In the early days of the ECQ, the Department of Finance (DoF) announced that the economy could still eke out growth of .08%. A month later, it adjusted its forecast and predicted a contraction of -3.4. Last week, Moody’s Analytics said that the economy will likely contract more acutely at -4.5%. Meanwhile, 7.6 million Filipinos are now unemployed, five million more than in the beginning of the year. All these are happening amid the backdrop of a budget deficit which could reach 8.5% of GDP.
As the economic blowback of the pandemic unravels, we are realizing that it is worse than we expected.
With the economy deteriorating, our need for foreign direct investments (FDIs) is now more urgent than ever. FDIs help bridge the unemployment gap and lessen the budget deficit. They also offer long term benefits such as technology transfer, recurring income through taxes and exports earnings.
Lucky for us, manufacturing companies from East Asia, the US, and the EU are leaving China in droves. Many are looking to geographically disperse their factories to reduce their dependence on the communist republic. Some are leaving due to the effects of the US- China trade war. It is imperative that the Philippines get its fair share of FDIs.
The governments of Vietnam and Indonesia recently announced that they had already secured several multi-billion dollar investments from China. Alarmed, I sent a message to Department of Trade and Industry Secretary Mon Lopez, urging him to give due attention to our campaign to attract our fair share of FDIs. I was worried that we might miss out on this investment bonanza again like we did in 2010 and 2015.
Mr. Lopez, who also chairs the Board of Investments, messaged back and said the Philippines is not sleeping and is aggressively pursuing investment leads. In fact, several investment commitments have already been secured. Despite the three month-long quarantine, the Board of Investments (BoI) bagged P645 billion ($12.6 billion) worth of investment commitments, a 112% improvement from the same period last year. The lion’s share of these commitments is going towards the energy, transport, and infrastructure sector. A portion is going to the agriculture and manufacturing sector. Also in the pipeline are two megaprojects — a steel manufacturing plant and a petrochemical plant, both valued at $5 billion.
Past experience indicates that 80% of all investment commitments come to fruition.
Earlier this year, the telecommunications industry got an investment windfall with 60 kilometers of fiber optic wires laid across the country. This was accompanied by the installation of new satellite-based connectivity systems meant to support the entry of the third telecommunications player.
Notwithstanding the favorable developments at the BoI in the first semester, no one can deny that the Philippines gets only a fraction of Vietnam’s intake of FDIs. The BoI attributes this to Vietnam’s geographic advantage, being closer to China (which translates to lower logistics costs), its superior investment incentives and better conditions to support manufacturing industries, including better supply chain networks.
Working against the Philippines is our uncertain tax and incentive regime (because the new tax law, CREATE, is still pending in congress), a shortage of sites in PEZA zones, limited supply chain networks and higher logistics costs.
How is the Philippines addressing these issues?
The Corporate Recovery and Tax Incentives for Enterprises Act, or the CREATE Law, is the silver bullet that can solve many of Philippine’s weaknesses. It has four features that will make us more competitive in attracting FDIs.
First, CREATE will cut corporate income tax from 30% to 25% as soon as it is enacted. The one-time 5% reduction will be followed by an annual cut of 1% from 2023 to 2027, to settle at 20%. This will put the Philippines in step with the corporate income tax rates of our regional neighbors. For context, corporate income tax is 24% in Indonesia, 20% in Vietnam and Thailand, and 17% in Singapore.
Second, to prevent existing investors from leaving, CREATE allows them to enjoy the same incentives that are in place today for a period of four to nine years.
Third, CREATE allows investors access to the domestic market, even if they are located inside PEZA zones.
Fourth and most importantly, CREATE allows our investment promotions agencies the flexibility to tailor-fit incentives to the needs of the investors. This gives us a greater probability of bagging the investors we deem “desirable.” It is certainly better than the one-policy-fits-all approach that is in effect today.
What constitutes a desirable investor? The BoI favors investors whose projects modernize the nation. These include projects relating to technology-based agriculture, cutting-edge manufacturing, food processing, health care-related projects, infrastructure and upstream industries, logistics, IT and digital industries, renewable energy, and industries that strengthen supply chain linkages. Those that offer employment opportunities en masse and those that offer substantial export revenues are sought after too.
Unfortunately, Congress failed to pass the CREATE bill before it went on recess earlier this month. To our great disappointment, it prioritized the passage of the anti-terrorist bill before this important law meant to hasten our economic recovery. But Congress’ penchant for patronizing the President is another story. What’s important is that it passes the CREATE bill when it convenes in two weeks.
As for the lack of PEZA zone sites, President Duterte recently greenlit 11 new PEZA zones. These consist of two horizontal manufacturing zones and nine vertical towers for IT-BPO purposes.
The BoI’s thrust is to attract Korean, Japanese, Taiwanese, European, and American companies who are leaving China. The Philippine advantage includes plentiful skilled workers, stable wages, industrial peace, and no export restrictions. Investors can also take advantage of the numerous free trade agreements we have with counterpart countries. The incentives offered by CREATE are the proverbial icing on the cake.
The BoI is positioning the Philippines as a complimentary host country to existing factories based in China, not as a principal place for manufacturing. I suppose this works for now — but by no means should it be our long term positioning.
At some point very soon, the Philippines must make the transition to become a manufacturing hub. We must make the shift from being a consumer-lead economy to one that is production lead. We must expand our range of competence in high-value manufacturing like aerospace parts, electric vehicles, and pharmaceutical products. Only then can growth be sustainable without widening the budget deficit. Only then will national income rise to upper income levels.
The economic blowback of the Wuhan virus will be minimized if we are able to attract enough FDIs to provide jobs, capital formation and long term earnings for the country. FDIs can make the new normal a “better normal.”
Let’s hope CREATE is enacted into law and the BoI sustains its strong FDI campaign.
Andrew J. Masigan is an economist