Interview with Hon. Ralph Recto, Secretary of the Department of Finance (DOF), Philippines

22 Jul Interview with Hon. Ralph Recto, Secretary of the Department of Finance (DOF), Philippines

Could you provide an overview of the current state of the Philippine economy, major trends currently influencing the economic landscape and the outlook for the coming years?

First of all, we are working in a challenging environment with two hot wars and a trade war. Because of that, global supply chains have been affected, causing inflation and rising interest rates. Just like everyone else, we are very much affected by these challenges. In spite of that, the Philippine economy grew by roughly 6.2% over the last two years, one of the highest in the ASEAN region. This year, we expect to grow by around 6%, with the IMF predicting 6.2% growth in 2025. We are very optimistic about hitting these targets as inflation is decreasing and there’s a possibility for a rate cut by the Federal Reserve by the end of the year.

We have adjusted our growth and revenue targets within our medium-term fiscal framework to be more conservative, acknowledging the external environment. Initially, we aimed to reduce our debt-to-GDP ratio from 61% to 51%, but after discussions with the economic team, we revised this target to 55.9% by 2028.

Often hailed as a “Fiscal Reform Hero,” the secretary’s extensive experience and vision have played a crucial role in shaping the nation’s financial landscape. Could you elaborate on any recent changes to the fiscal targets of the Department of Finance and the reasons behind these adjustments?

We did make some adjustments in our medium-term fiscal framework, taking into consideration the external environment. It was very ambitious in the beginning, but maybe at the expense of growth. That is why we thought it best not to reduce the debt-to-GDP ratio or the deficits too drastically, but to do it at a more strategically controlled pace, aiming for 55.9% by the end of 2028 to support economic growth. Despite this, the deficit will continue on a downward path.

The National Economic and Development Authority (NEDA) Board, chaired by the president, agreed to reduce tariffs on rice to tackle inflation, which is heavily influenced by rice prices. In May, rice inflation accounted for more than 50% of the headline inflation for average consumers. For those in the bottom 30% of households, rice has a bigger share at 80%. High inflation poses a challenge to achieving growth targets.

The Monetary Board has done much regarding increasing interest rates. On the part of the government, it is continuously investing in agriculture to boost production and has reduced rice tariffs from 35% to 15%, to better manage inflation. With more than 70% of our economy driven by household consumption, we expect these measures to improve growth numbers moving forward.

The DOF’s main priority is to raise 4.3 trillion pesos ($7.3 billion) in revenues this year, aiming to expand social services and create more jobs to support economic recovery. What are the long-term focus areas for ensuring a promising economic future for the Philippines?

The national budget is approximately 5.77 trillion pesos [$98 billion], meaning we need to spend around 15.8 billion pesos [$268.1 million] daily. To meet our revenue target of 4.3 trillion pesos, we must collect about 11.7 billion pesos [$198.6 million] each day. The Bureau of Internal Revenue (BIR) is tasked with collecting roughly 3 trillion pesos [$50.9 billion], the Bureau of Customs (BOC) about 1 trillion pesos [$16.8 billion] and the Bureau of the Treasury (BTR) will gather non-tax revenues, including fees, charges, privatization efforts and government dividends.

In January 2024, the secretary emphasized the need for rapid government digital transformation. Can you discuss recent advancements in this area and what new technologies are being implemented within the DOF to improve service delivery and operational efficiency?

The Department of Finance is on track to do the enhancement of the existing National Single Window, which we will undertake through the help of the private sector. This aims to reduce smuggling and mis-declarations at the BOC.

I also recently met with the BOC and other agencies to discuss a pre-border inspection system and electronic invoicing to address revenue leaks. This initiative will enhance trade facilitation, improve ease of doing business and ensure proper revenue collection. We aim to complete it within one to two years.

Next, we are focusing on the BIR. Our goal is to make payment easier for taxpayers, as income tax here is based on self-assessment and compliance. We believe that simplifying the process and digitizing tax payments, starting with cities nationwide will encourage compliance. This digitization effort is a joint program with the Department of Information Communication Technology and the Department of Interior and Local Government.

The Department of Finance is evaluating the BIR’s current processes and technology to determine improvements. With the shift towards e-commerce, it’s crucial that we adapt quickly to collect taxes from online transactions, just as we did from traditional brick-and-mortar stores.

Could you elaborate on the measures being implemented to enhance the clarity of VAT regulations and what benefits foreign investors can anticipate from these advancements?

Currently, we’re unable to collect VAT from e-commerce. We’ve asked Congress to pass a law to mandate VAT collection from both local and foreign e-commerce enterprises like Amazon and Netflix. The House has passed it, the Senate has also recently approved it, so now we expect it to be signed into law by year-end. Additionally, we seek to expand and refine our fiscal incentives with the passage of the “CREATE MORE” [Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy] to attract more investments. We also plan to exempt export-oriented enterprises from paying VAT so that there are no more refunds, making it easier for them.

FDI and international partnerships are vital for the Philippines’ economic growth and development. How is the DOF facilitating opportunities in these key areas and what current or potential partnerships with the US can bolster growth and development?

The government is spending about 5% of GDP on public infrastructure investments, including roads, bridges, airports, seaports and digitalization. The growth triangle of Pampanga, Subic, Metro Manila, Clark and Batangas is crucial, as over 50% of GDP comes from Region 3, Central Luzon, Metro Manila and Region 4. Investing in these areas is therefore vital, with a focus on airports, railways and power, especially since Region 4 is a manufacturing hub for both domestic production and exports.

The “CREATE MORE” bill in the Senate offers income tax holidays of four to seven years for exporters, a 5% gross revenue tax and special corporate income tax options for domestic enterprises. To address high power costs, it includes an enhanced deduction scheme allowing businesses to double their power expense deductions, effectively reducing their power costs.

The Department of Public Works and Highways and the Department of Transportation have the most resources for our infrastructure build-up. We now have a new Public-Private Partnership (PPP) code for financing infrastructure projects using private sector funds. For example, the Manila airport project, worth around 170 billion pesos [$2.9 billion], was successfully procured through a PPP to modernize and double its capacity. Similar initiatives are planned for regional airports, such as Laguindingan in Region 10. It should be a model now for all the other regional airports as well. We have a list of about 185 projects worth roughly 9.55 trillion pesos [$160 billion dollars] primarily focusing on infrastructure.

Do you have a final message for the millions of readers of USA Today about choosing the Philippines as their next business, tourism or investment destination?

I’d like to thank our fellow Filipinos in the U.S., who provide the largest source of cash remittances, contributing about 40% share of our total $33.5 billion in remittances in 2023. The Philippines, with an average age of 25, offers a young workforce, making it an excellent partner for countries like the U.S., where the average age is 38. Now is the time to invest in the Philippines. There are many opportunities for investors to profit. We invite you all to invest and partner with us.