THE economy stands to lose P5.41 trillion if the 15 strategically important companies (SICs) identified by the government will fold up as business activities have remained generally muted during the pandemic, a state-run bank’s study revealed.
Land Bank of the Philippines economist Guian Angelo S. Dumalagan said that the potential loss—which represents SICs’ total economic linkages—would also affect their related businesses, including the micro, small and medium enterprises (MSMEs) if ever. He did not name the companies.
Dumalagan shared this finding during a Senate hearing for the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery Act (GUIDE) bill on Wednesday.
Broken down, the wholesale and retail trade and repair of motor vehicles and motorcycles account for the bulk of the potential loss at P2.492 trillion, followed by construction at P1.091 trillion.
Accommodation and food service activities might lose P645.3 billion; water supply, sewerage, waste management and remediation activities, P581.4 billion; transportation and storage, P528.4 billion; and real-estate activities, P73.4 billion.
However, the loss figure is only a portion of the overall economic burden as Dumalagan said there are potentially 1,250 SICs. While the economist has not provided an estimate yet, it is expected to be considerably higher. Sen. Sherwin T. Gatchalian asked Dumalagan to submit a report containing the revised calculations.
The LandBank economist added that over 119,400 direct employees—0.30 percent of total employment—will be retrenched if these 15 SICs shut down completely. Majority of these are from the wholesale and retail trade segment—including supermarkets and retailers of petroleum products and food and beverage—with over 75,200 direct jobs.
“If these companies would fold up, those companies that are depending on these SICs might probably show some contraction in their employee level as well,” Dumalagan said.
Around 6.3 million workers, meanwhile, could be affected from potential 1,250 SICs, he said.
Aiding the SICs
Given the repercussions, Dumalagan highlighted the importance of passing the GUIDE bill, which aims to provide capital infusion of P10 billion to government banks. The bill allocates P7.5 billion to LandBank and P2.5 billion to the Development Bank of the Philippines (DBP).
Both banks, under the GUIDE bill, will be authorized to invest the P10 billion in incorporating a special holding company (SHC) that can assist SICs with their capital requirements under strict conditions.
“Not helping SICs would definitely mean not helping MSMEs who are depending on these SICs for their business,” Dumalagan said, noting that closure of any of these companies would cause disruptions in the supply chain.
For the part of SHC, Dumalagan explained that its investment in each SIC should not exceed 25 percent of the P10-billion allocation to avoid concentration risk.
An initial breakdown shows that wholesale and retail trade and repair of motor vehicles and motorcycles; and transportation and storage are seen to be given 25 percent or P2.5 billion each. Accommodation and food service activities and real-estate activities may account for 20 percent and 12.50 percent, respectively, of the budget. Construction and water supply may comprise 8.75 percent each of the allocation.
If all goes well and the investee companies are able to pay dividends annually, total cash flow expected to be received for five years will amount to P13.75 billion with a net present value of P10.96 billion, the LandBank economist said. This reflects a return on investment (ROI) of 9.63 percent.
Dumalagan explained that there would still be positive returns over a five-year period even if two of the “riskiest” SICs—from transportation and storage and real-estate activities—did not deliver after the capital infusion. This time, the amount expected to be generated is P12.66 billion with net present value of P10.09 billion. ROI is much lower at 0.86 percent in this scenario.
As a safeguard measure, Dumalagan said that the SHC will assess risks before investing in the SICs to reduce the probability of booking negative returns.
“In terms of risk mitigation, the SHC, before it invests into the SICs, would review the soundness of the rehabilitation plan of the potential SICs,” he explained. “At the same time, there would be monitoring involved to make sure the companies would act in accordance with the agreement and would act aligned with the initiatives they’ve mentioned with their recovery plans.”
In addition, the bill supplements the credit programs under the Bayanihan 2 as it aims to lower the cost of borrowings for the MSMEs reeling from the pandemic. Exemptions from paying documentary stamp tax, capital gains tax, and creditable withholding tax, among others, are provided in the bill.
The DBP said that the manufacturing, infrastructure and service industries are given priority in availment of loan assistance programs.
Trickle-down effect
The GUIDE bill focuses on SICs with the aim of having an economic growth spillover to the related MSMEs, which an industry group is asking to ensure.
The Supply Chain Management Association of the Philippines (SCMAP) called on the government to put up safeguard measures to make sure this goal is achieved in the long run.
“I understand the logic of…supporting the large corporations like the SICs because they have big value supply chains in their network,” SCMAP president Pierre Carlo Curay said during the hearing. “My only concern…this type of investment into these large corporations is [that] hopefully, there will be safeguards that can ensure the trickle-down effect of the investment into the different supply chains and MSMEs.”
He also called for improving the transportation sector during this pandemic to allow smooth mobility.
DBP President and CEO Emmanuel G. Herbosa agreed, saying that the government should “intelligently and rationally lift up transportation.”
Drilon: P10B not enough
Meanwhile, Senate Minority leader Frank Drilon pushed for a bigger outlay to rescue the affected business sector reeling from the backlash of the deadly contagion, belittling the Duterte government’s plan to release P10-billion aid to imperilled big and small businesses on the brink of closing shop.
Also at the Committee on Banks hearing, Drilon said the amount is much too small to boost the economy that lost P1.5 trillion in the yearlong pandemic, noting the dip in GDP growth contracted by 9.5 percent in 2020.
He noted that the amount is “nearly half” of the P19.5 billion that the administration allocated for its anti-insurgency campaign, much like the pork barrel.
Senator Gatchalian, vice chairman of the Committee on Banks and Financial Institutions, indicated they intend to suggest to the Department of Finance to seriously consider increasing the P10-billion initial fund provided under the GUIDE bill.
With Butch Fernandez
Image credits: Nonie Reyes
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