Slowdown in foreign investments

When the inflow of foreign investments slumped last year, government economists dismissed it as being temporary due to external factors that made capitalists jittery about where to put their money. However, latest official figures indicate that the entry of foreign capital to the Philippines continues to slow down.

According to the Bangko Sentral ng Pilipinas, foreign direct investments (FDIs) registered a net inflow of $242 million in May 2019, down 85.1 percent from $1.6 billion a year ago. This was the weakest monthly inflow in more than four years and brought the total for the first five months to $3.1 billion, down 37.1 percent from $5 billion last year. In 2018, net FDIs reached $9.8 billion, below the Bangko Sentral’s $10.4-billion goal and down 4.4 percent from $10.3 billion in 2017.

These are differentiated from portfolio investments or “hot money,” in that FDIs are more important to the economy because these are actually invested in business operations that generate jobs. In contrast, portfolio investments are temporarily parked mostly in shares of companies listed on the Philippine Stock Exchange, and can therefore be pulled out anytime.

One bright spot in the investment scene is that pledges registered by the Board of Investments jumped 24 percent to P313 billion as of July. Foreigners accounted for P69.6 billion (about $1.3 billion) and were up 348 percent. However, it’s also worth mentioning that these are commitments to invest, and may not materialize as actual investments.

As for economic zones that entice foreigners with tax incentives, investment pledges monitored by the Philippine Economic Zone Authority dropped nearly a quarter from January to April as the agency argued that it could not assure potential investors about the certainty of tax perks here.

The issue still stems from the proposed second tax reform package of the Duterte administration that seeks to revamp the incentives scheme, which has created uncertainty on what would be retained and what would be scrapped. This uncertainty on incentives already led to a 40.97-percent drop in investment pledges last year to P140.24 billion.

The government cannot keep on blaming external factors for the slowdown in foreign investments. Domestically, current laws and regulations tend to restrict, rather than welcome, foreign capital. One of these laws was enacted in the 1930s, while the others were designed to protect fledgling domestic industries from more advanced competitors from abroad. Haven’t many of these domestic industries been given enough time to develop or mature into globally competitive enterprises?

Today, the country’s chief economist, Socioeconomic Planning Secretary Ernesto Pernia, describes the Philippines as the most restrictive country in the Asean region insofar as foreign investments are concerned.

This is why the Duterte administration’s economic team is pressing Congress to pass bills seeking to amend the Foreign Investment Act, the Retail Trade Act and the Public Service Act.

For instance, the government wants to amend the antiquated Public Service Act under Commonwealth Act No. 146 of 1936 to limit “public utilities” to electricity distribution/transmission and water works and sewerage systems. Redefining public utilities will allow foreign companies to own up to 100 percent of local telecommunications ventures, for example, and open up competition and improve telco services.

Amendments to the foreign investment and retail laws will also allow greater participation among foreigners to promote competition in the domestic market and generate more job-generating investments.

For Pernia, if the amendments to just these three existing laws are passed, the Philippines can expect foreign investments to triple or even quadruple. He estimates that removing foreign restrictions on investment, retail trade and public utilities will allow the Philippines to generate up to $30 billion in FDIs a year.

That will bring the country at par with its more prosperous neighbors. Congress only needs to do its part, by removing these impediments to foreign investments with dispatch.