#TalkThursday: Cesar Purisima on PH's investment grade
MANILA, Philippines - #TalkThursday's guest this week is Cesar V. Purisima, the Secretary of the Philippine Department of Finance.
It's his second time serving under the position, being Finance Secretary under President Gloria Macapagal-Arroyo. He resigned in 2005 in the middle of the Hello Garci controversy, with nine other cabinet members as part of the Hyatt 10.
Presently, he is on the Board of Governors at the Asian Development Bank.
His previous stint in government service was as Secretary of the Department of Trade and Industry, from 2004 to 2005. Before then, he was the Chairman and Managing Partner at Sycip, Gorres and Velayo, the Philippines' largest multidisciplinary professional services firm.
In 2012, the leading global finance magazine, Euromoney, named Purisima Finance Minister of the Year. He was also dubbed Finance Minister of the Year the previous year, by the financial news source, "Emerging Markets."
Purisima talks to Rappler about the most recent upgrade in the Philippines' sovereign credit rating, rising to investment grade debt rating for the first time ever. The Philippines received this upgrade from the global credit rating firm Fitch.
Watch the episode below.
Maria Ressa: Hello and welcome. I'm Maria Ressa and this is #TalkThursday. For the first time ever, the Philippines gets its first investment grade rating, joining the list of countries considered safe for investment.Credit rating firm Fitch cites a robust economy and improved fiscal management for the upgrade.With us today to talk about this upgraded rating, what it means for the Philippines, what it means for you and me is finance secretary Cesar Purisima.In 2012, global finance magazine Euromoney named Purisima Finance Minister of the Year. How were you able to get this upgrade?
Cesar Purisima: Well as you know the market rates us two notches above investment grade. We’re probably the most underrated country in the world. I think we deserve the investment grade. When you look at it from an external standpoint, we’re net creditor country already. When you look at our fiscal situation, our deficit is well under control. In fact our debt to GDP is down to 40.9%. And if you look at our foreign debt to GDP, its even lower than Thailand, Malaysia, Korea. And other countries that are much higher rated than the Philippines.
Ressa: What sparked this turn around Secretary?
Purisima: It’s really good governance. Good governance. as the present says is good economics. And I think we just need to continue to focus on that. With better governance we’ve been able to gain more confidence which is the currency of business. With confidence, there’s more investments. With confidence, there’s better compliance on taxes. With confidence, you borrow at a lower cost and as a result it’s created room for us to increase investments in our people. For example, since President Aquino took over, we’ve increased the budget of the Department of Education by 45%, which is already the biggest item to an even larger item. He plans to continue increasing that.Department of Health, 77%. DSWD over 267%. Infrastructure and DPWH, 25%. See, we’re the youngest average age country in Asia. And we’re about to hit that demographic sweet spot. But if we are to realize the demographic dividend, we need to make sure our people will be productive and healthy participants in the future Philippines. And that’s what the President is very conscious about. He wants to make sure that every Filipino has the opportunity to actualize their potential.
Ressa: What are your main priorities, potential problems you see that you want to solve before the year ends?
Purisima: Well first, I need to continue to create fiscal space. And fiscal space means more revenue, and as you know our tax effort is at 12.8%. We want to bring this up to 16%. And to bring it up to 16%, we need to continue to focus on a key, a few key items. And we’re focusing on three.One is income tax from self-employed individuals. The sad thing is between 2011 and 2012, as a percentage of total individual income taxes, this sector decreased to about 6.5%, from over 8% the previous year. And this sector based on our knowledge of Philippine society are really the princes of society. There were over 404,000 of them who filed of average of 33,000 income tax payment, for the past year. Our goal is to increase that to 1.8 million and we’re basing this 1.8 million based on data of the professional regulation commission that has over 2 million practicing professions in its professional database. The NSO that says there are over 3 million of them. The SSS that has over 600,000 voluntary registrants who declare themselves as self-employed. And our next goal is to increase the average from 33,000 to 200,000 minimum. And if we’re able to do that, say if we increase the 400 to 1.5 million and increase the average to 200,000, that’s 300 billion pesos. At our current GDP, that’s 3% of GDP.
Ressa: Do you think that’s possible to do?
Purisima: Of course.
Ressa: Well first of all it looks like that requires a whole mindset change, getting, making sure that the BIR is corruption-free or as corruption-free as it can get.
Purisima: Well corruption-free.. maybe less corruption. And knowing that I’m using now information as a way to drive performance. So we’ve gone down to the individual units and we’ve asked for data from them and we told them “Okay, you have so many registered. We believe the potential is this.” The average is this, we want the potential average to be this.
