Philippines aims high on FDI

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Though early performance has been sluggish, officials in the Philippines are confident the strong foreign direct investment (FDI) showing from last year will be maintained in 2014, with an improved business climate along with political and economic stability as the Philippines’ main selling points. Even so, competition for investments is likely to remain keen.

On May 13 Trade Secretary Gregory L Domingo said the government expected FDI growth to match the 20% increase posted in 2013, even though investment inflows were down in the opening two months of the year.

“We expect at least a 20% growth in FDI this year to be driven by the increasing competitiveness of the Philippines, in particular the increasing capability of our workforce,” Domingo said during an address to a business forum in Manila.

If the government’s target is met, it will mean the Philippines will attract around $4.7bn this year, after almost $3.9bn flowed into the economy in 2013, the highest figure in more than a decade.

The secretary’s forecast came a day after the Bangko Sentral ng Pilipinas (BSP) issued a report on FDI inflows for February, showing net inflows of $350m, 59% down on the same month in 2013. The sharp decline took FDI for the first two months of 2014 to $1.3bn, 24.7% less than the same period last year. One of the reasons given by the BSP in its report issued on May 12 was a higher than usual outflow of funds.

“This resulted from sustained lending by parent companies abroad to their local subsidiaries/affiliates to support existing operations and to fund the expansion of their businesses in the country,” the BSP said.

Should the BSP be correct in its assessment of outflows, the weaker-than-expected February result could be a one-off, with a stronger movement of inbound capital to be expected in subsequent months.  

Manufacturing FDI destination

If, as the government and other agencies have forecast, FDI does continue its strong inward flow, the manufacturing sector could be one of the leading beneficiaries. Indeed, overseas high-tech firms are being tapped as one segment that could make the move to establish a base in the Philippines over the longer term, according to the Philippine Chamber of Commerce and Industry (PCCI). In part, this would be a result of improved investment opportunities but also from the Philippines recently being removed from the US Trade Representative Office’s Special 301 Watch List, meaning Washington has reduced the level of violations, the PCCI said.

Last year, the Philippines’ manufacturing component expanded by 10%, with some of this growth driven by higher levels of FDI. This performance is likely to be built on this year, with GDP predicted to expand by 7% or more, in line with the 2013 result. Alongside manufacturing, the chamber said other sectors that could attract greater FDI this year were software and information technology, chemicals and food processing.

In March the BSP forecast that FDI inflows would remain strong for 2014, with a number of factors contributing to expected high investment levels being maintained. Among these, the bank cited continued growth, stable inflation and the country’s solid external payments position as domestic factors that could attract FDI, while an external push could come from the ongoing recovery of the global economy.  

Best placed to post FDI growth

Another to talk up the Philippines’ FDI prospects for this year was HSBC. In a report issued at the end of April, the bank said the country was best placed of the ASEAN-5 economies to attract higher levels of FDI, while both Malaysia and Thailand could fall back. Compared to Singapore, Malaysia, Indonesia and Thailand, the Philippines was in a relatively favourable situation, given the lower degree of leverage and its current account surplus, the report said. These factors made its less vulnerable to a tightening in global financial conditions and more appealing to overseas investors.

While HSBC may be upbeat about the Philippines’ appeal as an FDI destination, that appeal is relative. All the other members of the ASEAN-5 have outperformed the Philippines in recent years, with Singapore posting a net FDI inflow of $56.17bn in 2012, with Indonesia attracting $19.85bn, Thailand $10.67bn and Malaysia $9.4bn for that year, compared to Manila’s $3.2bn.

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