By Melissa Luz T. Lopez
Senior Reporter

THE NEW Foreign Investment Negative List (FINL) that, among others, will allow foreign contractors to take on local projects may be approved by President Rodrigo R. Duterte early next month, a Cabinet official said on Wednesday.

Socioeconomic Secretary Ernesto M. Pernia, who heads the National Economic and Development Authority (NEDA) as director general, said the Cabinet has finalized changes to the existing FINL to allow increased foreign participation in several sectors.

“I just signed the one that is going to be submitted to the NEDA Board for approval,” Mr. Pernia told reporters on the sidelines of an event hosted by the Makati Business Club yesterday.

The negative list identifies sectors where foreign investments are limited or are prohibited. The latest version of the FINL issued on May 29, 2015 by then-president Benigno S.C. Aquino III was supposed to have been replaced by a new one last year.

Foreigners can hold up to a 40% stake in companies that operate public utilities; supply materials and goods to state-run firms, government agencies, and municipal corporations; or those that operate infrastructure or development facilities which need a public utility franchise.

To get around these restrictions, foreign firms pair up with Filipino-owned companies through joint venture agreements in order to take on a local project.

Mr. Pernia said the FINL is included in the agenda of the meeting tentatively set on March 6 of the NEDA Board, led by President Rodrigo R. Duterte. Once signed, it would be the first FINL amendment under the Duterte administration. Other projects approved by NEDA’s Investment Coordination Committee are also up for Mr. Duterte’s approval.

Mr. Pernia previously said that the government will allow contractors overseas to take on foreign-funded projects, but will keep the limit in place for those financed from local sources.

This comes ahead of the expected signing of loan deals with China and Japan, as the Philippine government seeks official development assistance (ODA) to fund a portion of its massive infrastructure program.

CHINA LOANS
Mr. Pernia said there is “great scope for growth” with warmer ties between China and the Philippines, with the government keen on tapping Chinese funds despite carrying higher interest rates than that offered by Japan.

The official noted that Manila can get loans from Beijing with rates of 2-3% “at best,” against a 0.25-0.75% for Japanese ODA.

“We cannot get all the loans from the ODA of Japan. They have to give to other countries as well so they have to allocate their ODA,” Mr. Pernia said.

“Ideally, my personal preference is we are friends with all countries.”

Mr. Pernia also pointed out that although higher than Japan’s offer, Beijing’s 2-3% rate is still “much better” than lending rates imposed by commercial banks.

Manila is looking to tap Chinese funding for three projects: the P2.7-billion Chico River Pump Irrigation Project, the P10.9-billion New Centennial Water Source-Kaliwa Dam Project and the P151.3-billion Philippine National Railway South Commuter Line.

These form part of 75 flagship projects which the government wants to roll out until 2022, with a total funding requirement of P8.13 trillion, the NEDA chief said.

Once the loan agreement is signed, Mr. Pernia said Chinese authorities will screen and select three private contractors and present them to the Philippines, which will then vie for the project contracts through a bidding.

The government expects about $2 billion worth of ODA-funded projects to go live this year, which forms part of $9 billion worth of funding committed by China and Japan over the next five years.

CONSUMER SPENDING could ease in response to rising commodity prices due to tax reform, an analyst at ANZ Research said, even as the Finance department maintains that the higher taxes should have a “minimal” impact on inflation.

“Domestic demand is strong and is likely to remain so. However, the risk of some moderation in consumption growth remains,” ANZ Research economist Eugenia Fabon Victorino said in a report published on Wednesday.

Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN) that took effect last month, introduced additional taxes on fuel, cars, coal, sugar-sweetened drinks and a host of other items.

Ms. Victorino said higher and new levies could dampen growth of domestic consumption, despite bigger disposable incomes from a parallel cut in personal income tax rates.

“While take-home pay is higher for taxpayers, non-tax payers are facing higher prices. In the past, for every one percent increase in headline prices there was a corresponding decrease in private consumption by 0.3%,” Ms. Victorino said.

Household consumption accounts for about 70% of national output. The government hopes to boost gross domestic product (GDP) growth to 7-8% this year from 6.7% last year, 2016’s 6.9% and a 6.2% average in 2010-2015, partly on the back of infrastructure spending that will rise to P1.84 trillion, equivalent to 7.3% of GDP, in 2022, when President Rodrigo R. Duterte ends his six-year term, from a planned P1.098 trillion this year or 6.3%.

TRAIN is widely believed to have been responsible for the auto sales growth slowdown to four percent last month from a 27% increase a year ago.

Government officials and economists have also pointed to TRAIN as a key driver of January’s price spikes that fueled annual inflation to a three-year-high of four percent that touched the ceiling of the central bank’s 2-4% target range for the entire 2018.

January’s faster-than-expected inflation, coupled with expectation of second-round effects like hikes in public transport fares and minimum wage, has prompted the Bangko Sentral ng Pilipinas to raise its 2018 inflation forecast to 4.3% from 3.4% previously.

ANZ Research expects inflation to average at 4.1% this year, before slowing to 3.4% in 2019.

‘MODERATE’
For its part, the Department of Finance (DoF) said tax reform is not expected to fuel inflation further.

In an analysis report sent to reporters, DoF Undersecretary Karl Kendrick T. Chua said TRAIN “can potentially increase inflation by up to 0.7 percentage points (ppt) in 2018,” with food prices to rise by as much as 0.3ppt and transport fares by 0.1ppt.

“This is very minimal and manageable, especially compared to the savings from lower income taxes,” Mr. Chua said.

Turning to last month’s inflation rate, the official said the higher reading was partly due to base effects as inflation clocked 2.7% in January 2017.

He added that retailers were likely still selling old stocks last month which were not covered by higher or additional taxes imposed on several products.

“Since the tax increase was not expected in the first half of the month due to sale of old stock, we can surmise that profiteering is a major reason for the higher-than-expected inflation. We expect this to ease in the coming months as the government intensifies monitoring of prices and as the markets adjust,” Mr. Chua said.

He noted that January’s faster inflation likely resulted from “better compliance” with tobacco tax rules, particularly citing higher cigarette prices charged by Mighty Corp. to reflect right taxes paid by its new owner, Japan Tobacco International (Philippines), Inc.

Tobacco inflation stood at 17.4% last month, against an eight percent increase prescribed by law.

On the whole, the DoF said these price upticks are likely to be temporary.

“At almost four percent, the January inflation rate is considered moderate,” Mr. Chua said.

“As the inflation target is set by the BSP for the whole year, one month of higher inflation is not a concern.” — Melissa Luz T. Lopez