Ressa: For decades, correct me if I’m wrong, for decades the Philippines’ personal income tax rate was around 4%. Is that correct? The amount of people who pay personal income tax for the longest time was.. it played in and around 4%.
Purisima: It’s very low. I don’t know about 4% but the bulk of our individual income tax come from those whose taxes are withheld from salaries.
Ressa: Correct. So you’re actually know talking about a major mind shift. Have you seen this in the time you’ve been in office?
Purisima: Well it’s, the shift is really in the use of information to drive performance. See, people will continue to abuse their position if they know that they will be able to get away with it. But now that they now that we have information and now that they know that I’m not just focusing on big data but I’m focusing down on the lowest levels, they will, it will be harder for them to get away with it. So we’re putting the pressure on them by telling them we know.So we’ve asked for example, my visits for them to name their top 20 in each of the different categories. And whenever they see the number, they themselves are shocked. You’ve lawyers paying 200, doctors 400 pesos. These are ridiculous. I call the number ridiculous because you can’t survive on this number. In fact...
Ressa: So in your mind, this is low hanging fruit. If you can get this, it’s 3%.
Purisima: And it’s really about government working together. The Department of Labor which oversees the PRC has instructed the PRC to make the income tax return a requirement for renewal of license. So that should help us because if you don’t show an income tax return, and then if you show a ridiculous amount then probably they’ll ask you what are, what have you been doing? Maybe you should not practice the profession. There should be a minimum. The DPWH now requiresincome tax return as the basis for determining you’re contractual capacity. So does the Department of Budget Management through the GPBB. So if all government agencies work together just on those who contract with government, it will improve our ability to increase compliance. And hopefully, the embassies are watching Rappler. So that they’ll require income tax returns rather than titles and passbooks and all of those. As a basis to prove financial capacity to be granted visas. So, anyway we have information sharing requirements with those countries. If they ask for those information from us we would gladly provide them these information. So this is one area. And I’m hoping that over the next three years, we’ll be able to get close to our target.The second area is in the area of estate taxes. Notoriously low compliance. Our goal here is to increase the collection to 50 billion. From an average of 1 billion the past 10 years. Last year we hit over 2 billion. Again, we’re going to use data from other sources to be able to help us improve compliance. As I, as people think mistakenly think that the secrecy of bank deposits goes beyond debt no? It doesn’t because once you file you’re estate tax return, the BIR has the right to check with the banks. So one of my instructions now with the BIR is to go back 5 years on all of those who filed estate tax returns. And then we’ll ask for the bank movements. And that should help us improve compliance here. And the third area is really, curbing smuggling, specially the technical variety that has, you know under declares the value of goods. The average right now that we collect per container is about 60,000 pesos.I believe that can be increased to 200 to 300 thousand. And just, if we hit the lower number 0f 200,000 at 2 million use per year that’s 400 billion. That’s almost 40% increase on customs take last year, without break bulk, without oil, without the other big ticket items. And we’re doing other adjustments, for example, accrediting ports as to what commodities they can handle so that we don’t play a game of hide and seek with smugglers. Asking for the import plan of these key players so that they tell us when and where and what quantities they’re going to import, and then monitoring it on a monthly basis, reconciling with the DOE and other data that’s available to us from outside including theUnited Nations that monitor, for example, energy consumption. So we just have to roll up our sleeves and focus. Then the other areas of course would be, making sure that VAT, VAT compliance is higher. We collect about a 180 billion to 200 billion in VAT. But if you look at the rate that’s 12%. And on a very simple calculation, if our economy’s 10 trillion, at 12%, that should be 1.2 trillion. But obviously there are exemptions. But with 200 billion collection, I believe it’s still very far from the potential of 1.2 trillion without exemptions no? One of our goals ultimately is to eliminate or reduce these exemptions, which make VAT compliance and administrative compliance very difficult.
Ressa: Fantastic, so you’re seeing the low hanging fruit. If you focus on it, you can move it forward. Let me pull out a little bit more. People are becoming quite bullish about the Philippines’ TIMP killing the bricks. And yet our foreign direct investment flow isn’t as high. It’s one of the lowest in the region actually. How, what other things do you see will encourage the FDI to grow?
Purisima: Well it’s really the nature of the industries that are doing well in the Philippines. If you look at the BPO industry, say JP Morgan Chase. They have over 12,000 people here in the Philippines. I don’t know the exact amount investment, but they probably invested around 50 million dollars or between 50 and a 100 million and yet they created 12,000 plus direct jobs. A similar industry in the heavy category would probably require a couple of billion dollar investment to create 12 million jobs.A tourism industry doesn’t require a lot of substantial capital investment as well.
