COVER STORY

Philippine business in 2019: Death and taxes

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Metro Manila (CNN Philippines, December 27) — Death and taxes generally characterized local business this year, marked by the rise and fall of taipans, corporate deals, and tariffs.

The Philippine economy saw highs and lows in 2019 as budget woes slowed down growth and business prospects. Activity has been revived towards the second half, with new taxes and a fresh infrastructure boost breathing new life to the local economy. 

Economic growth has averaged 5.8 percent as of end-September, short of the 6-6.5 percent goal for 2019. President Rodrigo Duterte’s economic managers are counting on catch-up spending to boost fourth quarter prospects just to pull up the full-year average.

Tycoon deaths

The year 2019 forced several conglomerates to face changes in leadership — planned or otherwise — with the passing of first-generation taipans.

Retail magnate Henry Sy, Sr., founder of the SM Group and the long-running richest man in the country, died in January. The 94-year-old Filipino-Chinese businessman was chairman emeritus of SM Investments Corporation and held key positions in firms within the conglomerate. His children went on to take board seats in the family businesses but chairmanship has been passed on to Jose Sio, SM’s long-time chief financial officer, as early as 2017.

The Bangko Sentral ng Pilipinas also saw a sudden change at its helm when two-year Governor Nestor Espenilla, Jr. succumbed to tongue cancer in February. The homegrown central banker has been replaced by former Budget Secretary Benjamin Diokno, the first time in over a decade when an outsider took the post. Diokno vowed to sustain Espenilla’s continuity agenda, which has translated into three interest rate easing moves and a series of reductions in reserve requirements for bank deposits.

JG Summit founder John Gokongwei, Jr., the third-richest in the country, passed away in November, long after taking the backseat in the group’s brands like Cebu Pacific and Robinsons mall chain. The Gokongwei children were orphaned in a week after John’s wife Elizabeth followed days later.

The death of Lucio “Bong” Tan, Jr., the son and namesake of the tycoon behind Philippine Airlines and Tanduay, came as a shock in November after he collapsed in the middle of a basketball game. The younger Tan, 53, was supposedly being groomed to be the "Kapitan’s" successor until his passing. His son Lucio “Hun Hun” Tan III, mother Carmen and his siblings went on to assume the board positions he left vacant.

Meat processing firm CDO Foodsphere, Inc. chairman and co-founder Jose “Pepe” Ong also passed away in November at 78.

Taxes and tariffs

The government became more aggressive in raising funding for state projects this 2019. After all, plans to “Build, Build, Build” and expand healthcare benefits are only as good as the available budget.

The second wave of increases in oil excise taxes under the Tax Reform for Acceleration and Inclusion (TRAIN) law took effect January 1, adding ₱2 per liter of fuel. This was followed by the implementation of the controversial Rice Tariffication Law on March 5, which removed existing import limits for the staple in exchange for a fee. 

READ: Rice tariffs 'major step' for economic growth – IMF

Tariff collections have reached ₱11.4 billion as of end-July, already surpassing the ₱10 billion earmarked as direct aid to rice farmers affected by the influx of cheap rice from abroad. However, farmers quickly bore the brunt as the supply glut pulled down palay (rice paddy) prices, leaving them with little earnings left to support their families

Authorities also cracked down on Philippine offshore gaming operators (POGOs) this year, with the Bureau of Internal Revenue padlocking three service providers and all of their branches to demand tax payments. They were allowed to resume business only after agreeing to settle their dues. 

Regulators have also refused to grant new POGO licenses amid issues on foreign employment permits and the collection of income taxes. The House of Representatives has begun work on a bill setting the tax duties of POGOs tentatively set at 5 percent of gross receipts.

Still on deck are future phases of the government’s tax reform program, including the proposal to further raise duties on alcoholic drinks and to impose taxes on e-cigarettes and vapes. Also left hanging is the reform on corporate income taxes, which would gradually reduce the rate paid by businesses to offset tax breaks and fiscal perks cut short. Other proposed reforms include those for real property valuation, as well as on passive income such as bank deposits and stock market investments. 

New life for infrastructure

Duterte’s economic team also opted to overhaul its list of flagship infrastructure projects halfway through his term, as it chose to drop projects which would be difficult to finish in the next couple of years.

From an initial list of 75 big-ticket projects, the list has been expanded to cover 100 items — but only 32 projects from the original list remained, while 68 new and more “doable” projects have been added to the pipeline. Of these, 38 are slated to be finished by 2022 which include airport upgrades in the provinces, the Malolos-Tutuban segment of the North-South Commuter Railway system, and the reconstruction of the war-torn Marawi City.

