Duterte fiscal plan raises red flags

Infra pump priming, 24/7 construction, unsolicited proposals 

MANILA, Philippines - The new administration’s fiscal plan, which entails an aggressive infrastructure spending, around the clock public construction, unsolicited project proposals and presidential emergency powers underscores President Duterte’s resolve to hit the ground running early in his term.

Observers hailed the apparent fiscal pump priming after six years of “cautious” spending program under the administration of former president Benigno Aquino III. Yet this early, red flags are already being raised.

“Their methods mark an innovation, but a little bit complex,” said Emilio Neri Jr., lead economist at Bank of the Philippine Islands.

For her part, Rosario Manasan, research fellow at the Philippine Institute for Development Studies, said “it will all be a matter of projects to be prioritized,” while contractor Ibarra Paulino said execution will be “crucial.”

From here, they listed three vital challenges facing Duterte’s fiscal plan.

Absorptive capacity

Topping the list is government agencies’ absorptive capacity. Manasan said this pertains to the capability of agencies to utilize funds through the completion of projects such that their budgets are consumed by the end of each year.

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Such was not the case, however, since 1992, data from the Department of Budget and Management showed. Since then, allocations were not completely used and that deficits are more a result of low revenues than high spending.

“Agencies are being choked with funds. They are not used to having so much money to spend,” Manasan said.

This could hit even President Duterte’s plan to get emergency powers from Congress to address what is already deemed a traffic crisis in Metro Manila.

Former president and now Pampanga Rep. Gloria Arroyo is set to file a bill that would grant Duterte additional powers to deal with the deteriorating traffic situation in Metro Manila.

Under her proposal, the President may enter into negotiated contracts for the construction, repair, rehabilitation, improvement or maintenance of critical infrastructure, projects and facilities, subject to certain conditions.

“That will help, but as far as public spending is concerned, the bottleneck is not really in the procurement side but on the agencies,” Manasan said in a phone interview.

“You can increase the budget as much as you want, but if agencies cannot absorb it or spend it because projects are not ready, it will be useless,” she said.

Neri had a different concern. He said while fasttracking spending is always welcome, this should not come at the expense of misusing public funds.

He echoed Melissa Yan, deputy executive director of the Government Procurement Policy Board, who earlier said the procurement laws, no matter how tedious, are created as “an anti-corruption measure.”

“If special powers are used to the extent of resorting to bending the rules, that’s a sign of wanting to take short cuts and that’s not good,” Neri said separately.

Finance Secretary Carlos Dominguez, however assured: “We will make sure that projects will undergo enough scrutiny.”

Revenues

The plan is to widen the budget gap—which indicates government spent more than earned — to three percent of economic output from just 0.9 percent last year.

This will be done through additional funds for infrastructure, programmed to corner at least five percent of gross domestic product (GDP) under Duterte. Last year, it hit a record high of 3.3 percent.

While Budget Secretary Benjamin Diokno said the figure is sustainable, Manasan said it would depend on where the deficit would come from. “What is the context of increased deficit?”

“They have plans to have tax reform and reduce income taxes. It remains to be seen if they can offset that, but I don’t think tweaking VAT exemptions would do it,” Manasan said.

“They should be careful because we might go back to a situation where we lack money,” she added.

So far, details were scarce as to the contents of Duterte’s tax reform. Former Finance secretary Cesar Purisima left Dominguez a tax package that would generate as much as P77 billion in the first year, but the latter said he will not use it.

He would, however, embarked on tax administration measures similar to Purisima’s such as filing of tax evasion and smuggling cases, rationalizing fiscal incentives, relaxing bank secrecy law, and making tax evasion a predicate crime to money laundering.

“The impact would really depend on the timing when these measures are rolled out. If they come in later than lowering income taxes, that could be revenue eroding,” Neri said.

At 14.7 percent of GDP as of the first quarter, the Philippines’ revenues are one of the lowest in Southeast Asia. Considering only taxes, the ratio of 13 percent was also among the worst.

Before this period, revenues and taxes, as a proportion of GDP, underwent a decline since 1997, finance data showed. This contributed to an increase in deficit to five percent in 2002.

“I think their appetite for risks is high would be willing to take a credit downgrade if it means pushing with their programs,” Neri said. Dominguez had long criticized the past administration for focusing too much on credit ratings.

But Alvin Ang, economist at Ateneo de Manila University, believes there should be no problem with it.

