By Luz Wendy T. Noble

FOREIGN direct investment (FDI) inflows dropped year-on-year for the sixth month in a row in August, according to data which the Bangko Sentral ng Pilipinas (BSP) released on Monday.

Economists blamed generally weak investor sentiment abroad and persistent uncertainty as the government continues to overhaul tax incentives.

The central bank reported that FDI net inflow sank by 45.1% to $416 million in August from $758 million a year ago and by 23.39% from July’s $543 million.

These inflows have been on a general decline since August last year, save for a year-on-year increase recorded in February.

The eight months to August saw these net inflows similarly drop 39.7% to $4.535 billion from $7.526 a year ago.

“The decline in FDI validates the view that this segment will remain a source of weakness for the country due to external uncertainties stemming mostly from the protracted US-China trade war, and to some extent rising protectionism amongst nations,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in an e-mailed reply to querries.

He also cited “uncertainty over the passage of local tax reform programs that may have caused investors to go on a holding pattern until there is clarity on developments, prospects and enforcement of said programs.”

In a note sent to reporters, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said: “These consecutive declines are seen to be the impact of the weak external environment.”

“Global trade has continued to reel from the protracted US-China trade war and has dampened investor sentiment, particularly that of emerging markets,” Mr. Asuncion said.

“Further hurting the general investment perception is the uncertainty brought by how certain fiscal reforms such as the CITIRA bill, particularly the rationalization of the current fiscal incentives and how it will come out in final form,” he added, referring to the proposed Corporate Income Tax and Incentives Rationalization Act.

“New investors and fresh investments are seen to be on hold, waiting for the eventual outcome of the discussions on the pending law.”

For Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort, “[s]ome investors have been on a wait-and-see attitude… while waiting for greater certainty on the proposed rationalization of fiscal incentives, as some global/multinational companies with presence around ASEAN/Asia even have the option to choose and locate in other ASEAN/Asian countries where production costs are lower and more predictable.”

The House of Representatives last September approved CITIRA, which will reduce the corporate income tax gradually to 20% from 30% currently — the steepest among major Asian economies — as well as overhaul investors’ fiscal incentives by making them more time-bound and tied to specific indicators of economic benefits they bring. The reform is now being discussed in the Senate.

August alone saw equity other than reinvestment of earnings was more than halved (55.3%) to $77 million from $172 million, as gross placements plummeted by 53.9% to $86 million from $187 million and withdrawals fell by a smaller 38% to $10 million from $16 million.

According to the BSP, equity capital placements that month came mainly from Japan, the United States, Hong Kong, Cayman Islands and Singapore and went mainly to manufacturing, real estate, financial and insurance, information and communication, as well as wholesale and retail industries.

Meanwhile, foreign firms’ investments in debt instruments of their Philippine affiliates dropped 50.8% to $263 million from $534 million.

On the other hand, reinvested earnings increased by 46% to $77 million from $53 million.

Looking at the uptrend in reinvested earnings despite the fall in other FDI segments, ING-NV Manila Senior Economist Nicholas Antonio T. Mapa said that “[t]he companies that have set up shop here in the Philippines continue to believe in the long-term viability of the Philippines as a market, while prospective investors may not be jumping head long into the Philippines, perhaps as they remain guarded while the CITIRA bill — and its implications on fiscal incentives — remains unpassed.”

YEAR-TO-DATE FLOWS
The eight months to August saw equity other than reinvested earnings drop 73.4% to $536 million from $2.017 billion in 2018’s counterpart period, as gross placements were almost halved (49.6%) to $1.114 billion from $2.212 billion while withdrawals grew nearly threefold to $578 million from $196 million.

The central bank said equity capital placements during the period came largely from Japan, the United States, Singapore, China, and South Korea and went to financial and insurance, real estate, manufacturing, transportation and storage, as well as administrative and support service.

FDI in debt instruments fell 32.5% to $3.327 billion from $4.928 billion.

On the other hand, reinvested earnings picked up by 15.6% to $671 million from $581 million in the same comparative eight-month periods.

For Mr. Roces, FDI net inflows could pick up “once the policy stance of the government has been communicated clearly” when it comes to tax reforms.

Mr. Ricafort said “[f]aster economic growth, especially starting September 2019, could lead to some pick up/improvement in FDIs as well in the remaining months of 2019, including those that benefit from increased government spending especially on infrastructure.”

Gross domestic product growth picked up to 6.2% in the third quarter from 5.6% and 5.5% seen in the first and second quarters, against a 6-7% official target.