'Build, Build, Build': New projects dominate in overhaul of priority list

Back in November, Presidential Adviser for Flagship Programs and Projects Vivencio Dizon said the list would be "evolving," as authorities are now open to accept more unsolicited proposals from the private sector. This is a departure from the previous pivot towards projects funded through official development assistance from foreign countries.

Big winners, losers

The year 2019 also saw a very vibrant stock market with mergers and acquisitions, new listings, as well as blips and dips in valuation.

It was a landmark year for Davao-based businessman Dennis Uy, who managed to acquire companies like fast food chain Wendy’s Philippines and SuperCat Fast Ferry through his listed firm, Chelsea Logistics. Duterte’s big-time 2016 campaign donor also took over Chevron’s 45 percent stake in the Malampaya natural gas facility, and secured the license to operate DITO Telecommunity as the third telecommunications player in the Philippines.

READ: Dennis Uy's Dito wants to corner 30% of telco market in 3 years

Uy, who began his empire with fuel retailer Phoenix Petroleum, also debuted in Forbes’ list of 50 richest in the Philippines with $660 million (about ₱33.6 billion).

Another billionaire, Tony Tan Caktiong, had a superb year with two new acquisitions. Fast-food giant Jollibee Foods gobbled up the global franchise of The Coffee Bean & Tea Leaf for $350 million (roughly ₱18.3 billion), as well as the rights to operate dimsum chain Tim Ho Wan stores in China.

The year 2019 also presented huge opportunities for Ramon Ang, president and chief operating officer of San Miguel Corporation, as he put forward several infrastructure projects as unsolicited proposals to the government. The biggest is his pitch to build the ₱734-billion New Manila International Airport in Bulacan to help decongest the gateway in Manila, which has been accepted and signed by the Department of Transportation.

Ang has also proposed a 10-lane toll road above EDSA and floated the idea of running a bus terminal along the NLEX-SLEX connector road, the Boracay-Caticlan bridge project, and the revival of the Loakan airport in Baguio City together with the local government.

Meanwhile, some firms had a turbulent year. The Lopez Group has had to grapple with an uncertain future for its flagship ABS-CBN Corporation as Duterte personally vowed to put the network out of business with its 25-year franchise expiring in March 2020. The House said it will tackle the franchise renewal by January the earliest, despite numerous bills looking to breathe new life into the news and entertainment TV channel.

A scandal also rocked the Philippine Stock Exchange in November after brokerage firm R&L Investments, Inc. unearthed a ₱700-million scam supposedly crafted by one of its long-time clerks. The company has stopped operations, with a market official seeing little hopes that it can resume business given massive losses.

Ride-hailing firm Grab Philippines also sailed rough seas this year in the face of mounting penalties slapped by the Philippine Competition Commission as it continues to exploit its market dominance. The company has been cumulatively charged ₱39.6 million for overcharging fares and for excessive ride cancellations just this 2019, with no viable competitors able to disrupt its monopoly to date. 

Water firms Maynilad and Manila Water likewise faced rough beating just this December, triggered by what would have been a big win for the Ayala-owned concessionaire. Manila Water emerged victorious before an international tribunal in demanding ₱7.39 billion from the Philippine government to cover losses from denied water rate hikes, only to see its share prices crash after Duterte ranted publicly against their supposed “onerous” supply deals back in 1997.

The Metropolitan Waterworks and Sewerage System has cut short their supply contracts as it revoked extensions that would have lasted until 2037. The Department of Justice has begun crafting a new contract, with the two firms forced to renegotiate terms of service to remain in business beyond 2022.

READ: Manila Water, MPIC stocks plunge amid uncertain deal with gov't

Despite these, financial markets performed generally better in 2019, with the benchmark Philippine Stock Exchange index ending the year at 7,815.26, up from the 7,466.02 level at end-2018. The stock market also welcomed four companies which went public this year, ending a long pause in public offerings.

The peso also strengthened against the US dollar to close at ₱50.635, stronger than its ₱52.58 finish last year.

What’s next?

Market watchers expect the Philippine economy to head no way but up in 2020, with softer price movements and looming interest rate cuts seen to spur even briskier activity.

Security Bank economist Robert Dan Roces said 2019's story has been pulled down by the delayed budget passage, as well as developments in the trade war between the United States and China which rattled global prospects.

"We expect faster growth in 2020, propped up by private consumption while the market absorbs the rate cuts and improved liquidity, plus a double-dose of stimulus from an extended 2019 budget validity and a timely 2020 budget passage that will provide higher capability for government to spend on projects," Roces said, which could be just enough to offset the slowdown in foreign direct investments.

The Federation of Filipino Chinese Chambers of Commerce and Industry also said it expect betters days in the new year, even pegging full-year growth between 6.5-7.5 percent with hopes that both infrastructure and agriculture will take off, with industry supported by lower corporate income taxes alongside a bigger push in domestic rice production.