IMF: PHL has room for new taxes

With the Philippines’ fiscal consolidation slowing this year, the International Monetary Fund (IMF) said the country still has room to introduce new tax measures.

“On the fiscal policy side, we see fiscal consolidation proceeding in 2024, although it will be more moderate than envisioned in earlier projections,” IMF Mission Chief Elif Arbatli Saxegaard said at a press briefing on Wednesday.

“In terms of spending, we actually see more spending on the public side. We see that being offset or financed by higher revenues,” she added.

The IMF projects the fiscal deficit to settle at 5.6% of gross domestic product (GDP) this year and in 2025. However, it noted that its deficit definition is different from the National Government’s (NG) as it uses a different standard in capturing the deficit.

“Based on our definition of the deficit, we expect the deficit to go from 6.1% in 2023 to 5.6% this year and to remain at 5.6% in 2025,” she said.

The NG set its budget deficit ceiling at 5.6% of GDP this year, equivalent to P1.48 trillion. Next year, the deficit is projected to settle at 5.3% or P1.54 trillion.

The IMF noted that there is room for additional tax measures that will create more fiscal space.

“Over the medium term, the fiscal consolidation plans remain appropriate and should be supported by a sustainable plan to raise tax revenues and implement expenditure reforms,” Ms. Saxegaard said.

The Philippine government can look into excise taxes as an option to generate revenues “sufficiently and quickly,” she said.

Last year, then-Finance Secretary Benjamin E. Diokno pushed for an excise tax on “junk food” and higher taxes on sweetened beverages. These taxes were projected to generate up to P76 billion in the first year of implementation.

However, the Department of Finance (DoF) earlier this year said there are no plans to introduce new tax measures apart from the ones already pending in Congress.

“In terms of other areas over the medium term, there could be a lot of different options that could be considered. One area is improving the efficiency of the value-added tax (VAT) system,” Ms. Saxegaard said.

Last year, the DoF said that the Philippines has one of the lowest VAT efficiencies in Southeast Asia despite having the region’s highest VAT rate at 12%.

From 2016 to 2020, the country collected an average of P723 billion from VAT, which is only around 40% of the expected VAT collection.

Ms. Saxegaard also noted the possibility of pursuing a carbon tax.

“We understand that there’s also different tradeoffs playing out here. The cost of power and electricity in the Philippines is quite high,” she said.

The Finance department has been studying various carbon pricing options for the country, including a carbon tax and emissions trading system (ETS). This as it seeks to encourage businesses to shift to sustainable practices.

The Philippines currently does not have any explicit form of carbon pricing.

“As a growing economy, the Philippines has to weigh different considerations in thinking about a carbon tax. It is one option for their consideration that can support the transition to a green economy to promote renewable energy, to shift consumption patterns away from polluting energy to more green energy sources,” Ms. Saxegaard said.

“In that respect, it could stay on the table. But it’s a complicated issue, so it needs to be considered very carefully.”

Meanwhile, IMF Representative to the Philippines Ragnar Gudmundsson said that the government should also pay close attention to granting tax incentives.

“What we would also recommend is continuing to monitor closely tax incentives as they’re being granted and ensuring that they contribute effectively to additional investments and momentum for growth.”

“There also may be a sense of provisions to these incentives so that eventually, once those investments have come to the Philippines and contributed to growth and that they’re sustainable over time, there will also be a contribution through, for instance, income tax over time.”

‘NEUTRAL’

For next year, the IMF said that the fiscal stance will be “neutral.”

“That means that the impulse from the fiscal policy is neither contractionary nor too expansionary,” Ms. Saxegaard said.

Financial conditions are also seen to improve as both the Bangko Sentral ng Pilipinas (BSP) and US Federal Reserve are expected to continue easing.

BSP Governor Eli M. Remolona, Jr. has said that the central bank can cut rates further in the fourth quarter, possibly by up to 50 bps. The Monetary Board’s remaining meetings are on Oct. 16 and Dec. 19.