Ressa: So you’re saying our growth industries doesn’t suck that much FDI’s.
Purisima: Because it is not capital…
Purisima: Intensive. But as we develop infrastructure, that’s capital intensive. As we develop heavy manufacturing, that’s capital intensive.But last year we hit two, over 2 billion dollars plus the fact that I think there is some data capture issues. But the important point that we’d like to say is that, there’s enough liquidity within the Philippines. The only reason we want FDI’s is to connect us to the global supply chains and to attract technology and management expertise. But talking about capital, we have enough liquidity in the Philippines. In fact, the Bangko Sentral would love companies to use the dollars that are in their burgeoning reserves. And so that’s why our challenge now isto continue fast track investment and infrastructure. And the implementation of this infrastructure project because that would attract more industries. Right now, we’re attracting industries that, our power is about 15% or less as a cost component, because of our high power cost. But as we’re able to reduce the cost of power then we’ll be able to attract more energy intensive industries. For example, the Gokongwei group is about to open their petrochemical project. So that’s a major industry. It’s a first basic heavy type industry that we’ve had additional in a long long time.
Ressa: One of the fears of investment grade is that it will further strengthen the peso which is actually bad news to the OFW’s, to the BPO’s, to the industries that are actually doing well right now. What’s your, how do you plan to manage this?
Purisima: Well it’s all a question of different set of challenges. When you’re junk, you have different challenges. When you’re investment grade you have different challenges. I prefer the challenges of the investment grade. I’d like to be triple A also. So those are different types of challenges, we just have to continue to improve our productive capacity, our efficiency. We need to continue to move up the value chain. In the case of BPO, when we started over what, 12, 15 years ago, we were in the data encoding part. We’re practically not there anymore. So we’ve gone up. And we need to continue to go up. And this is where investment in education working closely with industry to make sure that we supply them with the right talent, doing PPP projects there where
Ressa: PPP is delayed. Are you pushing forward now?
Purisima: PPP not just in infrastructure but PPP in terms of joint activities. For example, TESDA working with closely with BPAP. TESDA providing the scholarship for people so that they get the right skills, so they get the hiring cost of members of BPAP is reduced with the right skills. And then BPAP providingtechnical skills to TESDA, like some of the training modules that they have. That’s also PPP, not just infrastructure. In the case of infrastructure PPP’s, we’re moving. There’s seven or 8 being billed out right now including a 1.8 billion light rail transit extension to the South, there’s one to the East. We’re about to approve the one Northeast, MRT 7. There’s a couple of expressway, a hospital, there’s a powerplant being built. There’s 10,000 school rooms the second module. See, what people don’t understand is that there was a shift from accepting freely unsolicited, to preferring solicited. And to do solicited, you need to do your homework. You need to invest in a feasibility study. And to do a feasibility study takes a while. Just hiring the consultant that will do the feasibility study will take a couple of months under our system. And then doing the feasibility study takes a year or so and then getting to the report and hiring a consultant who will design the bid-out, but the good thing now is we built the pipeline that in the next few years, it will be just a matter of bidding out projects that will become ready and the next administration won’t have to wait as long as we did, they can bid out in the next month, because the feasibility studies are updated.And the work is done, and I think that's what's important, when we put back the trust of our people in PPPs.
Ressa: So in this case you've moved beyond just restoring confidence, you're saying the infrastructure there, if we look at last year, the move against, to oust former chief justice Renato Corona -- it seemed to be one of the spark points also that the Philippine government was serious about its anti-corruption campaign. And then after that we saw many highs -- confidence was boosted. Has the hard work been done on the ground to support that confidence?
Purisima: Well it was not just the impeachment of Chief Justice Corona, although that is an important signal because judiciary is an arm of government that is the final court.
Ressa: I would say that was more the tipping point, because you certainly had DPWH going through a cleanup process.
Purisima: We had a sin tax law also which took more than 15...
Ressa: which is the end of the year.
Purisima: We had the RH also that took more than 15 years, we had the pocket open skies early on in the administration of the president and there's many other reforms in the budget in terms of the transparency initiative. We have the no cash initiative, we have the budget ng bayan website where you can look at how the budget is being deployed. If you notice, President Aquino is really taking on transformational challenges. And I think he will continue to do that. In the next few months we'll tackle which of the negative list in investments we can further remove that won't require a constitutional change, and I think that should also be the positive signal.
