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A worrisome slide

/ 04:30 AM September 20, 2019

There are no ifs and buts about it: The news on overall investment in the country isn’t good. For the first time in 30 quarters (seven and a half years), fixed capital formation in our economy actually fell, registering -8.5 percent growth in the second quarter of this year. The term refers to total real investment, whether domestic or foreign, public or private—i.e., the kind that creates jobs, and not those that simply make money grow out of speculative market forces in the bond or stock markets (called portfolio investments).

The downturn in real investment is especially disturbing because that growth rate had almost consistently been in the double digits since 2011. The second-quarter growth rate last year was still a hefty 19.3 percent, though it had peaked at an even heftier 30.3 percent in the second quarter of 2016. To understand what’s behind the drop in overall investment, we need to examine its components.

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Our foreign direct investment (FDI) inflows fell by a steep 39 percent in the first half of this year, and by an even steeper 54 percent counting the second quarter alone. First semester inflows totaled only $3.57 billion, even as we hit a peak of $10.3 billion in 2017, but which fell to $9.8 billion last year. The full-year 2019 figure is likely to end up closer to $7 billion, and the global economic slowdown is no excuse for this, as FDI inflows to neighbors like Indonesia, Malaysia and Vietnam have actually jumped this year so far.

The US-China trade war appears to be boosting investments in our neighbors, with Vietnam seemingly attracting most of the firms moving to avoid the high import tariffs the United States has slapped on products from China. Despite all the talk that we could lure similar “refugee investments” from China, our falling FDI numbers suggest that this has largely been wishful thinking. Clearly, there’s something our neighbors have that we don’t, and I’m sure we all have our own favorite theories on what these are, so I won’t even bother to go into that here.

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Have our domestic investors been similarly timid? The generally downward movement since 2016 of the Confidence Index in the Bangko Sentral’s quarterly Business Expectations Survey would suggest so. But what really dragged domestic investment down was the government side of it. Rather than surge with the government’s ambitious “Build, build, build” (BBB) program, public construction of infrastructure instead fell by 8.6 percent in the first quarter, with Congress widely blamed for delaying approval of the 2019 budget. Yet even with the budget already approved early in the second quarter, public construction fell three times more steeply, by 27.2 percent. This time, with Congress no longer the culprit, the blame shifts to the infrastructure agencies themselves, whose “absorptive capacity” for the massive BBB funds has been put under serious doubt.

Could private domestic investment save the day? Perhaps, or perhaps not. Private construction activity did surge by 23.1 percent in the second quarter, against a relatively lame (yet still brisk) 9.1 percent growth a year ago. Many attribute this surge in private construction activity to the rapid growth of the Pogo (Philippine offshore gaming operators—aka online gambling) industry that has boosted real estate demand for both office and residential space. The latter is for its estimated hundreds of thousands of workers, mostly Chinese of questionable immigration status. And because the industry caters to an activity that is illegal in mainland China where its market lies, recent rhetoric and action from Beijing suggest that the boom in the sector may soon go bust. Thus, along with calls to begin planning for a post-BPO (business process outsourcing) era in the face of the onslaught of artificial intelligence, we would do well to plan for the post-Pogo scenario as well.

Meanwhile, investment in durable equipment, likely dominated by private investments in production machinery, also slid rather steeply (-13 percent) in the second quarter, adding more bad investment news.

Investment today builds our capacity to grow even more tomorrow. That’s why it’s urgent that we arrest the decline now.

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TAGS: build build build, China, economy, foreign investment, US
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