By Luisa Maria Jacinta C. Jocson, Reporter

LOWER INTEREST RATES will help drive the entry of more foreign direct and portfolio investments into the Philippines, analysts said.

“The outlook for foreign direct investment (FDI) and foreign portfolio investment (FPI) in the Philippines appears promising, with current trends suggesting the country could meet or potentially exceed the Bangko Sentral ng Pilipinas’ (BSP) targets,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.

The BSP expects to record FDI net inflows of $9.5 billion this year. For foreign portfolio investments, it forecasts $3.1 billion in net inflows by yearend.

“The BSP’s forecast for the year sounds reasonable, as it wouldn’t be too far a stretch, with that sort of level of annual FDI coming into the Philippines almost consistently over this period, barring the coronavirus-hit year in 2020,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said in an e-mail.

In the January-to-May period, FDI net inflows jumped by 15.8% year on year to $4.024 billion, data from the BSP showed.

Meanwhile, short-term foreign investments yielded a net inflow of $1.46 billion in the January-July period, surging from the $157.3-million net inflows in the same period a year ago.

FDIs are considered long-term investments, while portfolio investments or “hot money” are seen as more fickle due to the ease by which these funds enter and leave the economy.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said the BSP’s investment targets are doable amid easing interest rates.

“Offering attractive rates will be the key. All around will be declining key rates, thus, offering sensible investments now will lock in gains for prospective investors. I would like to believe that there is time,” he added.

Mr. Roces said the further reduction in policy rates this year and next year “should stimulate investment activity, particularly for FDI, by making borrowing more attractive.”

At its August meeting, the Monetary Board cut rates for the first time in nearly four years or since November 2020. It reduced borrowing costs by 25 basis points (bps), bringing the benchmark rate to 6.25% from the previous over 17-year high of 6.5%.

The central bank could also deliver another 25-bp rate hike in the fourth quarter, BSP Governor Eli M. Remolona, Jr. said earlier.

The US Federal Reserve is expected to start its easing cycle later this month, which also bodes well for investor sentiment, analysts said.

“The biggest catalyst for FDI and FPI into the country is the expected series of Fed rate cuts that could be matched locally, thereby leading to improvements in global investments, trade, and other economic activities,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

Apart from reduced borrowing costs, analysts said that the country’s strong macroeconomic indicators will help attract more investments.

“Key drivers for achieving these targets include sustained economic fundamentals, political stability, an improved regulatory environment, ongoing infrastructure developments, and the country’s competitive advantages in sectors like BPO (business process outsourcing) and manufacturing,” Mr. Roces said.

Mr. Asuncion said investors are likely to be attracted to the Philippines because of its upbeat economic growth.

“If foreign investors see real opportunity in investing in the Philippines, I do not think it will be a huge problem getting these investors on board,” he added.

The Philippine economy grew by 6.3% in the second quarter, marking the fastest growth in five quarters or since the 6.4% in the first quarter of 2023.

On the other hand, Leonardo A. Lanzona, Jr., an economics professor at the Ateneo de Manila University, said that lower borrowing costs may favor short-term investments over long-term ones.

“The low interest rates of BSP can stimulate economic activity. However, this can only boost short-term investments as borrowing becomes cheaper,” he said in an e-mail.

“It can depress long-term investments if the returns on longer-term projects are deemed insufficient relative to the risks.”

Mr. Chanco also cited risks to this investment outlook, noting the country’s “policy stasis.”

“The Philippines’ nearest neighbors and biggest competitors remain quite aggressive in their pursuit of more open trade borders and a better infrastructure environment for businesses, something that the Philippines is still struggling with,” he added.

The government’s policies may also benefit short-term investments, Mr. Lanzona said.

“Also, the government implements policies or incentives that encourage immediate spending or investment, such as tax breaks or stimulus checks. These policies can boost short-term investments but may not have the same impact on long-term projects that require sustained funding and are subject to continuous risks,” he said.

Mr. Ricafort also noted that the investment targets remain achievable, barring any further geopolitical risks.

“However, global economic conditions and exchange rate stability will also play crucial roles. While the current trajectory remains positive, risks such as geopolitical uncertainties and domestic policy changes will have an impact on these projections,” Mr. Roces said.

Mr. Ricafort also noted that the country’s improving credit rating outlook will also support foreign investment growth by boosting the confidence of international investors and creditors.

Japan-based Rating and Investment Information, Inc. last month upgraded the Philippines’ investment grade rating to “A-.”

The country also secured an “A-” rating from the Japan Credit Rating Agency but has yet to secure an “A” rating from the “big three” credit raters.

