The year 2024 saw the Nobel Prize in Economics awarded to two economists, Daron Acemoglu and James Robinson (along with their colleague Simon Johnson), who wrote a widely read book by development economists and political scientists entitled “Why Nations Fail.” The attention given to their explanation for the economic failure of nations prompted many in academia and the media to re-examine why our own nation failed and was for many years derided internationally as “the Sick Man of Asia.” I joined the bandwagon and wrote a series of articles in this paper entitled “Why the Philippine Nation Failed.” Encouraged by a barrage of very positive reports about the Philippine economy for 2025 and beyond, I am now going to try to explain to our readers why we have shed our notoriety as the “Sick Man of Asia” and are rated by international institutions such as the IMF, the Asian Development Bank, the Hong Kong Shanghai Bank, Goldman Sachs, and many others as one of the fastest-growing economies in the Indo-Pacific region, together with India and Vietnam.
I see the year 2025 replicating a growth rate that the Philippines has annually attained for close to 15 years since 2011, with the exception of the two worst years of the pandemic, 2020 and 2021, after which the economy bounced back quickly and started to grow again at a range of six to seven percent annually. That is why, despite some less sanguine forecasts putting our growth rate in 2025 at less than six percent, I am betting my bottom dollar that GDP growth rate this year will be close to 6.5 percent, with inflation settling at two to three percent and the exchange range fluctuating between P58 to P59 for most of the year. The two most important engines of growth, OFW remittances and BPO-IT earnings, won’t disappoint us: both will deliver more than $40 billion each.
There is no danger that the number of OFWs in the U.S. will significantly decline. Although there are some 300,000 illegal Filipino immigrants in the U.S., they are in no danger of being deported. There will be strong support from the American public to exempt Filipinos from deportation because they are vital to their health, hospitality, and other service sectors in which Filipino workers are given a premium because of their soft skills. In addition, Filipinos have an intercessor in the person of Elon Musk, a prominent figure with close ties to the current administration. Musk has a soft spot for the Philippines and is a bullish investor in our country. I speculate that his positive outlook about the Philippine economy has a lot to do with his constant remarks about countries becoming extinct because of low fertility rates and the consequent rapid aging of the population (e.g., Singapore, South Korea, Japan, etc.). He sees the greatest advantage of our young, growing, and English-speaking population.
I am equally certain that our BPO-IT sector will continue to deliver more than $40 billion, employing close to 2 million workers. The threat to our contact center workers being replaced by Artificial Intelligence (AI) is not imminent, and thanks to a very proactive group of leaders in that sector, by the time AI is displacing those workers, they will have been upskilled, reskilled, and retooled to do more knowledge-intensive work like animation, medical transcription, game development, legal documentation, data analytics, cybersecurity, and a host of other BPO-IT services less replaceable by AI or robots.
A third leg in the service sector that will contribute to the six percent or more growth of GDP will be domestic tourism, with a little help from its foreign counterpart. With inflation tamed at two to three percent and interest rates on the downturn, we shall again see some 60 to 70 million middle-income Filipinos with sufficient purchasing power to travel to places within the Philippines as domestic tourists. Thanks to significant improvements in our infrastructure that have attracted yearly expenditures amounting to some six percent of GDP for the last five years or so, domestic tourism is being given a boost. The domestic travel of some 60 to 70 million of our own citizens will ensure that consumption continues to contribute to high GDP growth. The year 2025 will remind us of the crisis years of 1997 (East Asian financial crisis), 2008 (beginning of the Great Recession), and 2020 to 2021 (COVID epidemic) when there were global recessions. During these crisis years, the Philippines was one of the least affected (like Indonesia) because we are not a major exporter of goods (only a 30 percent export-to-GDP ratio in comparison to 70 to 150 percent of many of our East Asian neighbors). Our businesses sell mostly to the domestic market of close to 120 million consumers. Once again, we will show how resilient we are in times of global economic slowdowns.
How did we get to this sweet spot? Not without major improvements in economic policies, either through enlightened legislation or executive fiat. The first legislative reforms I would like to cite over the last two decades are in the field of taxation. It is impressive to hear Secretary of Finance Ralph Recto boldly announce that in order to support the 2025 national government budget of P6.3 trillion recently signed by President BBM, BIR and Customs have to raise some P16 billion daily. That amount would have been unthinkable even just five years ago. Why does Secretary Recto speak with so much confidence? Because over the last 15 to 20 years, there has been very enlightened tax and tariff legislation that will enable the BBM Administration to actually collect such an amount.
What were these tax legislations? Let me use the LIFO (Last In First Out) method. The most recent enlightened legislation about taxes was signed by President BBM last November 11, 2024. Republic Act No. 12066 is popularly known as CREATE MORE. MORE stands for Maximize Opportunities for Reinvigorating the Economy, while CREATE stands for Corporate Recovery and Tax Incentives for Enterprises. The CREATE law was enacted during the Duterte Administration in 2021 to enable the economy to grow faster by being more globally competitive, especially in relation to our ASEAN peers like Vietnam, Thailand, and Indonesia, which were attracting much larger Foreign Direct Investments (FDIs). Certain provisions and implementing rules of CREATE, however, caused some confusion, which prompted Congress under the present Administration to introduce some improvements that have been integrated into MORE.
Among these improvements are:
- Reduced 20 percent Income Tax for Registered Business Enterprises (RBEs) under the Enhanced Deduction Regime (EDR);
- Additional and Increased Deductions granted under the EDR;
- Expansion of the allowable deduction for reinvestment allowance to the tourism industry, which was previously limited to the manufacturing sector;
- Amendment to the allowable period to claim net operating loss carry-over (NOLCO) under the EDR;
- Clarification that the five percent Special Corporate Income Tax (SCIT) is in lieu of all national and local taxes, including local fees and charges;
- Addition of Section 294 of the Tax Code, which enables a local government unit (LGU) to impose a local tax on an RBE at a rate not exceeding two percent of gross income, which shall be in lieu of all local taxes, fees, and charges during the ITH or EDR;
- Enabling RBEs to immediately avail themselves of SCIT and EDR upon the start of commercial operations;
- Allowing more flexible work arrangements for workers of RBEs;
- Establishment of a One-Stop Action Center and Initial Point of Contact for Foreign Investment Leads;
- Clearer guidelines on VAT Incentives of Registered Export Enterprises (REEs).
All these provisions of the combined CREATE MORE bill are intended to significantly increase the level of FDIs and, therefore, despite reduced tax rates and more tax exemptions, can lead to higher tax collections. As I have written in previous columns, the desired amount of FDIs annually that this present Administration should target realistically ranges from $15 to $20 billion annually. Our ASEAN neighbors like Vietnam and Indonesia have reached this level years ago. To be continued.