MONDAY MACRO: Although the quarantine measures have been taxing for the economy, Uniform Accounting signals economic improvement
Benjamin Franklin is widely quoted as saying that in this world, nothing is certain except death and taxes. While that sounds like a rather grim take on reality, we see how true that statement is today. Death numbers rise each day due to COVID-19, and even after death, taxes still need to be paid in the form of estate tax or inheritance tax.
Although death will always be a constant, at least we have a say in how we pay our taxes.
Through Uniform Accounting, we take a look at how this economic tool can be used to stimulate economic recovery and how this affects companies’ profitability.
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In our December 28th Monday Macro report, we mentioned how the Bangko Sentral ng Pilipinas (BSP) has been one of the most aggressive central banks in the world in terms of rate cuts. As the BSP cuts interest rates, borrowing costs from banks become cheaper, which should entice more people to borrow and stimulate domestic demand towards economic recovery.
However, even with the BSP cutting down rates by 200bps, bank lending behavior has been minimally influenced as banks continue to tighten their credit standards. That means whether or not banks lend is not something the BSP can directly control.
Since previous rate cuts appeared inadequate to stimulate lending during this pandemic, experts expect that the BSP would cut rates once more in order to boost the Philippines’ weak economic recovery. However, with the policy rates already at two percent, should we be worried that monetary policies may not be enough to stimulate the economy?
Fortunately, the government has its own rates it can cut to spur economic growth, similar in nature to the BSP cutting policy rates. The Philippine government can adjust its fiscal policies to assist economic growth.
With fiscal policy, the government influences the economy through government spending and tax rate changes. Fiscal policies are seen to have a quicker and more direct impact on employment and income, unlike monetary policies that may take some time. The government can directly spend on specific projects, industries, or even regions to stimulate economic growth, as well as change tax rates to ease consumers’ or businesses’ tax burden or to increase government revenues.
Last week, both the House of Representatives and the Senate ratified the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. After the President signs this bill, the corporate income tax rate will be gradually reduced from 30% to 25%, while small and medium enterprises’ (SMEs) taxes will be lowered from 30% to 20%.
The tax cuts are expected to directly reduce the costs of production, which in turn increases the savings of local companies as well as attract foreign investments. Over time, these can encourage companies to spend more towards capital that will translate to higher productivity or output.
Because of the higher productivity or output, companies will have a more sustainable source of earnings and potentially grow. Thus, the tax cuts will improve the Philippines’ ability to create more employment opportunities, which will improve the economy in the long term.
Although President Duterte has yet to approve the CREATE bill, the aggregate Uniform earnings of Philippine companies are already expected to rebound in 2021 to 6% levels, with the assumption that the virus would have been safely contained before the end of the year. This rebound is warranted given that fear of virus contraction was the main reason for the current recession and not by any form of systematic risk.
Together with a low interest rate and the new tax rate environment, the Philippine economy has a large potential to bounce back to pre-pandemic levels faster than previous downturns.
About the Philippine Market Daily
“The Monday Macro Report”
When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.
Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.
Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.
Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.
Hope you’ve found this week’s macro chart interesting and insightful.
Stay tuned for next week’s Monday Macro report!
Philippine Markets Daily
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