“All of these financial sector developments, including the reserve requirement cut as well, can support the more favorable financial conditions. That will support a pickup in investment, private investment, and also some pickup in private consumption next year, allowing the fiscal side to be sort of more neutral,” Ms. Saxegaard said.

The BSP will slash the reserve requirement ratios (RRR) of big banks by 250 bps to 7% from 9.5% later this month.

SLOW FISCAL RECOVERY

In a separate report, Fitch Solutions’ unit BMI said that the Philippines’ recovery in its fiscal position will be more gradual.

It said that the proposed P6.352-trillion national budget marks an increase in public spending, which will derail consolidation efforts.

“This will reverse the country’s fiscal consolidation efforts. Admittedly, the Philippines fiscal recovery has already fallen behind regional counterparts and the latest budget certainly does not help this cause,” it said.

BMI said the government will “fall short” of its fiscal targets, projecting the budget gap to hit 5.9% of GDP this year.

The NG will also struggle to bring down debt levels, BMI said.

“While the authorities aim to reduce public debt as a proportion of GDP to 55.9% by 2028, we believe that this is unlikely to be met. To achieve this, the deficit must be maintained at 3.6% of GDP over the subsequent three years (2026-2028),” it said.

“But this would necessitate spending cuts of almost 1.0 percentage points, based on our estimates, making it challenging for the current administration to balance its economic agenda.”

Latest Treasury data showed that the NG’s outstanding debt dipped to P15.55 trillion as of end-August.

In the first half, the debt-to-GDP ratio stood at 60.9%. The government expects the debt ratio to end at 60.6% of GDP this year.

“Instead, we forecast the budget shortfall to average 4.6% over the same period. Consequently, public debt will recede more slowly, eventually reaching 58.8% of GDP in 2028.”

On the other hand, BMI noted that the government could surpass its revenue targets.

“Revenue targets are relatively watered down in comparison. The government is forecasting revenue collection to dip from 16.1% of GDP in 2024 to 15.8% in 2025. In our view, this is a tad too conservative especially when the macroeconomic backdrop is set to improve next year.”

In the eight-month period, revenue collections jumped 15.91% to P2.99 trillion from P2.58 trillion last year.

“Philippine policy makers tend to underestimate their revenue targets, as seen in the past two years. Currently, we have projected revenue collection to be around 16% of GDP, which is already higher than the government’s expectation of 15.8%. If revenue exceeds even our projections, we could anticipate a smaller budget deficit.”

Source: Business World

IMF trims 2024 Philippine growth forecast to 6%

The International Monetary Fund (IMF) has cut its growth projections for the Philippines following a slowdown in private consumption.

Elif Arbatli-Saxegaard, chief of a visiting IMF mission, told a briefing on Wednesday that the global lender now expects the country to grow by 5.8 percent this year, down from a July forecast of 6.0.

The outlook for 2025 was also trimmed, to 6.1 percent from 6.2 percent.

Both forecasts fall below the government's 6.0- to 7.0-percent target for 2024 and the 6.5-7.5 percent for the following year.

"The downward revision from our July forecast reflects our view that private consumption is going to grow slightly with less momentum," Saxegaard said.

She qualified, however, that "the downgrade is very small and reflects the fact that the first half private consumption growth was lower than what we had anticipated."

This was likely due to high food prices, Saxegaard added.

"With the ongoing efforts of the Philippine government, including nonmonetary efforts to reduce food prices and especially rice prices, we do think that this will be supportive of consumption growth going forward."

Gross domestic product (GDP) growth averaged 6.0 in the first half following a below-target 5.8 percent in January-March and a better-than-expected 6.3 percent in the second quarter.

Finance Secretary Ralph Recto last month said that growth could hit 6.1 percent this year, to be helped by slower inflation.

GDP growth was just 5.5 percent last year, missing the 6.0- to 7.0-percent target, as high interest rates and inflation dampened household spending.

