Philippine Strategy:Proposed tax cut bodes well for consumption

Rebates from proposed tax cut to boost consumption — The proposal to cutpersonal income tax (PIT) rates is the key component of the first package of HouseBill No. 4774 or the Comprehensive Tax Reform Program (CTRP), backed by theDepartment of Finance (DoF). Our Economist Jun Trinidad discusses in his report,Philippines Economics View: Consolidating Gains Prior to Another PotentialMT Investment Run, that potential income tax rebates of up to P140bn could liftconsumption by 1.6%.

    Low- to middle-income earners as top beneficiaries — The DoF expects thereduced PIT rates to mostly benefit low- to middle-income earners, especially as theCTRP provides for tax exemption for those earning P250,000 or below, and thereduction of the top PIT rate from 32% to 25% for the wider bracket of middleincomeearners (earning up to Php2,000,000). Moreover, around 40% of theemployed population is within the 15-24 and 25-34 age groups. These would mostlyinclude daily wage earners, fresh graduates, and young professionals that maycomprise a sizeable chunk of the withholding income tax base.

    Implication: Consumer and retail sectors to gain the most — We believeconsumer companies like URC will directly benefit from the PIT cuts. Patricia writesin her report, Universal Robina (URC.PS): Strong domestic & internationalprospects outweigh concerns, that URC draws most of its revenues (~72% inFY2016) from its domestic operations. We believe URC’s growth story continues tobe supported by robust growth in household consumption (+6.9% in 2016), which isin turn a direct result of the Philippines’ persistently strong economic growth. Also,SMPH as a proxy to the retail sector via its vast mall portfolio can be seen to benefitfrom higher disposable incomes and increased spending as a result of the PIT cuts.

    The Philippines has a unique mall culture and economic progress over the pastyears has allowed SMPH to grow its mall portfolio from 41 malls with 5.0m sqm inGFA in 2011 to 60 malls covering 7.7m sqm at end-2016. Congressional passage ofHB 4774 will be a major catalyst to growing consumption even further, and withscale and market dominance in their respective sectors, URC and SMPH both standto gain much from this development.