Q1 FDI pledges lowest in two years

By Marissa Mae M. Ramos, Researcher

APPROVED foreign investment pledges in the first quarter fell to its lowest level in two years, preliminary data from the Philippine Statistics Authority (PSA) showed.

Foreign direct investments (FDI) committed with investment promotion agencies (IPAs) dropped 36.2% to P29.36 billion in the first three months of the year from the P45.98 billion recorded in the same period in 2019.

This was the lowest level since the P14.21 billion posted in the first quarter of 2018.

Likewise, combined investment pledges by both foreigners and Filipino nationals totaled P114.77 billion, down 58.1% from P274.23 billion a year ago.

Should foreign and local commitments materialize, it is expected to generate 34,814 jobs, 17.6% less than the 42,245 projected additional employment a year ago.

The government counts investment pledges from seven IPAs, which are authorized by law to grant tax and nontax incentives to investors putting up businesses or expanding existing ones in priority sectors.

The seven IPAs tracked by the PSA are the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI), Clark Development Corp. (CDC), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BoI-Bangsamoro Autonomous Region in Muslim Mindanao (BoI-BARMM) and the Cagayan Economic Zone Authority (CEZA).

The three months to March saw the BoI contributing the most pledged FDIs at 45.5% of the total with P13.36 billion, albeit a 56.6% year-on-year decline. This was followed by PEZA with a 42% share valued at P12.32 billion, though five-percent less than a year ago.

Rounding the rest of the IPAs were CDC’s 8.4% share at P2.47 billion (up six times or 547% from last year), CEZA’s 3.7% share at P1.1 billion (up 13.8 times or 1,277.3%), SBMA’s 0.4% share at P110.5 million (down 92.9%), and AFAB’s 0.003% share at P900,000 (down 99.5%).

Data from BoI-BARMM was not available.

By sector, a huge chunk of foreign investment pledges went to transportation and storage with a 37.2% share of the total at P10.93 billion, followed by manufacturing with a 33.9% share (P9.95 billion), and the administrative and support services’ 10.2% share (P3.01 billion).

Year on year, foreign pledges in transportation and storage were around 569 times bigger than last year’s P19.2 million. On the other hand, foreign commitments in manufacturing and administrative and support services were lower by 71.4% and 14.7%, respectively.

Among the regions, the National Capital Region got the bulk of the foreign pledges at 43.8% of the total or P12.87 billion. This was more than twice the commitments to the region in the first quarter of 2019 when it logged P6.29 billion in foreign pledges.

Calabarzon — the region immediately south of Metro Manila consisting of Cavite, Laguna, Batangas, Rizal and Quezon — was the second-biggest contributor with a 17.5% share (P5.13 billion), while Central Luzon came in third with 15.2% (P4.48 billion).

The United Kingdom was the biggest source of FDI commitments in the first quarter with P6.15 billion, around 21.7 times bigger than a year ago and accounting for 21% of the total for that period. It was followed by the US and China, pledging P5.74 billion (19.6% share) and P4.9 billion (16.7% share), respectively.

“Definitely, the COVID-19 (coronavirus disease 2019) pandemic played a huge role in this foreign investments pledges decline, and this may also include the impact of the Taal Volcano eruption and the general softer sentiment about investing around the world following the immediate impact of the virus in Wuhan,” Ruben Carlo O. Asuncion, chief economist at the UnionBank of the Philippines, Inc., said in an e-mail.

“I think the government has already anticipated the decline and has already lined-up particular responses (fiscal stimulus and economic reforms) to help buffer from these said negative impact,” he added.

In late January, the Taal Volcano eruption disrupted economic activities in Calabarzon and Metro Manila, while the rising COVID-19 cases in March prompted the government to impose a lockdown in the entire Luzon island and select areas in the Visayas and Mindanao to minimize the virus’ spread. The community quarantines remain in place, although more businesses are now allowed to resume operations.

For economist and Foundation for Economic Freedom (FEF) President Calixto V. Chikiamco, regulatory concerns in the first quarter were among the major reasons for the decline.

“Regulatory uncertainty [were] brought about by uncertainty over tax reforms, President [Rodrigo R.] Duterte’s demands to renegotiate the water concession contracts, [and] the administration’s bias against [public-private partnerships]…,” he said in an e-mail.

Mr. Chikiamco also noted other existing factors such as the “continued restrictive laws and regulations on foreign investments,” the country’s poor infrastructure, the lack of competition in many industries, and increasing labor costs.

“Monopolies and duopolies make doing business in the country expensive and challenging. The Philippines has the most concentrated economy in Asia, according to the World Bank, i.e., monopolies and duopolies dominate industries,” he said.

Among measures being discussed by lawmakers is the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), the revised version of the Corporate Income Tax and Incentives Rationalization Act (CITIRA), that accelerates reductions in corporate income tax to 25% from 30% by July.

More than 30 local and foreign business groups have supported the passage of the bill to revive the economy, however, economists from various universities have proposed amendments to CREATE noting that at its form, the bill is “inequitable and inefficient” which only serves as a tax relief for big companies and leaving out micro, small, and medium enterprises.

PEZA has also issued a statement on Monday advocating the status quo on incentives for export-oriented companies.

Moving forward, FEF’s Mr. Chikiamco expects approved foreign investments in the remaining quarters to be lower compared to last year.

UnionBank’s Mr. Asuncion also sees “further sluggishness” of foreign investment pledges throughout the year due to the ongoing pandemic.

“However, this view is highly dependent on a quick discovery and wide administration of a COVID-19 vaccine in the country. A significant and steep bounce back is expected at the start of 2021 if and when positive news of a vaccine pervades,” he said.