The Market Monitor Minding the Nation's Business
Investments inflow remain healthy despite the warning of Sen. Franklin Drilon during a Senate hearing over a 90.3 percent drop in inew investments on which he based his serious concerns “over the capability of the government to attract new foreign investments.”
Drilon raised his apprehension during the Senate hearing on the proposed budget of the National Economic Development Authority (NEDA).
The Bangko Sentral ng Pilipinas (BSP) and the NEDA in separate statements, however, soothed Drilon’s worries saying that investments inflows remain favorable.
“Prospects for inward flows of FDI into the country continue to be favorable as both “push” (e.g., subdued global economic growth) and, more importantly, “pull” (e.g., sustained robust macroeconomic performance and investment grade status) factors remain,” according to the BSP.
The BSP stated the Philippines is expected to sustain foreign direct investments (FDI) inflows this year, close to the $8 billion level in 2016.
“These prospective FDIs are expected to be channeled mainly to the manufacturing sector (e.g., electronics and motor parts), which can help create employment and more growth opportunities,” the statement read.
The BSP added there is a huge potential in attracting further FDIs, which can put the country at par with the large levels of FDI seen in neighboring Asian countries.
Such potential can be realized by reforming the rules on foreign ownership, addressing infrastructure gaps, and reducing the cost of doing business, it added.
“Addressing these challenges will require considerable support from the government,” it said.
For the BSP, among the measures it has taken to promote a more supportive environment for higher foreign investments have been the liberalization of foreign bank entry in the country through Republic Act (RA) 10641 or the Foreign Bank Liberalization Act passed in July, 2014 as well as the phased-in liberalization of the foreign exchange regulatory framework that started in 2007.
“The BSP will continue to promote an enabling environment for investments to thrive in line with its primary mandate of maintaining price and financial stability,” it added.
As reported by the BSP, FDIs registered net inflows of $3.6 billion in the first half, which was 14 percent lower than the $4.2 billion net inflows a year ago.
BSP said the lower net inflows were due to the 90.3 percent decline in net equity capital to $141 million from $1.4 billion a year ago.
“Data showed that the significant inflow noted last year was attributed to a large investment flow that went to the financial and insurance industry,” it said.
The decline in net equity capital was, however, offset in part by higher investments in debt instruments and reinvestment of earnings amounting to $3 billion and $416 million, respectively.
Meanwhile, the recently released July FDI data brought the first seven months net FDI level to $3.9 billion, which was 16.5 percent lower than previous year’s level.
Net equity capital continue to register inflows amounting to $272 million, but these were lower than the 2016 level.
Investment in debt instruments and reinvestment of earnings remain on an uptrend as they reached $3.1 billion and $487 million, respectively, for January-July 2017.
FDI data’s lumpy nature
The BSP’s compilation of FDI statistics is based on international standards and concepts outlined in the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6) of the International Monetary Fund. Based on the BPM6, FDI includes net equity capital, reinvestment of earnings and net debt instruments. Regardless of the source, inflows from these components are geared toward business development and expansion.
These FDI statistics are released to the public by the BSP on a monthly basis and correspondingly, on a year-to-date basis. Year-on-year growth rates can be affected by the timing of entry of big ticket items, with resulting base effects.
“Thus, the monthly profile of FDI flows can be volatile and may not exhibit a smooth upward trend due to its lumpy nature,” it said.
NEDA, meanwhile, said foreign investors remain confident to do business in the Philippines.
It said foreign equity placements was only a component of total FDI. Other components of FDI are reinvestment of earnings and intra-company loans or debt instruments.
NEDA said figure on foreign equity placements is not the entire FDI.
“While the data on equity placements serve as a gauge of new FDI entry and overall investor confidence, the figure is not complete. The figure does not show the total inward investments made by foreign investors in the country,” NEDA Officer-in-Charge, Undersecretary Rolando Tungpalan said.
The huge decline in the net equity capital is also attributed to a high base year. The BSP data in the first half of 2016 showed that the net equity capital grew by 121..5 percent on account of the combined effects of higher gross equity capital placements and lower gross equity capital withdrawals.
Tungpalan also underlined the rosy business outlook for the last quarter of 2017, citing results of the Business Expectations Survey (BES) quarterly conducted by the BSP. Respondents in the BES were drawn at random from the combined list of the Securities and Exchange Commission’s Top 7,000 Corporations in 2010 and Business World’s Top 1,000 Corporations in 2015.
Among the reasons for the positive outlook of businesses, according to the BES, are the uptick in the consumer demand during the holiday, harvest and milling seasons, and the government’s massive infrastructure spending program..
Meanwhile, NEDA is exhausting all measures to further improve the business climate in the Philippines, particularly easing foreign restrictions on several areas of business through the foreign investment negative list (FINL). A draft FINL is now up for review and adoption by the NEDA Board, which is chaired by President Duterte.
The present administration’s economic team is also pushing to strengthen the country’s macrofundamentals through the Tax Reform for Acceleration and Inclusion (TRAIN) bill, which is expected to have a tax yield of P133.8 billion if passed in both houses and enacted into law.
Tax reform key
The tax reform package is a crucial component of the government’s massive infrastructure program, “Build Build Build.”
To further attract more foreign investment, President Duterte’s economic managers have been holding a series of Philippine Economic briefings overseas. The delegation which includes Socioeconomic Planning Secretary Ernesto M. Pernia, Budget Secretary Benjamin Diokno, and Finance Secretary Carlos Dominguez III will be in New York City to talk on investment opportunities in the Philippines.
“If we are to attract new foreign investment, then it is about time that we take a serious look at how things are going on in our country, because new investment would not come in unless we are able to raise the investors’ confidence level on our country,” Drilon said during the NEDA budget hearing.
Citing a study conducted by The 2018 ASEAN Business Outlook Survey published by the American Chamber of Commerce in Singapore and the US Chamber of Commerce, Drilon said among the companies surveyed, only 22 percent chose the Philippines as a possible expansion location, with Vietnam topping the list (34 percent). LUIS LEONCIO