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January to May: Investment commitments drop 16%

July 28, 2015 News

Total approved investments by the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) fell 16 percent in the first five months of 2015 dragged by the 40 percent decline registered by the latter.

In a report BOI and PEZA registered P139.76 billion worth of projects, significantly lower than the P166.9 billion listed in the same period in 2014.

BOI recorded a 20 percent increase in investment commitments to P78.68 billion, and accounted for 56.3 percent of total registrations. PEZA, meanwhile, took in P61.08 billion worth of projects which is drastically lower than the P101.48 billion in 2014.

The dismal performance for the year follows a weak 2014 for BOI and PEZA whose registrations declined 14.5 percent to P634.24 billion from P742.16 billion in 2013. Last year’s tally was even lower than the P657.77 billion registered in 2011, the first full year of the Aquino government.

It must be noted that while Filipinos traditionally dominate the investment landscape for both BOI and PEZA, foreign investors in 2014 were wary.

Foreign investments dropped 38.6 percent last year to P164. 5 billion from P267.84 billion the previous year although they accounted for only 26 percent of total registered investments.

Local investments dipped slightly, by 1 percent, to P469.74 billion in 2014 from P474.32 billion the previous year.

Japan was last year’s largest country source of foreign investments at P164.5 billion, down 19 percent from P43.46 billion in 2013.

Bulk of the investments went to real estate, with P183 billion, and an increase of 58.7 percent from P115.4 billion the previous year. As the country addresses the housing backlog, low-cost housing is granted incentives by BOI.

This was followed by energy, (electricity, gas, steam and air conditioning supply) at P178.99 billion, but a 48 percent difference from P344.7 billion in 2013.

Manufacturing – which employ the most over a longer course of time -- only came in at third with P123.9 billion and is off 10.5 percent from P112.1 billion in 2013.

Foreign businessmen are of the opinion that a level playing field, a business-friendly environment, consistency in policies and further liberalization as key in further attracting investors.

“We have been asking for a level-playing field for foreign investors for decades; some adjustments have happened but the Philippines remains less friendly to foreign investors than competing countries (Vietnam is taking advantage of this),” said Henry Schumacher, executive vice president of the European Chamber of Commerce of the Philippines .

John Forbes, senior advisor of the American Chamber of Commerce of the Philippines, said foreign investors who are in the Philippines, generally stay and steadily expand with the local or global economy and that only few have left.

But Forbes said if the government wants foreign investors to spread the word around the world, “it must strive harder to reduce business costs and red tape, assure contracts are honored, reduce judicial risk, assure policy consistency such as the
perennial debate over fiscal incentives creates uncertainty for foreign investors, further liberalize restrictions on foreign equity, land access, public utilities, etc. and, maybe most importantly, implement the greatly-increased infrastructure modernization programs much faster.

Forbes specifically cited transportation congestion in any form -- air, port, road -- which he said raises costs and reduces the predictability for operations that most businesses place a premium on.

Schumacher said the recently released Foreign Investment Negative List—which among otherthings liberalized the practice of certain professions -- is not signalling a change in thinking and the delay in getting House Resolution No. 1 on opening the economic provisions of the Constitution for foreign investments is not a good sign.

Forbes said foreign investors take into account the domestic market, or the labor force for export production or export services when they invest in a country, a scenario present in the Philippines.

In the Philippines, the business process outsourcing (BPO) industry is in services exports with over 1 million employees. PEZA has over 3,000 companies in over 300 zones, where investors get “red carpet treatment.”

But he said foreign investors can also decide not to invest for various reasons such as high business costs, legal limitations on foreign equity or bans, lack of market opportunity, and policy and contractual risk.

He cited as an example that in Indonesia and in Vietnam, some 70 factories produce for Nike but there are none in the Philippines - the reason is business costs in the Philippines are too high.

Forbes also cited as a setback the moratorium since 2012 on new mining production projects, which had caused the delay of the $6-billion Tampakan project.

Forbes also noted how the investment climate in agriculture in the Philippines is hostile to foreign investment because of land ownership and farm size restrictions.

Schumacher said the Philippines has failed so far to come up with supply-chains from the farming community through production to the market, noting the need l to highlight successful business models, show-case the right cooperative models and get a clearer perspective on the Comprehensive Agrarian Reform Program and how farmers can get access to credit.

He said the trade centers created by the Department of Agriculture can be a model but still require evidence that the model works.

Forbes said the current Philippine agrarian regime discourages corporate investment in the sector by any company, Filipino or foreign.

“With the exception of Dole in pineapple in Mindanao, I can think of no foreign investment in growing the crops… . Some foreign companies in the food and beverage industry source ingredients locally for both domestic sales and exports. Examples are Cargil, Coca Cola, Pepsi-Cola, Nestle, Unilever and also Philip Morris,” he said..

For the business leaders, population is both a boon and bane for the Philippines.

Schumacher said the high population of the Philippine is an attraction for certain sectors; definitely for the BPO and creative industries sector, for service sectors like tourism, healthcare, medical travel, retirement of ageing populations in Europe, North America and Japan.

“The large population is good for consumption, including real estate, provided inclusive growth is achieved, and poverty, un- and underemployment is addressed,” Schumacher said.

But he said this can only happen if investments in manufacturing and in agriculture are achieved.

Forbes said for Philippines, population size has been a disadvantage over the decades when national and local governance of inconsistent quality was challenged by high population growth to raise the GDP growth rate, create more jobs, improve inclusiveness, and reduce very persistent levels of poverty.

“This paradigm is currently changing in a positive direction but can be slowed down. The demand for more goods and services can to a considerable extent be met with imports if local consumption is supported by remittances and economies producing imports at lower costs than local production. This is what is happening in the Philippines. 

Source: Malaya Business Insight