Foreign investors jittery on the Philippines

by Jose Galang, Sep 30, 2017

Despite the healthy economic fundamentals that the Duterte regime inherited from past administrations, as well as the strong political capital it enjoys, the economic managers seem to be having difficulty in converting these into equivalent foreign investment inflows.

In the Southeast Asian region that continues to attract increasing amounts of foreign direct investment (FDI), the Philippines is recording a decline. Reversing this may not happen soon given that foreign investment plans approved by the government have also been on a downtrend as of midyear.

A further challenge to the outlook is a drop in the Philippines’ competitiveness rating in a newly released World Economic Forum (WEF) study of 137 countries, despite a one-step improvement in the overall rankings. Vietnam and Brunei did better and overtook the Philippines in the annual study.

For the economy to sustain robust economic growth, it needs a steady injection of foreign investments that could lead to more jobs and production. Most of the country’s neighbors in Southeast Asia are attracting increasing amounts of investment inflows, and analysts are projecting that the region will continue to be a major destination for investments in the coming years.

A different picture is emerging in the Philippines. International investors looking into prospects in Southeast Asia are expressing preference for locating operations in Vietnam or Cambodia over the Philippines, according to a Standard Chartered Bank survey. Only 3 percent of the survey respondents are said to be keen on the Philippines.

Business executives of South Korean corporations here, noting what they called “higher cost of doing business and lack of incentives” in the Philippines, revealed recently that a number of Korean operations were pulling out and relocating to Vietnam.

Reports quoted officers of the South Korean Chamber of Commerce in the Philippines as describing the cost of doing business here to be around three times that in Vietnam. Labor intensive manufacturing industries, the Korean executives say, no longer find local costs attractive.

The cost of labor is also now a major challenge to businesses, according to Australian executives. Around 78 percent of Australian business leaders in the Philippines cite labor as a key concern, along with corruption, traffic congestion, government bureaucracy and the tax system.

There are other reasons for investor hesitancy toward the Philippines. Peace and order concerns are being raised, particularly due to the prolonged battle with extremists in the southern Philippines. The business process outsourcing business, a linchpin of recent years’ robust economic growth along with overseas Filipinos’ remittances, is starting to feel the negative impact of the months-long clashes, with potential new business and investments now taking a wait-and-see posture.

The unexplained deaths that have accompanied the government’s campaign against illegal drugs are also causing jitters among investors and tourists, according to leaders of foreign businesses in the Arangkada network. European business leaders were disappointed with the recent move in Congress to slash to a pittance the budget of the Commission on Human Rights, a critical watchdog on human rights issues in the country.

More recently, the impeachment case filed in the House of Representatives against Supreme Court Chief Justice Lourdes Sereno is making both foreign and local investors jittery owing to its implications on political stability in the country. It will be remembered that a similar impeachment case initiative against then chief justice Hilario Davide in 2003 triggered the specter of a constitutional crisis that sent investors to scale down or cancel business plans.

Early this year, results of a survey conducted by the Japan External Trade Organization (JETRO) showed Japanese investors to be lukewarm to their prime minister’s signal to invest in the Philippines. Despite the high profitability record of Japanese firms already operating in the Philippines, their counterparts in Japan looking for locations in the region expressed preference for China and other Southeast Asian countries.

Executives of the Japanese companies already operating in the Philippines cited “complicated customs procedures” as the top problem affecting their activities. Apparently, although Japan has remained to be a leading source of investments, the problem at customs has not been addressed, given the recent scandals in the agency.

The Japanese executives also cited as other problems the volatility of the Philippine peso’s exchange rate against the Japanese currency, difficulty in developing new clients in the local market, and requests for lower prices from their major clients. There is no more room for cost-cutting in their Philippine operations, the executives noted.

In the latest Bangko Sentral ng Pilipinas report on foreign investment flows into the country, net foreign equity capital that went into Philippine businesses in the January-June period totaled just $141 million, a steep fall from $1.4 billion a year ago. There were more capital withdrawals than new placements in recent months.

Total FDI during the period (including earnings reinvestments and debts from companies under the same owners) reached $3.6 billion, down from the year-before $4.2 billion. The leading sources of these investments are the United States, Japan, Singapore, Hong Kong and Taiwan.

How does this performance compare with our Southeast Asian neighbors? In Thailand, total FDI flows as of June amounted to $4.56 billion, up by 23 percent from a year earlier. Indonesia reported $15.5 billion inflows in the first half.

Vietnam, which has overtaken the Philippines in the WEF competitiveness rankings, recorded $25.48 billion worth of FDI in the first nine months of this year, a significant rise of 34.3 percent from the year-ago mark. More than 2,700 business enterprises are funded by these investments.

Myanmar, despite the reports of violence in some parts of the country, attracted $3.7 billion of FDI in the first four months of its current fiscal year that started April 1. More than 11,000 new jobs are estimated to be created by these investments.

Clearly, the economic managers of the Duterte administration have a lot of work to do to keep the economy attractive to new investments and sustain the economic growth—seeing to it that it will not be overtaken by more of its neighbors in key economic and social performance ratings.