Despite the effects of some negative developments in the economies of the US and the eurozone, business in the Philippines has continued to remain relatively brisk. Foreign investors have taken heart from President Benigno Aquino III’s promotion of transparency as well as the administration’s efforts to root out corruption and create a level playing field for all stakeholders. Moreover, an upgraded credit rating has given a boost to investor confidence.
DRAWING FDI: Indeed, the Joint Foreign Chambers (JFC) in the Philippines has cited a string of factors that could draw more foreign direct investment (FDI) into the country, including improving infrastructure, sound economic and pro-business policies, costs that are more internationally competitive, and governance and commercial practices that have reduced corruption. The JFC has pinpointed seven investment sectors which could generate a combined $75bn in FDI and 10m jobs over the next decade. These are agribusiness, creative industries, manufacturing and logistics, mining, tourism, medical travel and business process outsourcing (BPO). BPO has been greatly buoyed by investments from international firms such as Salmat of Australia, which has set up an 800-seat facility in Taguig City. Existing investors such as Convergys and Aegis PeopleSupport have also been expanding operations in the Philippines.
The mining sector at present is underutilised but with untapped mineral wealth worth more than $850bn, the Philippines is “one of the world’s most highly mineralised countries,” according to a report issued by the US Department of State. In the early 1980s the Philippines was one of the biggest mining countries in the world, but the industry foundered due to a collapse in commodity prices in the 1990s coupled with a lack of investment in infrastructure. As commodity prices rebound the government is keen to begin work designed to revive the industry.
SEIZE THE DAY: The Philippines is indeed in a good position to capture more investment flowing from the Western world to emerging Asian markets. As China is moving up the value chain, higher costs make it less feasible to produce basic manufactured goods. This gives a chance for the Philippines to fill that niche. Indeed, as the Philippines is emerging as a low-cost country in terms of wages situated next to Asian demand centres such as India and Indonesia, it is well positioned to benefit from rising investment levels.
But in order to lure more FDI the Philippine government will need to offer more incentives for setting up manufacturing centres as well as get the country’s logistics infrastructure up to par. Manufacturing has been at a disadvantage as local power costs are high and there is a lack of economies of scale, according to local analysts.
Furthermore, to take full advantage of the coming ASEAN Free Trade Area agreement the country will have to expand its offerings when it comes to higher-value-added services, noted Anand Kumar, Synovate’s business consulting head for the Philippines, and Singapore group director, during a road show presentation he has been giving abroad entitled “Developments in ASEAN markets: Assessing the risks and opportunities”.
“The opportunity needs to widen at this point in time,” he said during one presentation. “It may not be available in three to five years so it needs to be seized now.” Unfortunately for the Filipino government, FDI figures for 2011 proved disappointing.
BELOW EXPECTATIONS: Under the Arangkada Philippines roadmap, which consists of a list of recommendations by the JFC, the Philippines should be able to attract $75bn of FDI by 2020, provided that the government follows the advice given in the study. To achieve this, the Philippines would need to attract some $7.5bn worth of FDI every year during the period, including in 2011. Yet for 2011 the Philippines remained below $4bn in approvals and $1bn in actual inflows. By comparison, Indonesia had an 18% increase in its FDI approvals, amounting to $19bn.
For 2012, Hubert d’Aboville, president of the European Chamber of Commerce of the Philippines, has said FDI must improve to $2.5bn, which is still far below target. “This year we have to grow by more than $1bn,” he said, continuing that any level below $1bn would be very disappointing. Weak investment figures would undercut a key cornerstone within the roadmap – the creation of new jobs via increased investment. The JFC has pointed out that for the past 10 years, the Philippines has been experiencing jobless growth. The JFC cited figures showing that the labour force stood at 38.9m by the end of 2010, of which 5.7m worked in the formal sector and 27.2m in the informal sector, with the remainder unemployed, underemployed, or not working. The Arangkada study showed that sustained growth of 7% and above would be required in order to counter rising unemployment and underemployment levels, which would only be possible with higher domestic savings and investment, including additional FDI.
FIGURES: According to the latest statistics from the Bangko Sentral ng Pilipinas (BSP), FDI for the first 11 months of 2011 posted net inflows of $782m, 38.5% lower than the $1.3bn recorded in the same period a year earlier due to dampened investor sentiment in light of the eurozone crisis. Total approved FDI fared better, reaching P87.3bn ($1.98bn) in the first three quarters in 2011 compared to P79.4bn ($1.8bn) in the same period the previous year. For the third quarter alone, approved FDI amounted to P25bn ($567.5m), up by 32% from P19bn ($431.3m) approved in the same period of 2010.
According to data from the National Statistics Coordination Board (NSCB), Japan has been the leading country in terms of approved investment. For the third quarter, Japan accounted for 38.6% or P9.7bn ($220.19m) of total FDI commitments. In a distant second was South Korea, accounting for 18% (P4.5bn, or $102.15m) followed by the US with 8.2% (P2bn, $45.4m) in FDI funds. The NSCB further noted that manufacturing accounted for 60.1% of total FDI approved during the third quarter followed by electricity, gas and steam and real estate activities.
Meanwhile, it is expected more international investors will contribute cash for infrastructure works once the government’s much-touted public-private partnership (PPP) programme picks up steam.
PARTNERING FOR INVESTMENT: The executive director of the PPP Centre, Cosette Canilao, has said the government may accelerate the execution of 8-16 PPP projects in 2012. With an estimated value of P142bn ($3.22bn), Canilao said the projects will include water sources, airports, classrooms and expressways. The PPP programme did not achieve full take-off in 2011, with the government awarding only the 4-km Daang Hari-South Luzon Expressway project to the local Ayala Corp. It had planned to roll out 10 PPP projects during the year, but officials noted that feasibility studies had taken longer than expected. The Japan International Cooperation Agency has conducted feasibility studies for three projects: the 5.2-km Ninoy Aquino International Airport Expressway, the P8bn ($181.6m) project for the new Bohol Airport and an additional road project.
FREE ZONE: A major magnet for investment has been the Clark Freeport Zone, which is a redevelopment of the former US Clark Air Base about 60 km from Metropolitan Manila. According to the free-zone’s state-run administrator, Clark Development Corp (CDC), the ultimate plan is turn the 4400-ha main zone and 27,600-ha sub-zone into an airport-driven urban centre targeting high-end IT industries, aviation and logistics-related firms, tourism and other sectors. CDC said that in 2011 it had signed 207 lease and sublease projects worth P22.9bn ($519.8m). CDC’s president, Felipe Antonio B Remollo, was quoted in the local press saying the projects could generate 8200 jobs as soon as they begin operations during 2012.
A large swathe of new work will come from investments such as that of South Korea’s Hae O Rum Development Corp, which has pledged P1.5bn ($34.1m) for tourism-related projects. The company plans to build a hotel, dormitory and business centre within Clark. Elsewhere in the zone, Haitima Clark Corp of Taiwan has invested over P1bn ($22.7m) in building a factory that produces a variety of valves, flanges, pipes, fittings and accessories for export to Asia, Europe and North America. There is also a raft of BPO firms in Clark set to expand operations in 2012, which will help boost employment numbers.
Jitters stemming from the debt crisis in Europe played a significant role in dampening investor sentiment in 2011. Yet higher economic growth is expected for 2012, with the government set to further prime the economy and investments are expected to rise in tandem. Higher credit ratings and the administration’s efforts towards transparency will undoubtedly be a fillip for further FDI. The question going forward is if the country will take advantage of its position as a potential centre for investment.