“Your economy is liquid and we have not really taken advantage of our investment grade. Besides, I’m sure Dr. Diokno knows what he is doing and will not let that happen,” Ang said by phone.

Diokno, whose first term as budget chief saw the deficit at 3.7 percent of GDP in 2000, only had this to say: “The fear of higher deficit is misplaced.”

Private sector woes

Paulino, executive director of Philippine Constructors Association, said another factor to consider would be the capacity of contractors to cope with the spending push.

While he welcomed plans to undertake a non-stop, 24 hours contruction of major infrastructure projects initially in Metro Manila, Paulino said there might not be enough willing contractors in the provinces, particularly Mindanao.

“There are not much qualified contractors who would want to go to Mindanao because of the peace and order situation there. Most of them are here (in Manila) and Cebu,” he said by phone.

Cosette Canilao, former executive director of Public-Private Partnership (PPP) Center, meanwhile said projects should also be scrutinized carefully, especially those coming from the private sector.

Unsolicited PPPs -- such as the Metro Rail Transit 3 and Ninoy Aquino International Airport Terminal 3 -- are so prone to corruption that the government should hire good consultants to evaluate them as well as improve Swiss challenges.

“The challenge process should be clear. The challenge period should also be increased, but that can only be done via amendment of the BOT (build-operate-transfer) law,” Canilao said in an e-mail.

But Neri said this would seem have to wait for a while.

“What (Duterte administration) is doing is contrary to institutional reforms. We have not seen that yet,” he said.

“I think they are trying to put out fires first. Focus on very urgent matters that need attention. Hopefully after, they would go on long-term reform, which is much more important,” he added.

SOURCE:  The Philippine Star

If Trump Wins, Asia Loses

South Korea, Philippines are most at risk in Asia if trade barriers rise

Investors say there's a low chance Donald Trump will build a wall on the U.S. border with Mexico if he becomes president. But they think it’s highly likely he'll slap tariffs on Asian imports, triggering a currency war. 

An investor survey conducted earlier this month by Nomura Holdings Inc. flags a long list of worries under a Trump presidency: from a possible rise in trade protectionism to threats to regional security if the U.S. cuts its military commitments in Asia.

The conclusion is clear: after Mexico, Asia is most at risk.

"A Trump presidency would no doubt hurt Asia’s gross domestic product growth and could ultimately drive cost-push inflation, impart smaller trade surpluses and looser macroeconomic policies," said Rob Subbaraman, the report’s lead author.

In Nomura's report, titled "Trumping Asia", 77 percent of respondents in its survey expect the U.S. will brand China a currency manipulator under Trump and 75 percent predict he will impose tariffs on exports from China, South Korea and Japan. Only 37 percent think he will follow through with a pledge to build a wall along the Mexican border. 

Nomura didn't disclose how many respondents it surveyed. 

Investors' fears aren't unwarranted. Asia is the world’s manufacturing hub and many nations are export-dependent, putting them at risk if trade barriers start rising.

China was the U.S.’s biggest trading partner last year, and if trade restrictions are imposed on the nation, the knock-on effects on the rest of Asia would be substantial, according to Nomura.

None are more vulnerable in Asia than South Korea and the Philippines. South Korea faces a possible backlash from two sides: Trump has criticized a 2012 free-trade agreement with the country, saying it has destroyed almost 100,000 American jobs; and he has vowed to force South Korea to meet the full cost of security guarantees provided by the U.S., which may add to fiscal woes there, Nomura said.

The Philippines faces risks because of possible immigration restrictions. The U.S. is host to 35 percent of the total number of Filipinos working abroad, and Nomura estimates they account for about 31 percent of total worker remittances, a key source of foreign inflows for the local economy.

The Philippines has one of the biggest export exposures to the U.S. in Southeast Asia and Trump’s pledge to bring jobs back to the U.S. may threaten the nation’s burgeoning business process outsourcing sector. The industry caters mostly to U.S. companies and attracts revenue that may equal the size of total worker remittances, about 9 percent of GDP, over the next two years, according to Nomura.

Nomura's analysis finds the least vulnerable economies include India and Thailand.

While the majority of respondents in the Nomura survey view a Trump victory as unlikely, the threat of protectionism is real. 

Trump has already pledged to withdraw the U.S. from the Trans-Pacific Partnership -- a free-trade agreement covering 12 countries from Peru to Malaysia and that accounts for 40 percent of the global economy. If TPP is ratified before President Barack Obama leaves office, Trump still has the authority to withdraw the U.S. from the treaty.