Inflation, which hit a 14-year high of 8.7 percent in January last year, has since returned to the 2.0- to 4.0-percent goal. It eased to 3.3 in August and is expected to end the year well within target.

The IMF trimmed its forecast for 2024 inflation to 3.3 percent and said the rate would moderate to 3.0 percent next year.

"That would be supported by lower food and core inflation remaining well within the target," Saxegaard said.

"Downside risks to the outlook could include a slowdown in major economies that could disrupt trade and financial flows, commodity price volatility and supply shocks, and an escalation of geopolitical tensions," she added.

"However, an easing of global financial conditions, or faster than anticipated private investment linked to public-private partnerships and larger foreign direct investments inflows could stimulate higher growth."

Lower inflation has allowed the Bangko Sentral ng Pilipinas (BSP) to start lowering key interest rates, in August announcing a 25 basis point (bps) cut.

Amid speculation whether the BSP would opt to follow the jumbo 50-bps cut announced by the US Federal Reserve last month, the IMF said a "gradual" easing would be appropriate.

"With inflation and inflation expectations returning to target, a continued gradual reduction of the policy rate is appropriate," Saxegaard said.

"Along this declining rate path, it will be still important for the BSP to anchor inflation expectations in the target band and remain data dependent and agile."

The IMF, however, declined to suggest a pace and magnitude for potential cuts at the BSP's policy-setting meetings on October 16 and December 19.

BSP Governor Eli Remolona said on Monday that they had scope to do a 50-basis-point rate cut in one policy meeting, but such a big reduction would only happen if there were worries about a so-called hard landing for the economy.

The Philippines' current account deficit, meanwhile, is now expected to hit 2.0 percent of GDP this year compared to the 2.1 percent forecast in June.

It expects the shortfall to hit 1.9 percent next year.

Source: Manila Times

Challenges and Outlook for the Construction Industry

The construction industry, a key contributor to the Philippine economy, generated about seven percent (7%) of the country’s gross domestic product in 2022. The recent COVID-19 pandemic affected the real estate and construction industry and caused financial burden due to additional health and safety requirements, project suspension and delays, and reduced productivity resulting from massive supply chain disruption, and material and equipment procurement difficulties. The construction sector is expected to see growth in the following years as the country’s economy recovers. However, raging inflation, high-interest rates, and global geopolitical instabilities are seen to challenge growth forecasts.

The industry has been characterized by declining efficiency and performance over the years. As the industry continues to evolve, it is likely that additional steps will be taken to address new and emerging issues. With economic activity in the country picking up, the Philippine construction sector is bound to face more challenges. This article discusses some of the major challenges faced by the industry and how they can be overcome.

Labor Shortage

The lack of skilled workers and professionals, ranging from architects and engineers to construction workers and equipment operators, create difficulties for contractors in hiring and retaining talent. The growing skills gap contributes to this labor shortage as the construction sector urgently needs skilled labor with the need to recruit over two million workers by 2025 to meet demand. This gap is attributed to limited training and educational opportunities, coupled with an aging workforce and Filipinos looking for better opportunities abroad. Incorporating construction technology may help in fixing the issue of labor shortage in the construction firms but the industry is also slow when it comes to adapting to new technology. By investing in training and modern recruitment strategies, construction firms can bridge the labor gap, bringing in fresh talent and new perspectives.

Cost Overruns and Construction Delays

Cost overrun occurs when a project exceeds its original budget due to unexpected expenses, delays, and other unforeseen factors impacting project management, construction firms, and the industry at large. The fluctuating cost of construction materials, including raw materials, challenges firms to forecast future expenses affecting project profitability. Poor productivity and lagging technological advancements lead to delays and increased costs.

Delays also pose a major challenge in the industry, significantly affecting construction firms and the entire supply chain, given the complex nature of construction projects, which involve numerous stakeholders like subcontractors, suppliers, and project managers. Supply chain disruptions are a leading cause of these delays. The construction sector depends on the prompt delivery of materials and equipment, and any interruption in the supply chain can lead to significant project setbacks. Factors such as natural disasters, transportation difficulties, or sudden regulatory changes can also disrupt material delivery.