Ressa: The easiest entry point for foreign investments is the stock exchange, and how do you prevent hot money inflows that could actually destabilize the economy if they were spooked and pull out quickly?
Purisima: Well obviously as we are connected to the global economy...
Ressa: I saw it happen in Indonesia...
Purisima: In Indonesia, yes, but in the case of the Philippines we are a current account structural surplus economy. So even without the hot money flows, we are a current account surplus country because of BPOs, the remittances and the increasing tourism and our increasing exports -- export's up 7.8% last year so even when hot money flows leave we're still positive. And our reserves are at a historic high, it's more than 12 months of our imports. Plus the fact that the central bank has been quite vigilant in imposing rules. For example, they've disallowed foreign funds from investing in SDAs. I think pretty soon they'll be requiring, looking at reserve requirements for intrabank lending, head office subsidiary from foreign banks. So then they're going to look at the complete toolset available to put safeguards. Then we have withholding taxes that is good for us. They are very vigilant so that's good.
Ressa: What about the flipside of it? Last year I remembered looking at our PSEi and it was double Hang Seng index. Is it overpriced? Our stock prices, is our stock market, the PSEi overpriced?
Purisima: I'm not an expert on the stock market, all I know is the country still has a lot of upside. So long as we continue on the fundamentals, make doing business much easier, continue open up the economy, create more jobs, continue to develop the low-hanging opportunities such as tourism, agriculture, and making sure that the infrastructure is competitive with our neighbors, our corporates will continue to increase their profitability. And with increased profitability of corporations then the valuation should follow. I think a lot of the pricing is not historical, a lot of the pricing is the fact that they expect profits to increase and if you look at the trend of profits of corporates they're actually increasing. And I think their pricing in the fact that for the next 30 or so years, we'll be in a demographic that...
Ressa: That's a growth area.
Purisima: Countries that have gone through that have seen acceleration of their GDP growth rates. In fact I think, I find our challenge as a country easier than China as a country, because in China, 70% of the growth is investment. Only 30% is consumption. Ours is the reverse. 70% consumption, 30% investment. Consumption I believe is harder to move because it takes millions of people to change their behavior, whereas in investment, it's the government making sure that it creates the right environment and few players to move that investment meter.
Ressa: What I also saw in Indonesia is if your middle class is consuming, even if the investment dies, which it did in 1997 in Indonesia, the economy will remain if you have a large enough population.
Purisima: That's what happened in the Philippines since 1997, we've had 56 straight quarters of growth. Even through the global economic crisis. So during 2008, during the worst of the crisis in 2009, we still register positive growth whereas countries that don't have as much consumption power like Singapore suffered.
Ressa: They just have a small population. Let me ask you a question. What are the danger points as we become...part of our strength in the last few years also came from the fact that we were uncoupled from the global economies. So while the global economy is sick and it still is to many degrees, we didn't catch a cold. Singapore did, the Philippines kept up doing well, what are the danger points now as we become more closely intertwined?
Purisima: First we need to follow through. Just like in anything, follow through and sustaining is very important. We need to continue with the reforms, we need to continue to invest in our institutions, we need to continue to invest in the infrastructure, we need to make doing business in the country easy. We need to take advantage of technology. We need to pay our people better, we need to create meritocracies in government, we need to make it less bureaucratic and we're far from there. So there's still a lot of work to be done. And it won't be finished in this administration. This administration, its job was to point it in the right direction. And show that it works. And I hope that the people through social media will now be aware of the fact that better governance will make their lives better and require that of future administrations so that this can be continued beyond 1, 2, 3, because it took us how many administrations to get to where we are, 40, 50 years? It will take us several administrations to also get back to where we were. It's fortunate that President Aquino has the mandate and walked his talk in terms of good governance. We were able to reverse over a decade worth of credit downgrades in less than 3 years. And now even higher.
Ressa: The timing is perfect. The Philippines is actually riding a crest now that is riding on Asia as well.
Purisima: Well as they say if you do the right thing and you work hard enough you create your own luck as a country and despite the difficult global economic environment we grew 6.6%. Imagine if the global economy improves, then that 6.6 would have been higher. Imagine if mining, once we fix the mining area, it was negative when we grew 6.6, it can be an extra gear. Imagine Mindanao, the peace agreement that the president is trying to finally close in Mindanao. That will create another 1, 2 percent a year in growth. Just one project, the XStrata project that will require 6, 7 billion dollars in investment. Based on their calculation, that should increase the growth rate of the country by 1% a year for the next 25 years. Just one project in Mindanao. Imagine what else can be done there, in agriculture, in tourism, and infrastructure.
