A vote of confidence in the Philippines

Foreign Direct Investments (FDI) recorded an all-time high in President Rodrigo R. Duterte’s first full year in office, reaching $10 billion in 2017 and surpassing the government’s $8 billion target. The 2017 figures came on the heels of the widely circulated US News & World Report, which cited the Philippines as one of the top countries to invest in, even outranking our neighbors such as Indonesia, Malaysia, and Singapore. This is a turnaround seeing as only a few months ago, a lawmaker expressed his alarm at the 90.3% drop in new FDI inflows in the first half of 2017.

The strong FDI performance is a welcome respite from the controversies that have clouded our country’s political landscape. More importantly, this has cemented the Philippines’ status as an emerging investment destination.

DISAGGREGATING THE FDI INFLOWS
The Philippines registered inflows of $10 billion for 2017, growing by 21.4% year on year. The central bank attributes this to the country’s sound macroeconomic fundamentals and growth prospects. Top industries receiving FDI include manufacturing, gas, steam and air-conditioning supply, real estate, construction, wholesale and retail trade. However, over a third of the equity capital placements, or new FDI inflows, were directed into the manufacturing sector.

Foreign investments in manufacturing grew by 244% in 2017, coming from a low base in 2016. In addition to strong domestic and external demand for locally manufactured products, the surge in manufacturing investments can be partly attributed to Japan Tobacco Inc.’s acquisition of Mighty Corp. in September 2017. This year, FDI in manufacturing is expected to grow by 10% to 15%. The increased manufacturing investments is a promising development, amid the government’s efforts to pursue reforms to revive the sector. After all, manufacturing is expected to provide more stable jobs, especially for the less skilled members of the labor force.

In terms of source country, the Netherlands topped the list, followed by Singapore, the US, and Hong Kong. So far, Duterte’s overtures towards China have yet to translate into a significant surge in FDI inflows. In 2017, equity placements from China only amounted to $28.8 million, or less than 1% of the total, a paltry figure compared to $1,573 million from the Netherlands or even the $683 million from Singapore.

HOW DO WE FARE AGAINST OUR NEIGHBORS?
The Philippines has come a long way from being a laggard in FDI inflows, slowly overtaking some of our neighbors in the region such as Malaysia and Thailand. Despite this progress, the country can still take advantage of some opportunities. For example, rising labor costs and an aging population in China have encouraged several firms to relocate their operations in other Southeast Asian countries. Vietnam has benefited greatly from manufacturers looking for a low-cost alternative to China. Although the full-year FDI data for Vietnam is still unavailable, the country has already raked in over $10.1 billion for the first three quarters of 2017.

Meanwhile, Indonesia, which UNCTAD (United Nations Conference on Trade and Development) tagged as the most promising Southeast Asian host country in the next two years, registered FDI inflows of $22 billion in 2017, rebounding from its unusually dismal record of $4.5 billion in 2016. Interestingly, China became Indonesia’s second largest source of FDI in 2017, overtaking Japan. Chinese funds, mostly invested in the construction of power plants and ports, is expected to pick up in the years to come as Indonesia, like the Philippines, is gearing up for its infrastructure drive.

INSTITUTING REFORMS
While the Philippines is undoubtedly enjoying increasing international interest, there is still a lot of space to institute much-needed reforms, especially as other Southeast Asian countries are also pursuing their own policy and infrastructure developments to entice investors. The 2017-2018 Global Competitiveness Report cited the inefficient government bureaucracy, inadequate infrastructure supply, corruption, and tax regulations and tax rates, as among the most problematic factors for doing business in the Philippines. In line with President Duterte’s directive to provide a more conducive environment for investors, government bureaucrats have initiated a host of reforms, from aggressive infrastructure buildup plans to reducing red tape.

With regard to economic liberalization, President Duterte issued Memorandum Order 16 in November 2017, directing the National Economic and Development Authority to ease foreign investment restrictions. The 11^th Foreign Investment Negative List, which the government committed to release some time last year, is still pending the president’s approval. On the legislative side, the Ease of Doing Business bill, which seeks to cut red tape, is already in the advanced stages in Congress. The Senate is also deliberating on the proposed amendments to the Public Service Act to define “public utility” and open the sector to foreign participation.

A CLOUD OF UNCERTAINTY?
One of the more immediate risks for the business community is the upcoming tax package 2. The second package proposes to lower corporate income tax conditional on rationalizing fiscal incentives. Based on its assessment of the finance department’s proposal, BMI Research cautioned that the second package will dampen the country’s competitiveness and create uncertainties for investors. The House of Representatives has yet to file its own version of the bill, which could deviate from the original proposal. The final form must ensure that we don’t sacrifice our competitiveness.

The strong FDI performance is a vote of confidence in the country’s economic prospects. However, the government should continue to implement measures that would make the business environment more investor-friendly, otherwise, we’ll lose out to our more competitive neighbors.

Weslene Uy is Senior Economic Research Associate at Stratbase ADR Institute.