Corruption

A report citing confidential interviews with industry players indicated that construction companies allot up to thirty percent (35%) of their budgets for infrastructure projects to pay off government officials and employees preventing them from causing any further delays. This causes companies to compromise other parts of the construction such as the quality of raw material, in order to accommodate the additional cost and to keep the projects moving.

Fifteen to thirty-five percent (15-35%) of the expenses were spent on “other costs of doing business” while construction companies have to maintain a net income margin of eight to fifteen percent (8-15%) no matter the costs. Since the budget for a project was already fixed, other parts of the project sometimes suffered for those “other costs”. Additionally, the poor quality of buildings, partly linked to corruption, makes the country vulnerable to natural hazards such as earthquakes and typhoons.

Other Emerging Issues and Challenges

Other risks and challenges include barriers to the implementation of green building practices, declining efficiency and performance of the industry, and occupational health and safety concerns. Occupational health and safety in construction projects is a critical concern, with a need for risk management and mitigation strategies. The rapid growth of construction projects has also led to the generation of high amounts of construction waste and excessive resource consumption, resulting in adverse environmental impacts. The industry's efficiency and performance have been declining, which has a significant impact on pollution. Moreover, there is a lack of infrastructure and connectivity that hinders inclusive growth and requires substantial investments.

The Future Outlook of the Construction Industry

Despite the challenges, the industry faces exciting prospects with key trends and potential opportunities that will ultimately determine its fate. While daunting, each of these hurdles presents an opportunity for growth and innovation. In a nation poised for significant transformation, the industry holds the key to economic progress, infrastructural advancement, and the adoption of sustainable practices.

Affordable housing. The government is ramping up efforts to address the shortage of affordable housing units in the country, particularly for the low-income sector.  The government has launched several initiatives to address the shortage of affordable housing including the establishment of the Housing and Urban Development Coordinating Council, creation of a housing finance company, and implementation of various socialized housing programs. Additionally, the government has implemented tax incentives for developers engaged in building low-cost housing units and has also established a fund for housing financing.

Development of new urban centers. The government is pushing for the development of new urban centers outside Metro Manila to decongest the capital and spur economic growth in other regions.  This includes investment in infrastructure and the creation of economic zones to attract investment and create jobs. Urban planning, in particular, is a critical aspect that will shape the industry’s future. However, the country is known for its unique set of laws and permits that can sometimes lead to delays and bureaucratic hurdles. Balancing this need for effective urban planning with environmental concerns, historical preservation, and infrastructure demands will require careful coordination.

Further, the industry faces challenges related to land use, zoning, and local government policies, which can vary from one region to another. These diverse regulatory frameworks demand a high degree of adaptability from construction firms, while they work effectively within this multifaceted regulatory environment. If the construction sector including the way the government handles business permits, were modernized and made digital, the value of the industry could reach up to P130 trillion from P2.3 trillion in 2018, which would increase the number of jobs in the industry. Without modernization, the industry’s value could go up to only P43 trillion in 2030.

Infrastructure development. The government aims to embark on a multi-billion dollar infrastructure development initiative that will upgrade the country's infrastructure, including airports, seaports, highways, and bridges by working with the private sector to finance, build, and operate these projects. With a rapidly growing population and the need for modernization, the government is setting aside substantial funds for ambitious development initiatives in infrastructure projects, which include road networks, public transportation, and utilities. These investments not only promise economic growth but also open doors for construction firms to secure major projects. Again, this rosy outlook is met with the real-world challenge of efficient project management and strict compliance with regulations.