Ressa: Is the Aquino government clear now in the policy it will pursue regarding mining?
Purisima: Yes it's been very clear from day 1, President Aquino has been very clear. He wants responsible mining, he wants the environment protected, he wants strategic mining, that means government will make a strategic decision on which areas to open up and which not to open up and he wants fair sharing of the return. And unfortunately in the past it wasn't the case and that's why he said I'd rather not until...anyway the mine will stay there.
Ressa: He's got a captive investor.
Purisima: And mineral prices will only go up because these are finite resources. And that's why the president's mind is on the right area, he told us, if it's a tourism area then it cannot be mining, imagine if they have mining in Bali. What would happen to Bali? And the beauty about tourism is it's recurring, it's already there, and it creates so many jobs. Mining is also good in areas where mining is the only option. And that's why we're trying to define no-go areas. We've asked tourism, we've asked agriculture, we've asked other departments what would be open to mining. And if we do open mining, we want to make sure that they protect the environment, they don't leave the area with holes in their midst or they reduce the productive capacity in terms of other industries of that area. Plus sharing of revenue must be one that's fair. We don't want miners to be laughing all the way to the bank whereas we having to carry the burden of an environmental disaster, not getting the equivalent amount and we're about to propose a bid in Congress that should address the revenue sharing part. On the environment, we have all the environment laws, it's all a question of implementation.
Ressa: Let me give you just a chance to wrap everything up. You've gone from macro to micro to the specfic details of how to move this economy forward. You've got 3 years left, the best scenario that you can see, the growth rate you can see for the Philippines?
Purisima: Well I think we've removed enough of the constraints to allow us to aim to 6 to 7 percent on a consistent basis. But we believe that we can go 7 and 8 if we lift more of the constraints, making doing business much easier, opening up more areas, more predictable implementation of laws, better judiciary, etc. But at the heart of being a nation is the ability of the nation to generate revenues. A nation that cannot generate revenues has no right to exist. And that's why it's crucial that we're able to increase our tax effort from where it is now to at least 16% and maybe more. And if we're able to do that then that means we will have 3 or 4 percent more to invest in better infrastructure, better schools, better healthcare, better everything, better government, pay people better, empower them more with technology. And that is crucial if we want to move to the next level. The best example of what compliance and good governance can do to a country is Singapore. Singapore has nothing, not even water. They have to buy their own water. We have too much water, we have a lot of resources. And yet they are the richest country in the region. True, they're just like a city but point me to a city in the Philippines that is as rich as that. Complying with laws is crucial to realizing a vision of a better Philippines.
Ressa: You've talked about how important tax revenues are so we have the tax date, April 15th coming up. What about the flipside? Filipinos say why do I pay taxes to the government when it would just be frittered away in corruption? What about the corruption campaigns? Do we get better assuraces?
Purisima: That logic is faulty. If you see people kill other people, do you also kill people? That's the same logic. If you see people waste tax resources, do you now commit another crime to do that? Because tax evasion is a crime. Let's not add to the problem. Let's be part of the solution by doing our duties and let government deal with this with the more resources that we're able to generate, then we'll better able to fight corruption, enforce the laws. This is the logic that people say which I think is faulty logic and if we follow that, then this investment grade will be fleeting. Our goal is not just investment grade. We want to be A, maybe even AAA. Singapore is AAA. Why can't we?
Ressa: This is the last question. How do you bring in inclusive growth now? So you've gotten investment grade, you've created an environment where money can come in, you've put in place more transparent systems. How does it trickle down to the poorest of the poor?
Purisima: Everything the president's doing is about making it inclusive. The increase of the budget of the DSWD by 267 percent is meant to make sure that the poorest of the poor is able to bring their children to school.
Ressa: This is the CCT, bottom up, it's like pump priming from the bottom up.
Purisima: Not just pump priming, but make sure that they're going to have an opportunity to be educated, and to lead healthy lives. Because after all it's equipping individuals so that they can actualize their potentials, that will really have inclusive growth. Increasing the budget of the Department of Health by 77%, increasing the budget of the Department of Education by 45%. Goal of the president is to have zero backlogs in terms of school rooms. All of this are meant to give the poorest of the poor a fair chance to succeed. Then improving the business environment, improving the confidence about the country is all about inclusive growth. Obviously when it rains it hits the mountains first, but it will ultimately trickle down. We just have to follow through.
Ressa: Thank you very much. We've been speaking with Sec Cesar Purisima, Euromoney's finance minister of the year right after the Philippines received its first ever investment grade. I'm Maria Ressa. Continue sending in your questions, we'll get answers for you, thanks for joining us.