Business reform giving the Philippines a competitive economic edge

 

The Philippines is keen to boost foreign direct investment (FDI) inflows in the wake of robust macroeconomic growth, aiming to catch up to its regional neighbours by enacting legal, economic and tax reforms that should see new investment in the country take off. While some of these reforms have been delayed, revisions to the country’s Foreign Investment Negative List (FINL)– which outlines the sectors in which foreign investment is prohibited or restricted – have been more successful. Recent moves to liberalise the country’s financial services sector are expected to open the door to future reforms, allowing the government to meet its ambitious investment target in 2017.

Necessary Numbers

Data from the Joint Foreign Chambers (JFC) reports a lower average FDI figure for the Philippines than its regional neighbours, reporting inflows that averaged $3.9bn annually between 2011 and 2015. According to the JFC, other ASEAN members including Indonesia and Vietnam have surpassed the Philippines in terms of inflows in recent years, owing largely to the latter’s regulatory restrictions, which have driven up the cost of doing business and, as a result, affected the availability of salaried jobs in the country.

In 2015 the country’s FDI did not hit the government’s target of $6bn, but the central bank, Bangko Sentral ng Pilipinas (BSP), reported the figure came close by reaching $5.7bn. The JFC forecasts that the country will require an estimated $75bn in FDI inflows between 2010 and 2020 to provide enough jobs for its growing population; however, total FDI inflows stood at just $20bn between 2010 and 2015.

Foreign Investment Restrictions

One of the most significant obstacles to FDI growth, according to March 2016 reports in local media, is the 60:40 rule that limits foreign ownership of certain assets – a part of the country’s 1987 Constitution. Article 12 prohibits foreigners from owning more than 40% of properties and businesses, in addition to completely restricting foreign investment in media and natural resource extraction. Furthermore, the country maintains a FINL, which is updated every two years.

The 10th FINL, revised and signed by former President Benigno Aquino III in 2015, prohibits foreign investment in 11 industries including mass media (except radio), any retail trade with paid-up capital of $2.5m, cooperatives, private security agencies and pyrotechnic manufacturing. Other sectors carry stringent foreign ownership limits, for example, 20% in private radio communications networks, 25% in private recruitment for local and overseas employment and the construction of defence structures, and 30% in advertising firms. Foreign nationals are also prohibited from providing services as pharmacists, radiologists and X-ray technicians, criminologists, forestry professionals and lawyers.

Cost Of Doing Business

Prohibitively high business costs are also often cited as a major impediment to doing business, particularly for start-ups and smaller firms. Foreign companies establishing operations in the country must secure $200,000 in paid-up capital before receiving approval. The country fell six spots on the World Bank’s “Doing Business 2016” report, from 97th to 103th out of 189 economies surveyed. It recorded its sharpest drop in the starting a business category, where it fell from 157th to 165th place. The bank reports that foreign investors must complete an average of 16 procedures to start a business in the country – compared to the East Asia and Pacific average of 7 – while the cost of starting a business is 16% of national income per capita, compared to the Organisation of Economic Cooperation and Development member countries’ average of 3.2%.

Corporate and personal income tax rates are the highest in the region, with ceilings of 30% and 32%, respectively. Although reforms are currently under way to reduce corporate rates to 15-25% and index personal income tax rates to inflation in order to reduce the burden on low-income earners; the prohibitively high cost of providing formal employment has left many citizens to seek work abroad or be underemployed in the informal sector (see Economy chapter). Although a charter change enabling amendments to constitutional provisions on foreign ownership failed to pass in June 2015, amending the constitution to reduce foreign ownership restrictions remains a long-term goal.

Revisions to the FINL should help boost sluggish FDI inflows in the near-term. The revisions to the 10th list in May 2015 removed a 49% foreign equity restriction on lending firms and a 60% limit on investment houses and financing companies regulated by the Securities and Exchange Commission, in addition to reducing the number of professions reserved only for Filipinos. However, a new law permitting foreign ownership of these companies has yet to be signed.

Banking Reforms

The previous administration took a number of steps towards economic liberalisation before a change of power in May 2016, particularly reforms to the financial services sector that enabled the entrance of new foreign banks. In 2014 foreign banks were allowed a 100% stake in existing domestic banks, when prior to this the maximum foreign equity limit was 60%.

In January 2016 the BSP announced the sector was set for further liberalisation, following the entrance of six new foreign players since February 2015. The first to enter the market was Japan’s Sumitomo Mitsui Banking Corporation and five others followed in quick succession: Shinhan Bank of South Korea, Taiwan’s Cathay United Bank, South Korea’s Industrial Bank, Yuanta Commercial Bank of Taiwan and Singapore’s United Overseas Bank.

A Win For Foreign Companies

More reforms came in January 2016 when the Foreign Investment Liberalisation Act received Senate approval. The act set to open up financing companies, investment houses, lending companies and adjustment firms to foreign ownership for the first time, and is expected to help bolster competitiveness prior to ASEAN Economic Community integration. The act would amend any laws imposing nationality requirements or limitations to foreign investors, allowing companies to be 100% foreign owned, compared to previous limits of 60% in financing and investment houses. Foreign investors in lending companies had previously been permitted up to 69% equity participation and limits were set at 40% for adjustment companies.

The act prohibits stock ownership unless reciprocal rights for Filipinos are in place in the investor’s home country, in addition to requiring that finance companies be structured as stock corporations with a paid-up capital of at least P10m ($212,000) for the Metro Manila area. Investment houses would be permitted 100% foreign ownership and foreigners would be allowed to serve on these companies’ board of directors.

The act was approved by Congress and sent to former President Aquino on June 16, 2016 but he did not sign it into law before his term expired two weeks later. However, bills in the Philippines are able to lapse into law after 30 days without a signature, and this is what happened in mid-July when the act became legally valid.

New Government

The current administration of President Rodrigo Duterte is also keen to boost FDI inflows through constitutional reforms to reduce red tape and other barriers to market entry. In June 2016 he unveiled his 10-point socio-economic agenda: a mid-term strategy that outlines the government’s priorities over the next six years. The third priority directly addresses FDI in the country and aims to increase competitiveness and the ease of doing business through reforming constitutional restrictions on foreign ownership, although this excludes land.

Duterte campaigned on easing restrictions in order to garner more FDI and, once elected, announced plans to reduce processing times for new business applications at various government agencies. Furthermore, he plans to roll out the aforementioned tax reform programme which will reduce corporate taxes, expand the value-added tax base and potentially offer tax amnesty in a bid to improve compliance.

Fdi Surge

These announcements, combined with reforms launched under Aquino and the country’s strong growth outlook, have already made a significant impact on FDI inflows. In October 2016 the BSP reported that net FDI hit a three-month high in July, reaching $503m. Total FDI inflows during the first seven months of 2016 stood at $4.7bn – a 79.1% increase over the same period in 2015 – and the year ended with total FDI inflows of $7.9bn, leaping past the official FDI projection of $6.7bn for 2016.

In January 2017 the country’s Board of Investments reported a 20.4% year-on-year increase in investment commitments during 2016, with total commitments standing at P441.8bn ($9.3bn) compared to P366.7bn ($7.8bn) in 2015. This increase surpassed the government’s goal of 7% growth and is the second-highest year for investments since 2000, after P466bn ($9.9bn) was posted in 2013. As such, another of Duterte’s economic goals – to become one of the top-three FDI destinations in South-east Asia by 2022 – appears to be on track.

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The Report: The Philippines 2017

Trade & Investment chapter from The Report: The Philippines 2017

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