FDI pledges drop 37.9% in first quarter

By Elijah Joseph C. Tubayan
Reporter
APPROVED foreign investment pledges fell to their lowest level in nearly eight years last quarter in the face of external developments and uncertainties due to planned changes to the corporate income tax and incentives schemes.
Foreign direct investments (FDI) committed with investment-promotion agencies dropped 37.9% to P14.2 billion in the first three months of the year from the P22.883 billion posted in the same period in 2017, Philippine Statistics Authority (PSA) data show.
This was the lowest level since the P13.8 billion logged in the second quarter of 2010.

The report counted FDIs registered with the government’s seven premier investment promotion agencies (IPAs), namely: the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI), Clark Development Corp. (CDC), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BoI-Autonomous Region of Muslim Mindanao (BoI-ARMM) and Cagayan Economic Zone Authority (CEZA).
The three months to March saw PEZA contributing the most pledged FDIs at 91.2% with P12.96 billion, down 34.5% year on year. This was followed by the BoI with a 5.6% share at P792.8 million, though 58.2% less than a year ago.
Rounding the rest of the IPAs were CDC’s 2.4% share at P339.8 million (a 59.8% decline), SBMA’s 0.1% at P11.5 million (down 96.3%) and CEZA’s 0.7% at P104.1 million (up 92.4%).
PEZA said that the decline was largely due to the impact of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) law which slashed personal income tax rates but added or raised excise taxes on several items and lifted the value added tax exemptions of various sectors, as well as the uncertainties brought by the second package that will slash corporate income tax rates but will remove fiscal incentives deemed redundant.
“TRAIN 2 and the effects of TRAIN 1 have created uncertainties for new investment…” PEZA Director General Charito B. Plaza said in a mobile phone message on Thursday, claiming that tax reform “created fears, worries and directives to investors’ principals to start looking at other countries to transfer.”
“Unstable laws, policies that can be changed in the middle of the game, that can be removed at the pleasure or threats from government is dangerous and will discourage… the investors already here.”
Sought for comment, Security Bank Corp. economist Angelo B. Taningco said that the decline was due to external developments, but also noted the effect of domestic inflation that averaged 4.1% in the first four months of the year against the central bank’s 2-4% target for the entire 2018.
“I think a potential reason why it was relatively low is… greater foreign investor uncertainty arising from heightened financial market volatility, trade war concerns and geopolitical tensions,” Mr. Taningco said in an e-mail.
“Another possible explanation is that of rising production costs domestically as Philippine inflation was rising sharply and the peso depreciation being strong versus most other Asian currencies.”
Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), shared this view, saying in a separate e-mail: “Approved foreign investment pledges declined amid increased protectionist measures and risk of trade war by some developed countries, especially in the US…”
Foreign investment commitments are different from actual capital inflows tracked by the Bangko Sentral ng Pilipinas for balance of payments purposes. Latest available BSP data showed that net foreign direct investments in peso equivalent grew 56.1% to P76.1 billion in the first two months of the year from P48.7 billion in January-February 2017.
Japan was the top source of pledged investments in the first quarter, accounting for more than half of that period’s portfolio with P7.9 billion. This was followed by the United Kingdom and the Netherlands with P1.5 billion and P878.5 million worth of commitments, respectively.
By industry, manufacturing bested other industries as it got 64.1% of the total at P9.1 billion albeit lower by 39.4% from a year ago. Administrative and support service activities came in next with a 12.7% share of the total at P1.81 billion, though down 48.7%, while real estate activities came in third with a 12.6% share, declining 47.7% to P1.80 billion.
PEZA’s Ms. Plaza said that although, for manufacturers, it “isn’t easy to pull out their huge factory and machines… they can slowly move out by giving to their other branches in other countries the transfer of production and market quota” as well as slowly reducing their work force over time.
In terms of investment destination, CALABARZON — the region just south of Metro Manila that consists of Cavite, Laguna, Batangas, Rizal and Quezon — got the most investment pledges in the first quarter at 52% of the total at P7.4 billion. This was, however, down by 51.8% compared to the first quarter of 2017.
The National Capital Region got the second-biggest pledges with 22.5% at P3.2 billion, up 19.3% from a year ago.
Northern Mindanao came in at third with 11.5% at P1.6 billion.
The PSA said that first-quarter investment pledges are expected to generate 33,704 jobs should they materialize, 38.4% less than what was projected a year ago.
Looking forward, Security Bank’s Mr. Taningco said that foreign investment pledges for the whole year “may fall short of previous years’ levels.”
For RCBC’s Mr. Ricafort: “Increased infrastructure spending by the government in the coming years may fundamentally help in attracting more foreign investments into the Philippines.”