FDI is down, but manufacturing investment sky rockets

Cebu, PHILIPPINES, April 11, 2015 –  The Bangko Sentral ng Pilipinas (BSP) reported yesterday, Friday, April 10, that the FDI figure for January was a net inflow of $263 million. The bulk of that investment went towards debt instruments issued domestically, amounting to $167 million.

This is a marked 71% drop from January last year when $905 million net inflows was recorded, and also a fall from December 2014 figures, which stood at $557 million net infows. Although this is the lowest figure for 13 months, FDI flows are subject to the volatility that major projects can bring and the January, 2014 figure has yet to be surpassed since.

We can see no fundamental changes that would result in a permanent situation of lower foreign investment inflows, but 2015 is expected to be muted compared to 2014. While the Philippines may no longer be the “sick man of Asia”, its economy has become somewhat of a “forgotten man of Asia”, as nearby, the opening up of Vietnam by the ruling Communist Party has garnered great attention, attracting large amounts of foreign capital since 2007. Foreign investors have also been jittery about the upcoming election, despite assurances by the BSP Deputy Governor Guinigundo. The reforms that the Aquino administration have undertaken during his tenure have been well received by the international community, but, due to falling approval ratings, there is a real risk he will not be returned in the 2016 elections.

However, as always, the greatest impediment to foreign investment has been the Constitutionally mandated restriction of foreign ownership to 40% in corporations in most industries. Combined with the problems with capacity in electricity generation, the rigid requirements of employing local staff, and stalling infrastructure investment by the Government, one can see the impost this imposes on doing business in the Philippines.

Changes to these factors would help attract more of the FDI that the Philippines needs. Last month at the annual JFC meeting, the group recommended a 40% increase in FDI inflows.

Their overall assessment of the performance of the Philippine economy in 2014 was that it was lackluster, stating that, despite being the second fastest growing economy within the region behind China, the Philippines was still “growing too slow”. We would argue that this expectation is somewhat overwrought, and we believe growth within the economy was and still is solid; business and consumer confidence continues to be high; and, unlike China, the Philippines does not have an underlying debt problem.

Domestic investment is picking up the FDI slack. 59 projects valued at P54.62 billion were approved by the Board of Investments (BOI) for the first quarter of this year, 17% higher than the same period last year, generating 56% more jobs when completed. 96% of the investment approvals were driven by local investment.

The biggest growth was posted by the manufacturing sector, as, following the typical holiday season slow-down, favorable conditions have allowed it to explode, expanding by 517% (P12.9 billion) from the same period in 2014 (P2.08 billion). This is a direct result of the resumption of government spending in the MRP (Manufacturing Resurgence Program), which is pushing for a 30% increase in gross value added and a 15% increase in employment within the sector by 2025, coupled with the lower costs of production the depressed oil price has provided.

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