Philippines tops foreign investment growth in ASEAN

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Oxford Business Group

On the back of efforts to encourage more international business activity, the Philippines registered the highest rate of foreign direct investment (FDI) growth in the Association of the Southeast Asian Nations (ASEAN) region last year, with the country hoping to capitalize on the global attention generated by hosting the bloc’s most recent summit to enhance trade and investment flows.

As regional and global leaders converged on Manila this month for the 31st ASEAN Summit and sideline events, part of the organization’s 50th anniversary celebrations, the ASEAN Investment Report revealed that FDI to the Philippines grew by 40% between 2015 and 2016 to $7.9 billion. This increase, the largest in the association, saw the country become the fourth-highest recipient of FDI in the 10-nation group, up from sixth in 2015.

The positive trajectory bucked the overall trend in ASEAN, with FDI to the bloc as a whole falling by 20% between 2015 and 2016. Much of this decline was attributed to a drop in investment flows to Indonesia, Thailand and Singapore, which brought down the overall total.

Speaking ahead of the summit, Ambassador Marciano Paynor, Jr, the director-general for operations of the ASEAN 2017 National Organizing Council, told OBG the Philippines’ chairmanship was a chance for the country to showcase its credentials as an emerging economic power, which should open the door to new trade and investment opportunities.

“Our chairmanship during the 50-year anniversary of ASEAN signifies a coming of age for the bloc and a coming of age for the Philippines,” Mr. Paynor said. “As the economies of Southeast Asia continue to grow faster than most other regions, ASEAN will become increasingly important on the world stage. Under the current administration, the Philippines is also seeking a positive leadership role in regional affairs that reflects the growing status of our country.”

Although overall investment in ASEAN declined last year, intra-bloc investment increased by 12% to $23.9 billion, representing the first time intra-bloc trade constituted one-quarter of all ASEAN investment.

As part of the rise in internal ASEAN activity, manufacturing investment increased by two-thirds to $8.3 billion and investment in finance doubled to $5 billion.

This increase in trade comes amid targeted efforts to promote greater ASEAN collaboration, with 2016 representing the first year of implementation of the ASEAN Economic Community (AEC), which aims to establish a highly integrated and cohesive economic bloc by 2025.

“Intra-ASEAN trade and investment has traditionally been low, but the potential for improvement is very high. We are only 10 countries, which makes it much easier to find common ground compared to a bloc like the EU. Economic integration is already taking place through the AEC, and member states don’t all produce the same products and services, so we can complement each other in many ways,” Mr. Paynor told OBG.

Although the Philippines displayed the highest FDI growth in ASEAN in 2016, concerns over the government’s approach to tackling the drug trade, coupled with the persistence of martial law in the southern island of Mindanao, could weigh on investor sentiment and the wider economy.

In a report issued in September, credit ratings agency Moody’s listed the war on drugs and martial law as two factors that create “a rising but unlikely risk of deterioration in economic performance and institutional strength.” The report added: “[A] worsening of the Islamist insurgency in Mindanao… could lead to an expansion of martial law, undermine both foreign and domestic business confidence and disrupt economic activity in other parts of the country.”

Meanwhile, the 2018 ASEAN Business Outlook Survey, published that same month by the US Chamber of Commerce, revealed that 70% of respondents in the American Chamber of Commerce of the Philippines (AmCham Philippines) were planning business expansions this year, a slight decline from 74% the previous year, but higher than the overall ASEAN average of 62%.

“At the moment American companies are somewhat cautious in the Philippines because they feel uncertain about how the policies of the [Philippines President Rodrigo R.] Duterte and [US President Donald J.] Trump will play out,” Ebb Hinchliffe, executive director of AmCham Philippines, told OBG.

“I strongly suggest that it is a mistake to delay investments,” he continued. “Although there are a number of challenges and problems, the efforts of the Philippines’ administration to pass wide-reaching tax reforms and overcome the infrastructure deficit should create lucrative opportunities to tap into demand from the growing middle class.”

His sentiments were echoed by Chris Nelson, chairman of the British Chamber of Commerce Philippines, who told OBG: “The Philippines has many inherent advantages as an investment destination, including high proficiency in English and the second-largest population in ASEAN, which provides a large, adult, discerning consumer base.”

In an effort to spread the benefits of international trade and investment to micro-, small and medium-sized enterprises (MSMEs), the region’s largest mentoring program was launched at the ASEAN Business and Investment Summit, which preceded the meeting of government leaders.

Intended to be the legacy project of the Philippines’ chairmanship, the ASEAN Mentorship for Entrepreneurs Network will bring together an initial 143 mentors from all 10 member states, including 48 from the Philippines, allowing regional MSMEs to tap into the expertise of successful entrepreneurs, executives and academics to help scale-up their operations and access global value chains.

It is hoped the program will help address the challenge of rising income inequality in the Philippines, where 99.5% of companies are classified as MSMEs.