Capital flows to Philippines seen to recover by 2021

By Beatrice M. Laforga, Reporter

FOREIGN INVESTMENTS into the Philippines may return to pre-pandemic levels by 2021, the Institute of International Finance (IIF) said.

“We expect total non-resident capital flows to the Philippines to recover back to 2019 levels in 2021,” Elina Ribakova, deputy chief economist at the IIF, said in an e-mail last month.

The IIF last week projected capital flows into the Philippines will drop by 41%, equivalent to $7 billion, in the second half of 2020, as the two-week lockdown in August hampered recovery prospects.

This is the biggest decline among the Asia-6 grouping, which includes India, Indonesia, South Korea, Malaysia and Thailand.

Ms. Ribakova cited the country’s robust macroeconomic fundamentals and its exposure to the global supply chains as key factors to attract foreign investments.

“We still see the Philippines becoming one of the fastest-growing economies in Asia due to the solid macro fundamentals and the significant role the country already plays in the global supply chains (this is also the reason behind the sharp contraction in growth in 2020, failure to control the pandemic caused significant shutdowns in manufacturing),” she said.

The Philippine economy grew by 6% last year. However, the pandemic pushed the economy into a recession in the second quarter, after contracting by a record 16.5%.

Ms. Ribakova said the Philippines can woo investors by promoting private sector investment through public-private partnerships, improving infrastructure and promoting the digital economy.

In the first nine months of 2020, net inflow of foreign direct investments to the Philippines fell 11% to $3.795 billion.

However, Ms. Ribakova said the portfolio flow outlook is “more challenging,” although the Philippines is not as reliant on these investments as its neighbors in the region.

“For portfolio flows outlook is more challenging. The Philippines experienced exceptionally high non-resident portfolio inflows of $7.5 billion in 2019 (down to forecasted $3 billion in 2020) and we expect a partial recovery to $5.9 billion in 2021. However, the Philippines do not rely on portfolio investments as much as other countries in the region (particularly Indonesia),” she said.

Short-term foreign portfolio investments, or referred to as “hot money” saw an eight-month net outflow of $3.889 billion, up 254% year on year.

The IIF projected a 7.5% contraction for the Philippine economy this year due to the impact of the pandemic, and a 7% growth next year driven by low base effects and further relaxation of lockdown restrictions.

“Recovery of 7% in 2021 will be largely driven by reopening and base effects. Ultimately, pace of the economic recovery will depend on how quickly the government can control the COVID-19 and whether there will be additional fiscal stimulus. More lockdown measures in the future will be the major downside risks,” Ms. Ribakova said.

Economic managers projected the economy to shrink by 4.5% to 6.6% this year.

“Compared with peers in the region, the policy support from the government remains low. We expect the central bank to stay pat and the focus now is on fiscal policy support,” Ms. Ribakova added.