The Philippines currently holds a “Baa2” rating from Moody’s Ratings, “BBB” from Fitch Ratings, and “BBB+” from S&P Global Ratings.

The government is targeting to achieve an “A” rating by the end of the Marcos administration.

FASTER PRIVATE CONSUMPTION will be crucial for the Philippine economy to hit its growth target this year, S&P Global Ratings said.

S&P Global economist for Asia-Pacific Vishrut Rana said Philippine gross domestic product (GDP) is projected to expand by 5.8% this year.

“The key swing factor for the rest of the year is whether private consumption comes back online or whether it remains slightly weak and that will ultimately determine whether the economy can hit the 6% growth mark. For the moment, we have 5.8%. There’s some upside risk to that number,” he said in a webinar on Tuesday.

Philippine GDP expanded by 6.3% in the second quarter, bringing first-half growth to 6%.

To meet the lower end of the government’s 6-7% target, the economy must expand by at least an average of 6% in the second half of 2024.

Domestic demand is expected to support the growth outlook of the Philippines and the rest of Southeast Asia, S&P Global said.

“What we observe is the domestic demand in the region is holding up pretty well. Generally speaking, private consumption and investment are both doing relatively okay,” Mr. Rana said.

“This is particularly relevant given that we’ve seen tighter monetary policy over the past couple of years, and that has not slowed down domestic demand as much as feared earlier.”

However, Mr. Rana cited risks to this outlook, such as a global slowdown.

“In particular, if global growth turns out to be weaker than expected, then we could see a deterioration in Southeast Asia’s growth outlook driven by weakness in manufacturing and trade,” he said.

He noted that growth in the Philippines has been driven by the public sector.

“In the Philippines, what we observe is that it’s the public sector that’s holding up growth. We see public spending remaining very strong. Investment activity is strong. On the other hand, private consumption growth is slightly weaker,” he said.

Second-quarter GDP growth was primarily driven by gross capital formation, which expanded by 11.5%. Government spending also grew by 10.7%, a turnaround from its 7.1% contraction a year earlier.

On the other hand, household final consumption rose by 4.6% year on year in the second quarter, slowing from the 5.5% growth a year ago. Private consumption typically accounts for over 70% of the economy.

“Sectorally speaking, some of the service sectors continue to perform relatively well. We see some weakness in manufacturing, which is holding back the economy somewhat,” Mr. Rana added.

For 2025, S&P Global sees Philippine growth expanding by 6.1% due to an “improvement largely based on gradually recovering domestic demand and also a normalization of monetary policy going forward,” he said.

Meanwhile, S&P Global said that inflation is not a “major risk” at the moment for the Philippines and the rest of the region. 

“We did see an uptick in the latest inflation reading… so there was an acceleration, it was largely driven by food. However, if you look at core inflation, that is still under the 3% mark,” Mr. Rana said.

Headline inflation likely settled at 3.7% in August, according to the median estimate yielded from a BusinessWorld poll of 15 analysts. If realized, this would be slower than the nine-month high of 4.4% in July and the 5.3% clip in the same month a year ago.

The BSP earlier said that the spike in July inflation was expected and only temporary, with inflation expected to return to within the 2-4% target band from August onwards.

“Accordingly, central banks in the region are also likely to be cutting interest rates. So we expect BSP to cut further. (The BSP is) likely to lower the interest rates, but also at the same time, not so sharply that the currency is affected,” Mr. Rana said.

BSP Governor Eli M. Remolona, Jr. earlier said that the central bank can cut rates by another 25 basis points (bps) in the fourth quarter. This after the Monetary Board delivered a 25-bp rate cut at its meeting last month, bringing the key rate to 6.25%.

Meanwhile, Mr. Rana said Southeast Asian currencies are expected to remain “relatively stable” for the rest of the year, “assuming no surprises to our Fed rate outlook.”

S&P expects the US Federal Reserve to deliver two rate cuts this year, one in September and another towards the end of the year.

“What we’ve seen over the last month is significant strength in global currencies, but particularly Southeast Asia currencies against the US dollar. We’ve seen appreciation in the range of between one and a half to 3% against the dollar or several currencies,” he said.

“The peso also appreciated over that time period. This is based on expectations of easing out of the US Fed. The pace of easing will determine the currency outlook as well,” he added.

The peso closed at P56.61 against the greenback on Tuesday, weakening by 23 centavos from its P56.38 finish on Monday. The local currency was previously trading at the P57-58 per dollar level in the past months.

The peso is expected to range from P56 to P58 this year, according to latest Development Budget Coordination Committee data. — Luisa Maria Jacinta C. Jocson