The Philippines looks to foreign investment to liberalise trade

With an eye on reversing a dip in foreign direct investment (FDI), the Philippines has proposed a series of reforms aimed at increasing trade liberalisation.

In early October Ernesto Pernia, the director-general of the National Economic and Development Authority (NEDA), told media that the government planned to significantly reduce the foreign capital limit currently in place for the retail sector.

Under the proposed changes, the minimum amount of paid-up capital that foreigners need to take up full ownership of a retail company will be reduced from $2.5m to $200,000.

Efforts to tap international funding for retail gathering pace

The reforms are aimed at attracting more international investment to the retail industry.

Both the European and Japanese chambers of commerce in the Philippines told media they welcomed the move, saying it should improve competitiveness. The announcement also brought a favourable reaction from key foreign business leaders based in the country.

However, the favourable response has not been universal; local businesses, in particular, have expressed concern that a ceiling of just $200,000 could crowd them out of the market by bringing in foreign entities seeking short-term gains.

In response, the Philippine Chamber of Commerce and Industry has called for the foreign investment cap to remain above $200,000, arguing that a higher limit would attract more strategic foreign investors, and, in turn, bring improved technology and innovation into the retail sector.

Reforms to open up industries to international operators

The proposals form part of a broader national strategy to liberalise the economy and are a key component of the government’s review of its Foreign Investment Negative List (FINL).

Scheduled to be released by NEDA before the end of the year, the review is expected to reduce the number of activities and sectors in which foreign participation is prohibited. It is also expected to allow 100% foreign ownership of companies in more areas of the national economy.

In addition, NEDA has proposed lifting restrictions on foreign contractors, highly skilled academic professionals and public utilities.

Contractors are seen as key potential partners in the government’s ambitious plans to build and upgrade roads, bridges, and mass urban and subway systems across the country. The administration has targeted spending 7% of GDP on infrastructure needs, up from 4% in 2015 and 5% in 2016.

“Current foreign participation limits create additional risk and act as a deterrent for many companies interested in investment opportunities in the Philippines,” Jim Wilkins, general manager of Fluor Philippines, an engineering, procurement and construction firm, told OBG. “Easing these limits will put the country back on the map for investors.”

Increasing the number of foreign academics in the Philippines’ universities, particularly in the fields of science and technology, will also improve the education system, according to Pernia.

The University of the Philippines was the only local facility to make it onto the Times Higher Education World University Rankings 2018 list, appearing in the 601-800 bracket of more than 1000 facilities assessed.

Efforts to liberalise the economy come at a time of declining international capital inflows. FDI fell by 16.5% y-o-y in the first seven months of 2017 from $4.7bn to $3.9bn, according to data from the central bank. In July net inflows fell to $307m, their lowest monthly level since June 2016, when they reached just $238m.

Philippines targets improving ASEAN competitiveness

The planned liberalisation drive coincides with efforts to make the Philippines more competitive with its ASEAN neighbours, as officials look to boost the country’s share of regional FDI.

At a recent speech to a Bank of China-organised forum in Shanghai, Carlos G Dominguez III, the secretary of finance, highlighted what he has often referred to as the Philippines’s “demographic sweet spot”, noting that a sizeable generation of young, educated people will be entering the workplace as the populations of some other Asian countries begin to age.  

However, the country still has work to do; the Philippines ranked seventh out of the nine ASEAN countries featured in the World Economic Forum’s Global Competitiveness Index 2017-18, placing 56th out of 137 economies overall. 

While improving its position in last year’s survey by one spot, the country lost ground to ASEAN neighbour Vietnam, which ranked 55th, and also placed lower than Singapore (3rd), Malaysia (23rd), Thailand (32nd), Indonesia (36th) and Brunei Darussalam (46th). The report cited inefficient bureaucracy, inadequate infrastructure, corruption and a problematic tax system as the most pressing barriers to investment.

Despite these challenges, the government’s broader plans to liberalise the economy appear to be generating a generally favourable response among businesses. In OBG’s Business Barometer: Philippines CEO Survey, undertaken in mid-2017, all C-suite executives surveyed described their expectations for local businesses in the year ahead as either “positive” or “very positive”.