US will depend on US regulations for content stating the origin of products and components. The degree of foreign origin recognition is therefore important, and companies in the Philippines need to scale up their contribution to the final product in order to avoid protectionist tariffs. To this end, technological development and training need to be optimised. There are business opportunities in different sectors, such as the automobile industry. The Philippines already produces electronics, which constitute 25% of a car’s components, so it makes sense to focus on this strategic sector.
How is it possible to increase financial inclusion while maintaining adequate net interest margins and ensuring sufficient risk management?
DEE: The central bank has simplified the requirements for opening a bank account, to accommodate the majority of the Filipino people, the majority of whom remain unbanked. Today, this segment of the population can open a bank account for just P100 ($1.86) and one simple identification document. However, many of these accounts end up containing no more than a few hundred pesos and are used for very small and sporadic transactions. Fees are thus the only way for banks to make a profit. The current system is about social responsibility rather than business. Given the high margins in this segment, as well as the high cost of setting up physical branches or investing in digital services, the only viable option for banks is to scale up operations. When it comes to risk management, the Philippines has the most highly capitalised banking system and the strictest regulator in the region. Risk management is thus highly advanced, but this entails a high cost, which has edged out some smaller banks.
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