Optimism running ahead of investment

With optimism high, consumption rising, but FDI lagging, the Philippines is in transition

A lot depends on the Duterte government’s execution of its tax, economic and infrastructure reforms, if it wants to seize the opportunity to build a well-functioning capital market capable of attracting the investment necessary to keep up with its Southeast Asian counterparts, become an export-led manufacturing hub and sustain future growth.


10 Jan 2020


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THE Philippines has, as outlined by Finance Secretary Carlos Dominguez III, Bangko Sentral ng Pilipinas (BSP) governor Benjamin Diokno, and others at the 14th Philippine Forum organized by The Asset, a lot going for it – record US$85 billion national reserves, lowest unemployment in 20 years, aggressive tax collection and reforms, a recent S&P upgrade to a triple-B plus, booming real estate, tourism and gaming sectors, stabilizing sources of income from business process outsourcing (BPO) firms and overseas foreign worker (OFW) remittances, and a massive government spending commitment to a game-changing reboot of its outmoded and overburdened logistics and infrastructure network.

But with global growth slowing and markets volatile, the country’s traditional drivers of growth – BPOs, OFWs, and foreign direct investment (FDI) – are slowing.

BPOs and OFWs bring in revenue of about US$50 billion a year, but they are tapering off to single-digit growth. And while FDI hit US$10.3 billion in 2017, it slid to US$9.8 billion in 2018, and looks set to slip further this year.

For the first seven months of 2019, FDI net inflow was US$4.1 billion, 39% lower than the US$6.1 billon posted a year ago on the back of this weaker global activity that reflects investor confidence, according to BSP figures published in October.

Inflation is rising. Roads are congested. There are hard-to-manage gaps in the supply chain. Interest rates rose, albeit temporarily. But optimism reins when discussing the economy. “Overall, life is good,” Michael McCullough, managing director of property consulting firm KMC Savills, says during a panel discussion. “The Philippines is recognized right now as the place to do business within Asia.”

Wilson Lee Flores, chairman of Anvil Business Club, agrees: “I talk to many business people, and they are very optimistic about the economy. Peace and order is much better. Traffic, of course, is very horrible.”

And even with the global slowdown, Sino-US trade tensions and contracting FDI, on the ground, investment in resorts and competition for restaurants and rental space – along with consumption levels - are very high and going higher, points out George Siy, president of the Integrated Development Studies Institute (IDSI). “It’s not formal, not registered. There’s a disconnect in terms of the sector and the statistics.”

“And while the supply chain isn’t moving for exports, it is domestically,” Siy explains. “If you look at the supply chain for logistics, warehouses, and software and operations, for instance, you cannot find the [necessary] people and everything gets booked ahead.”

“In the banking industry, we see slower [loan] growth,” Eduardo Francisco, president of BDO Capital and Investment states. “The numbers don’t reflect the same optimism. People are not putting their money in to invest.” It’s possible, he argues, that there is excess cash or investors have overall trade concerns. “[But] people are down on capex.”

One of the reasons for the banking sector’s slow loan growth in the first half of the year, Francisco posits, is that the government took the banks out of the funding of the Build, Build, Build (BBB) infrastructure projects when it decided to use official development assistance (ODA) and hybrid public-private partnerships.

In addition, Francisco points out, most of the BBB projects haven’t started yet and some of the ODA ones, even those funded by Japan or China, still have problems. “[So] it’s possible that in the next year, once all the contracts are awarded, and you do the financial disclosure, you will see the drawdowns.”

KMC Savills’ McCullough notes that many American, Australian and Asian multinationals in the service, retail, banking and finance sectors are finding opportunities in the Philippines, a lot of which have come for the human talent. “It’s hard to find employees. You cannot find a warehouse in Metro Manila or office locations in Quezon City where people can live.” But service industries, he adds, are great job creators, not huge investors.

“The US healthcare services market is one of the fastest growing sectors in the Philippines,” McCullough notes. “It’s fortunate that we have nurses and medical professionals that have studied at Western levels. We’re seeing a higher level of jobs being created.”

And while the Sino-US trade war froze the BPO sector for six months, once the dust settled, it went back to business as usual, McCullough notes. “The [largely Western-owned] BPOs are one of the unsung heroes of this economy in the last year or two, and they haven’t been given the same credibility or respect. It’s been all POGOs, China, POGOs, China.”

And while the Philippine offshore gaming operators (POGOs) have boosted the real estate sector in Metro Manila, they are pricing the BPOs out of the area and pushing them farther north, he laments.

From a real estate perspective, POGOs represent 38% of the office take-ups, the largest in the country, and they are growing. “We have to be careful, [POGOs] are something we could get used to, but shouldn’t rely on,” IDSI’s Siy warns.

“I would prefer we get more other [non-POGO] China investors to come here, such as the factories that are moving from China to Southeast Asia,” Flores proffers. “Before when relations between the Philippines and China were abnormal, many of the legit and big companies were afraid to come here. And maybe, only the illicit ones [under Chinese law] were brave enough to come to a country they thought was negative towards China.”

As well, the Philippines hasn’t even begun to tap the Chinese tourist market at numbers anywhere near those that Thailand has, Flores points out. “That industry alone could become a big catalyst for growth in the next few years.”

But the Philippines missed the boat on the FDI-fueled manufacturing-for-exports market, unlike its Southeast Asian neighbors and, in particular, Vietnam, which is currently overwhelmed by FDI inflow and is the region’s rising star in this sector.

In contrast, the Philippines faces challenges in attracting the investment necessary to become an export-led manufacturing economy, in part, because of its focus on domestic consumption and its reliance on BPOs, OFW remittances and an inadequate infrastructure and logistics network brought about by decades of weak government investment.

As the government passes into the second half of its six-year mandate, it’s forging ahead with its infrastructure reboot and tax rationalization, and much depends on its ability to execute both. “We have to make sure the roads are built, the bridges are built, the airports are done,” Francisco warns, believing the nation’s reputation is at stake.

If the reboot is successful, the focus will shift to the business sector. “We need a cultural change because the government is taking care of the physical infrastructure,” Siy argues. “They are [even] going to integrate the financial payment system in the country later this year.”

“The business community supports the [government’s] general trend [towards rationalization of tax incentives] because to improve our productivity we need to fund the infrastructure,” Siy adds.

The Philippines, spurred on by a massive infrastructure reboot and a rationalized tax system, will hopefully transition towards a stronger, services- and manufacturing-based economy, supported by a capital market capable of turning savers into investors, boosting long-term growth, and fulfilling BSP governor Diokno’s predictions: “We expect the Philippines to become an A-rated economy in the next two years or so, and a high-income economy by 2040.”  


10 Jan 2020


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