Analysis: The path to maintaining the upswing in FDI starts at home

Dindo Manhit, President of the Stratbase-Albert del Rosario Institute (ADRi) for Strategic and International Studies

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Image Source: The Philippine Star

An analysis of patterns of foreign direct investments in the Philippines

The Philippine economy today continues to benefit from admirable macroeconomic fundamentals. If maintained, they can be key in attracting foreign investors who are important in filling the gap that local investments are not yet able to fulfill. Not only do they fund projects in the Philippines, they also expand Filipinos’ technological choices and access to foreign buyers.

Despite the change in administration, the country’s economic managers are quick to reassure Filipinos that they intend to provide continuity in the country’s good policies. On Wednesday, at a forum arranged by the Stratbase ADR Institute, Secretary Benjamin Diokno of the Department of Budget and Management and Bangko Sentral Deputy Governor Diwa Guinigundo both spoke positively of the Philippines’ economic prospects.

Investors have short-term jitters

More specifically, Guinigundo said that the Philippines had succeeded in building a reputation for its ability to improve institutions, promote good governance, and demonstrate resilience in the midst of external stress. Whether the cause was external stress or investors’ political jitters, however, recent portfolio investments in the country have not been meeting expectations. The benchmark Philippine Stock Exchange (PSE) has been declining since August until the third week of September. Guinigundo even said that the Philippine peso was now “the worst performing currency in the region.”

“The benchmark Philippine Stock Exchange has been declining since August until the third week of September”

As pointed out by the country’s economic managers, however, there are a number of external and internal factors that have contributed to this lackluster performance. One major external factor is the expected increase in federal interest rates in the United States, inviting short-term investors to transfer their money in the market for higher returns.

Confidence in the long term

In the longer term, however, the country should be less concerned about the fluctuations in the stock market and in the value of the peso and more concerned about its attractiveness to foreign direct investments (FDI). Once investors have chosen to invest in a country or not, there is little flexibility involved going forward, as the investment would have already been made, be it in a factory, a power plant, or a luxury hotel. In the case of the Philippines, cautious investors look at the country’s fundamentals while keeping an eye on the political situation.

The past administration was generally successful in attracting FDI into the country. The UN Conference on Trade and Development (UNCTAD) World Investment Report 2016 shows that FDI inflows into the Philippines in 2015 was huge compared to its level in 2010: US$ 5.234 billion compared to US$ 1.298 billion. The administration’s success came despite some inherently less attractive aspects of the Philippine economy. The restrictions in and protectionist tone of our Constitution, where several sectors are either closed outright to FDI or limited to 40 percent maximum equity ownership, are two aspects.

“The UN Conference on Trade and Development World Investment Report 2016 shows that FDI inflows into the Philippines in 2015 was huge compared to its level in 2010.”

Despite the country’s progress in the last five years, the overall amount of FDI into the country is still modest compared to many of our dynamic Asian neighbors’. According to the same World Investment Report, countries like Vietnam, Thailand and Malaysia each attracted more than US$ 10 billion in 2015. Vietnam overtook the Philippines around two decades ago in attracting FDI and Myanmar is also catching up.

Another indicator of the country’s investment attractiveness is the share of FDI in gross investments in the economy. The Philippines has a see-saw record in this category. FDI share of investment was 12.5 percent in 2000 and 9.0 percent in 2005. In 2010, however, FDI was only 3.2 percent. It recovered to 8.2 percent in 2015. For the Duterte administration to maintain the upswing of foreign investments into the Philippines, it will need to hurdle a few challenges.

Policy stability and national credibility

A first step for the Duterte administration is reducing or removing uncertainties that can sour investments. These include the high and rising state-mandated national minimum wage, the always extended and never concluded agrarian reform program, and anti-mining, anti-coal power policies in the environment sector. The unstable policy environment, however well-intentioned, reduces investors’ and businesses’ confidence in long-term planning.

One other consideration in the credibility of the Philippines’ promise of long-term stability is how the administration lives up to its long-term commitments. Beyond the economy, the country appears paved to reverse years of friendship and partnership with countries such as the US in favor of forging new ties with China and Russia. Perhaps worse than a drastic shift from one partnership to another, this step is unnecessary for the country to achieve its economic and security objectives.

“Beyond the economy, the country appears paved to reverse years of friendship and partnership with countries such as the US in favor of forging new ties with China and Russia.”

Second, and in an area the administration has already begun to work in—it could continue to work on significantly reducing red tape and the bureaucratic burdens on business, both local and national, that discourage many foreign and local investments.

The final and most serious challenge will be to liberalize the Philippine economy and lift the protectionist provisions of the Constitution. More specifically, the administration could explore lifting the caps on foreign equity ownership, except in critical resources like land. This will be a significant challenge on its own, which would demand charter change to take place within the next six years.

“The final and most serious challenge will be to liberalize the Philippine economy and lift the protectionist provisions of the Constitution.”

The flow of much-needed FDIs that would directly generate jobs and revenues will depend on how wide this administration will open the country’s doors to global enterprises and how well it can invite cautious investors.

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