A cautionary tale in trade and investment

Edwin Santiago, Fellow and Member of the Editorial Board of the Stratbase ADR Institute

By many accounts, the Philippines is now acknowledged as one of the fastest-growing economies in the world and this is a result of administration-spanning structural reforms. For the Philippines, reducing poverty and improving people’s living standards are of primary concern.

For these to happen, there must be economic growth. And, trade and investment are crucial because of their high multiplier effects on expanding income and employment.

For decades, the Foreign Direct Investments (FDI) in the Philippines, even when posting growth, have mostly been lackluster compared to our Southeast Asian neighbors.

Philippine FDI, is on a downward trend since 2017, reaching its peak that year at US$10.3 billion, dropping to US$9.8 billion in 2018 and resting at US$5.1 billion from January to September 2019.

Improving the attractiveness of the Philippines as an investment destination should be the key direction if the country hopes to mount a credible challenge to our neighbors.

According to the Doing Business 2020 Report of the World Bank, it is apparent that doing business in the Philippines now has become easier and more convenient, owing to recent reforms.

The ranking of the Philippines climbed to the 95th spot from 124th in the previous year, while its score likewise rose to 62.8.

However, despite this improvement, the Philippines still lags behind its Southeast Asian neighbors, ranking 7th out of 10. It was only better than Cambodia (144th), Laos (154th), and Myanmar (165th). 

Providing a similar barometer is the Global Competitiveness Report of the World Economic Forum. In the 2019 report, out of 141 countries, the Philippines dropped by 8 notches from being 56th in the previous year to 64th, owing to the lower performance in the areas of information and communications technology (ICT) adoption and macroeconomic stability.

Perhaps recognizing the need for more structural reforms, the Duterte administration, last year, was able to get off the ground several measures seen as potentially improving our trade and investment position.

The country’s economic managers have been busy pushing for what they see as a more favorable climate for trade and investment.

The Comprehensive Tax Reform Program (CTRP) is one of the centerpiece measures that the administration is determined to accomplish within the term of Duterte.

With the first package of the CTRP—the controversial Tax Reform for Acceleration and Inclusion (TRAIN) Law—already underway, the Department of Finance (DOF) has been closely watching the progress of the Corporate Income Tax and Incentives Rationalization Act (CITIRA) in the legislative mill.

Previously known as the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill, this second package of the CTRP failed to get the Senate nod in the last Congress.

The CITIRA is touted to attract more foreign direct investments with the gradual reduction of the corporate income tax (CIT) from the current 30 percent—the highest in the ASEAN region—to 20 percent by 2029.

The DOF is strongly pushing this proposed law to rationalize the current incentives package.

According to its officials, with the passage of the CITIRA Law, the country will be able to remove unwarranted advantages enjoyed by some companies and industries in terms of tax holidays and other forms of incentives.

Their aim with the new law is to align the incentives with the national development objectives of the government and with the benefits that have been brought by these entities.

But this is a thorny issue as not everyone agrees with the DOF that the CITIRA Law will bring positive results in terms of investments. By withdrawing the incentives currently being enjoyed, companies may be saddled with higher operating costs that will make them either cut employees or pack up their business and move to another country.

Another CTRP package is the Passive Income and Financial Intermediary Tax Act (PIFITA), which seeks to simplify and reduce the taxes on financial investors to “increase and direct the movement of capital to where it is most needed, so that higher, sustainable, and more inclusive growth can be achieved,” according to the Department of Finance.

In theory, with the reduced taxes to be paid by investors in this regard, the money saved may be ploughed back as investments, creating more employment and the like. The ensuing issue, however, is the observation of some sectors that this measure disproportionately favors the rich.

In terms of trade, the country posted a total amount of US$149.2 billion from January to October 2019, based on the latest data released by the Philippine Statistics Authority (PSA).

Total exports were recorded at US$59.0 billion while total imports reached US$90.2 billion. These figures are not much different from those of the same period in the previous year. Even in terms of export and import items and partners, the Philippine performance seemed uneventful in 2019.

What is important to pay closer attention to are the problematic factors in trade that have been outlined by the 2016 Global Enabling Trade Report by the World Economic Forum and the Global Alliance for Trade Facilitation. Consistently present affecting both export and import is corruption.

Also, amidst the long-standing discussions on promoting rural development, Duterte issued an Administrative Order directing the Philippine Economic Zone Authority (PEZA) and other government agencies to speed up the development of special economic zones (ecozones) in rural areas and to stop the approval of ecozones in Metro Manila.

This measure may also be seen as a way of improving productivity by decongesting the National Capital Region (NCR). The NCR is renowned for its crippling traffic problem that negatively impacts on productivity and public health.

The attractiveness of the Philippines as an investment haven hangs in the balance given the mounting international pressure on the administration for its human rights records that might affect political stability, the uncertainty of the final form of the CITIRA Law, the outcome of the government’s strong-arming of the water distribution concessionaires, and the controversial nonrenewal of a dominant media franchise.

Any self-respecting potential investor will want to wait and see what happens next.




This article was originally published in philstar.com. Image Source: AFP/Timothy A. Clary



























































































































































































































































































































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