Environment-friendly construction practices. The construction industry lags behind other sectors in its response to the problems of the environment. Construction companies should be encouraged to continuously search for inputs and ways of working which will minimize the negative impact of construction activity on the environment. There is a growing interest in green building and sustainable construction practices, as developers look to create projects that are more environmentally friendly and energy efficient. On its part, the government is promoting green building and sustainable construction practices through various initiatives, including the establishment of a green building council, the creation of a green building rating system, and the implementation of tax incentives for developers who build environmentally friendly projects. However, green building implementation is hindered by barriers related to social and economic aspects of sustainability. Additionally, the government is encouraging the use of renewable energy sources, such as solar and wind power, in construction projects. 

Advancements in Construction Technology. The future of the construction industry is intricately tied to technological advancements. As the world embraces innovative construction methods and materials, the Philippines is poised to follow suit. Additionally, adopting these emerging technologies can enhance workers' and contractors' safety on construction sites. However, even when construction firms recognize the advantages of these technological solutions from design to execution, securing the necessary funding often presents a significant obstacle.

Integrating modern technology promises efficiency, cost-effectiveness, and safety improvements in the country. This includes the adoption of Building Information Modeling, drones for site inspection,  3D printing, and automation in construction processes. However, these advancements are met with the practical need for training the workforce and addressing infrastructure challenges, such as reliable internet access and a lack of funding. With some exceptions, the sector remains a technology laggard and is struggling to get to grips with data and analytics. Major technology players are already eyeing up the sector, seeking to use their data mastery and fast innovation to steal market share.

A Growing Focus on Safety and Compliance. The next few years in the Philippines would focus on safety and adherence to codes and standards in construction. The reason for this is a heightened awareness of improving employee welfare in the industry. Safety policies, conducting safety training and regulation at a high level, will be further implemented by both workers and investors. Moreover, as the industry expands, meeting these standards is critical not only for the well-being of workers but also for securing contracts and maintaining a positive reputation for the Philippines construction industry.

Skilled Labor and Workforce Development. As the demands of construction projects become more complex and diverse, the need for well-trained professionals also becomes more evident. From architects to tradespeople, the Philippine construction industry requires individuals with expertise in cutting-edge construction methods and technology. One solution is investing in training and education programs to bridge the skills gap, particularly focusing on younger, tech-savvy generations. Modernizing recruitment methods and offering competitive benefits can make the construction industry attractive to potential employees. Further, embracing technological advancements, such as automation and digital tools, can compensate for the workforce deficit and enhance productivity. In order to meet these demands, workforce development programs and educational initiatives have to emerge. A forward-looking approach recognizes that a skilled labor force is central to the industry’s success and the realization of its future potential.

Environmental, social, and governance (ESG): On the one hand, engineering and construction (E&C) companies aim to be at the frontline of delivering sustainable infrastructure, energy production, as well as carbon capture, biodiversity and other sustainability projects. On the other hand, the industry is a massive emitter of carbon, with concrete alone responsible for approximately eight percent of global CO2 annually. Hence, business leaders in the E&C sector must commit to their ESG goals through data-driven digital innovations, performance evaluation and risk management.

Throughout the 2020s the construction industry was responsible for building the next generation of sustainable infrastructure, including renewable energy facilities, and energy-efficient buildings with low lifetime carbon footprints and low water usage. The construction value chain has become equally sustainable, with a circular design, sensitivity to biodiversity, and strong support of local communities. Consultations with those impacted by projects will also result to sustainability.

Conclusion

The Philippine construction industry faces a pivotal juncture with both opportunities and challenges from labor shortages and technological adaptation to cost overruns, delays, and communication barriers. Factors like increased infrastructure investment and skilled workforce development will shape its future. However, the road ahead is not without its share of intricacies, particularly concerning the government’s complex regulatory landscape and the nuances of urban planning. This is why the Philippine construction industry must respond with resilience, adaptability, and a multi-sectoral vision to ensure a flourishing tomorrow for the country. The industry must navigate this path, balancing the allure of opportunities with the practicalities of execution to truly shape the future.

By: Fernando Penarroyo

Source: Philippine Resources