Under U.S. law, the president can impose punitive duties, including a 15 percent tariff for a maximum of 150 days without prior Congressional approval in the case where the U.S. has a “large and serious” balance of payments deficit with another nation, such as China.

If China is declared a currency manipulator -- a power that resides with the U.S. Treasury without needing the approval of Congress -- it could trigger a range of trade restrictions too. Under these conditions of rising trade barriers and reduced foreign investment, Chinese policy makers may seek to weaken the yuan at a faster rate,  according to Nomura.

Trump could well change his policy views in the run-up to the November election and Asian officials are bracing themselves for inconsistent messages until then.

“We are all discovering Donald Trump, as he is himself: there is a stream of consciousness approach to policy pronouncements,” Singapore’s Deputy Prime Minister Tharman Shanmugaratnam said in April. “One can only hope that it evolves towards addressing the strategic interests of the United States in the world.”

source:  Bloomberg

Infra bond offerings beyond PPP eyed

OFFERINGS in the country’s capital markets should cover infrastructure projects beyond those under the public-private partnership (PPP) scheme, according to a regulator and a top financial sector executive.

Securities and Exchange Commission (SEC) Chairperson Teresita J. Herbosa and BDO Capital Investment Corp. President Eduardo V. Francisco separately floated the possibility of “project bonds” in addition to allowing companies with PPP infrastructure contracts to join the Philippine Stock Exchange (PSE).

“In addition to what you would call PPP bond issuances, we’re also thinking of project bonds... we’re conducting a study on that,” Ms. Herbosa told BusinessWorld after the ceremonial listing of P10 billion worth of bonds issued by Ayala Corp. on the Philippine Dealing & Exchange (PDEx) in Makati City on Thursday.

Mr. Francisco, meanwhile, noted that discussions with the PSE included the possibility of expanding the coverage of the listing framework to include companies implementing public infrastructure projects outside the PPP program.

“The thing I’m suggesting is they include other infrastructure [projects] so that if, let’s say the project is not considered a PPP because it was unsolicited, it’s still covered,” Mr. Francisco told reporters in a mix of English and Filipino.

The SEC, along with other organizations, will look into the feasibility of allowing the issue of project bonds by companies engaged in infrastructure developments whether under a PPP contract or not, Ms. Herbosa said.

“Advisers from Treasury of the US and FINEX (Financial Executives Institute of the Philippines) headed by Mr. Francisco as well as PDEx headed by (Chairman and Chief Executive Officer) Mr. (Cesar B.) Crisol would form a committee together with our people to study project bonds or PPP bonds,” Ms. Herbosa said.

In end-May, the PSE released the proposed supplemental listing and disclosure rules applicable to entities undertaking PPP infrastructure projects to solicit feedback from stakeholders.

According to the draft rules, a company or group working on an infrastructure project under a PPP contract worth at least P5 billion can join the stock exchange.

It must have commenced commercial operations or completed construction or a phase at the time of listing.

In addition, the PPP contract of the company or group must have a minimum remaining life of 15 years from the date it filed a listing application.

PSE Chief Operating Officer Roel A. Refran, in an earlier interview, cited that the minimum 15-year remaining life requirement for PPP contracts of interested entities as the “major point” of discussions in public comments.

“That should not be a problem because infrastructure, especially when their implemented under PPP contracts, last 20-30 years, so it’s more on the [inclusion of] other projects,” Mr. Francisco said when asked for comment.

Mr. Francisco also noted that private-sector proponents of PPP projects would rather tap banks for pre-funding requirements rather than the capital markets.

“When you win the PPP, you have 12 months to close. Time-wise, procedure-wise, I don’t think it will work. So, what the PSE did was to open the market when the concerned entities are simply de-risking or close to completing the project,” Mr. Francisco said.

“That will work perfectly for the bank. Sometimes, we lend to these consortium, say for the first four years of construction, and once operational, they can refinance. So, if the PPP comes out with a [better] alternative, they can in turn pay off the banks.”

The administration of President Benigno S.C. Aquino III put together 53 projects in the PPP pipeline. Of these, 12 cumulatively worth P217.4 billion were awarded, although the P5.61-billion Philippine Orthopedic Center modernization contract was rescinded in November last year. The pipeline also includes 15 projects in various stages of procurement, two for rollout, five for government approval and three with ongoing studies.

source:  Businessworld