By Luz Wendy T. Noble
NET INFLOW of foreign direct investments (FDI) — involving long-term capital that generate jobs and transfer technologies — was nearly halved in June and fell by more than a third last semester, the Bangko Sentral ng Pilipinas (BSP) reported on Tuesday, with analysts blaming an escalating Sino-US trade war and uncertainty over proposed changes to tax incentives.
BSP data showed net FDI inflow dropping by 48.5% to $430 million in June from $836 million, even as the latest amount was 77.69% more than June’s $242 million.
“This decline relates to external environment issues such as the US-China trade conflict and other trade-related concerns since last year,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mail.
On the domestic front, Mr. Asuncion believes that the lower FDI net inflow “stems from planned fiscal reforms that have somehow clouded the foreign investment space, whether fresh ones or expansions for existing ones.”
Also sought for comment, Michael L. Ricafort, Rizal Commercial Banking Corp.’s (RCBC) economics research division head, said in a separate e-mail: “Uncertainties related to the proposed rationalization of fiscal incentives kept some foreign investors on a wait-and-see attitude.”
The United States on Sept. 1 announced 15% tariffs on even more Chinese imports — including footwear, smart watches and flat-panel televisions — while China began imposing new duties on US crude oil. Beijing later lodged a complaint against Washington at the World Trade Organization over US import duties.
The International Monetary Fund released on Tuesday its World Uncertainty Index showing that concerns about global trade could shave about 0.75 percentage point off global economic growth this year.
At home, foreign business chambers in Philippine economic zones have been asking the government not to proceed with plans to overhaul the current tax incentives package by removing perks deemed redundant and making the rest more time-bound and tied to economic benefits from investments.
Mr. Ricafort added that “the declining trend in both local inflation and interest rates… kept some foreign investors on the sidelines while waiting for a bottom in interest rates (in able to further save on borrowing costs) and start to borrow more aggressively again to finance more FDIs into the country.”
June saw equity other than reinvested earnings plunge 86.5% to $25 million from $184 million a year ago, as gross placements dropped 64.7% to $73 million from $208 million and withdrawals more than doubled to $49 million from $24 million.
The BSP said that equity capital placements in June came mostly from Singapore, the United States, Japan, the Netherlands and China, and went mainly to real estate; manufacturing; financial and insurance; transportation and storage; as well as electricity, gas, steam and air conditioning supply industries.
Foreign firms’ investments in debt instruments of their Philippine affiliates similarly dropped 44% to $317 million from $570 million.
Only reinvested earnings grew — by 8.3% to $89 million in June from $82 million a year ago.
FIRST HALF TALLY
June brought year-to-date net inflows to $3.576 billion, 38.8% less than the $5.842 billion in last year’s first half.
The same comparable six-month periods saw equity other than reinvested earnings plunge by 77.2% to $361 million from $1.585 billion, while withdrawals grew more than threefold to $499 million from $163 million.
Equity capital placements last semester came chiefly from Japan, the United States, Singapore, China and South Korea, and benefited mainly financial and insurance, real estate, manufacturing, transportation and storage, as well as administrative and support services.
Intercompany borrowings dropped 28.8% to $2.708 billion from $3.805 billion, while reinvested earnings grew 12.1% to $507 million from $453 million.
Despite the fall in net FDI inflows, both economists believe that net inflows will bounce back.
“As the smoke clears from both external and domestic concerns, FDI net inflows are expected to pick up particularly as fiscal reforms are in place,” UnionBank’s Mr. Asuncion said.
For RCBC’s Mr. Ricafort, such inflows could turn around in the coming months “after long-term local interest rates recently declined to new lows in two to three years and have already declined by nearly 400 basis points from their decade-highs posted in October 2018.”
“Thus, demand for loans by businesses/investors, including for financing FDIs, could pick up due to much lower borrowing costs that encourage greater financing for new investments and expansion projects by both foreign and local investors, including the financing for more FDIs,” he explained.
Given appropriate policies, FDIs help fuel overall economic development by generating gainful employment, facilitating technology and knowledge transfer, enhancing international trade integration and creating more competitive business environment.
FDI net inflows dipped 4.4% to $9.802 billion last year from a record-high $10.256 billion in 2017. The BSP had said it expects such inflows to hit $10.2 billion this year.
BSP data on FDI cover actual capital inflows, in contrast to project commitments to state investment promotion agencies that are tracked by the Philippine Statistics Authority (PSA).
Moreover, BSP’s FDI data include investments in which foreign ownership is at least 10%, while PSA does not make use of this threshold and includes borrowings from foreign sources that are non-affiliates of the domestic company. Furthermore, PSA data do not account for equity withdrawals.
The PSA released preliminary data on Sept. 6 showing that FDI commitments approved by the country’s seven main investment promotion agencies grew 60.2% year-on-year to P49.58 billion last quarter from P30.95 billion a year ago, making such pledges more than double to P95.56 billion last semester from P45.154 billion in 2018’s first half.