Easing foreign ownership rules to drive FDI -- Nomura

Posted on August 02, 2017

MORE FOREIGN direct investment (FDI) is expected to enter the Philippines amid a liberalization in the banking sector as the government plans to ease foreign-ownership limitations in most industries, analysts at Nomura Global Research said.

The banking sector was opened up to more overseas investment through the passage of Republic Act 10641, known as the Act Allowing the Full Entry of Foreign Banks in the Philippines, in July 2014. BW FILE PHOTO
They said they see a continued rise in FDI inflows entering the country primarily driven by the Bangko Sentral ng Pilipinas’ (BSP) liberalization policy way back in 2014 as well as President Rodrigo R. Duterte’s policy of easing restrictions on foreign ownership.

“The pickup in inflows we have seen in the last three or four years has been very consistent,” Nomura Global Research Senior Economist for Southeast Asia Euben Paracuelles said in a media conference call on Tuesday.

He noted that despite the political uncertainty of the change in government, “we haven’t seen a turnaround or deterioration in inflows; the nature of the inflows is (mainly) structural,” due to BSP’s efforts in opening up the banking sector in 2014.

FDI net inflows surged by 40.7% year on year to a record high of $7.93 billion in 2016.

By end-March, meanwhile, FDIs totaled $1.56 billion, jumping by 16.6% from the $1.337 billion registered in the first quarter of 2016 fueled by a rise in intercompany borrowings as foreign firms invest more in their local affiliates to support operation and expansion plans, versus declining equity placements.

The BSP projects FDI inflows to hit $8 billion this year.

The banking sector was opened up to more overseas investment through the passage of Republic Act 10641, known as the Act Allowing the Full Entry of Foreign Banks in the Philippines, in July 2014.

“More foreign banks are still applying for domestic licenses. We would expect an acceleration of FDI inflows after these applications are approved, as the presence of foreign banks could encourage foreign corporates from the banks’ home countries to also invest onshore,” research analysts at Nomura said in its Global Market Research report dated Aug. 1.

Prior to the law’s passage, only 10 foreign lenders could operate here. Nine foreign banks have secured BSP approval to set up shop in the Philippines over the last two years.

“The fast-growing economy of the Philippines is expected to attract more foreign banks into the country, as they plan to participate in: 1) an anticipated increase in capital investments across industries; and 2) rising demand for consumer lending,” the report said.

The report also said FDI will also accelerate through the ASEAN Banking Integration Framework which was endorsed in December 2014, that sought to allow duly identified qualified ASEAN banks to operate freely across the region’s member-economies.

“The ASEAN Banking Integration Framework of 2014 will also allow qualified ASEAN banks to have greater access to neighboring markets as well as more flexibility in their operations. As such, increasing competition is anticipated over the long term,” the report said.

Asked about the risks seen that could derail foreign investment, Mr. Paracuelles said: “Key barriers are institutional,” referring to the continued restrictions on foreign ownership in certain sectors.

However, Mr. Paracuelles noted that should President Rodrigo R. Duterte’s administration update regulations, “make some legal changes and allow to open up these sectors, this could sort of add to the momentum” of FDI inflows.

In July, Finance Secretary Carlos G. Dominguez III said the department expects to issue its 11th foreign investment negative list (FINL) in August. The 10th FINL issued on May 29, 2015 made minimal changes due to the continued Constitutional restrictions on foreign ownership of public utilities and mass media.

“Also, a potential reduction of corporate income tax rates and a further easing of constitutional foreign ownership restrictions (point #3 in Duterte’s 10-point economic agenda) -- particularly in utilities and education sectors -- should also help boost FDI inflows,” Nomura Global Research said. -- Janine Marie D. Soliman