Recent legislative changes aim to attract foreign investment to the Philippines

With strong economic growth and an expanding portfolio of business opportunities, foreign direct investment (FDI) in the Philippines has been rising steadily in recent years, reaching a record high in 2017. However, a fall in FDI the following year indicates that maintaining investor interest is dependent on a variety of factors, including a regulatory and bureaucratic framework. In 2019 improvements to the business environment have taken centre stage, following the passing of the Ease of Doing Business Act the previous year. In October 2018 the government also passed the reform of the rules for foreign investors, which liberalises ownership restrictions and opens up new areas to FDI. The revised foreign investment negative list (FINL) should help boost inflows, while also raising standards and productivity in key sectors. Despite this progress, however, challenges still remain for the country as it attempts to attract record inflows of FDI in 2019.

Investment Boost 

In 2017 net FDI hit an all-time high of $10.3bn, a significant increase compared to the 2016 total of $8.3bn. Broken down 2017 figures outline $6bn in debt instruments, $3.4bn in equity other than reinvestments of earnings and $862.6m in reinvestment of earnings. The sectors that benefitted the most from FDI in 2017 were manufacturing, which received 52% of the total; real estate, with 21.2%; and administrative and support service activities, with 13.2%. Some 30.3% of total FDI originated from Japan, 10.3% from Taiwan and 9.6% from Singapore. Around 45.8% of FDI generated was directed towards the Calabrazon region. This was followed by the National Capital Region, which received 16.5%, and Central Luzon, with 10%.

The strong results in 2017 led to predictions that 2018 would be another record year for FDI. The factors influencing this optimism ranged from the demographic – the country’s young and expanding population of around 107.4m means a large market, as well as a large labour pool – to the macroeconomic, as inflation in 2017 was within target and GDP growth had been over 6% between 2012 and 2017. However, over the course of 2017 there was a slowdown in FDI agreements. By the last quarter of the year the number of agreements had fallen by 51.8% year-on-year. At the same time, the global economic climate was affected by the US-China trade dispute and rising oil prices during most of 2018, causing uncertainty and a difficult year for emerging markets. An increase in the US Federal Reserve interest rate also drew money from developing economies. The result for the Philippines was a decrease in FDI by 4.5% to $9.8bn at the end of 2018. Equity capital investment also fell to $2.3bn, while investment in debt instruments grew by 11%, to $6.7bn. Although the result for 2018 was an increase compared to 2016, demonstrating that the country is sticking to a pattern of long-term growth, the Philippines still lags behind its South-east Asian peers in terms of FDI. For example, Indonesia received $27.8bn in 2018, while Vietnam received $19.1bn. As a result, the decline in FDI created additional pressure to increase the attractiveness of the Philippines as a destination for foreign investment.

Regulatory Changes 

New rules and regulations have been rolled out to improve FDI inflows and international competitiveness. The first of these new instruments is a revised FINL. Traditionally, the negative list has been used with a view to protecting certain industries and sectors from foreign competition by restricting overseas participation.

However, in October 2018 the government introduced the 11th version of the FINL, which opened up five new areas for 100% foreign ownership: online businesses; higher education teaching, with the exception of professional subjects; training centres for short-term, high-level skills development outside the national curriculum; adjustment, lending and financing companies, and investment houses; and wellness centres. The new list also enables foreign firms to own up to 40% of contracts for the construction and repair of locally funded public works, excluding infrastructure and development projects covered under the Build-Operate-Transfer Law, and projects required to undergo international competitive tendering. The previous upper limit for foreign ownership in this area was 25%. In addition, foreigners may also now own up to 40% of private radio communications networks, up from 20% previously. Pharmacy and forestry were also removed from the list of sectors barred from overseas participation.

Foreign investment is likely to be boosted further by three economics-related bills, two of which have been passed while the third is still under debate. Senate Bill No. 2102, an amendment to the 1991 Foreign Investments Act, was certified in June 2019 and will bring the previous law up to date with advances in technology and changing global trade relationships. It will also mandate the National Economic and Development Authority (NEDA), Board of Investments, Department of Trade and Industry (DTI), Securities and Exchange Commission, and other relevant agencies to conduct an annual review of the FINL.

At present, reviews nominally take place every two years, but delays often occur – the FINL signed by the president in October 2018 was the first review since 2015. The amended act will also remove regulations related to the practice of professions from the FINL, thereby limiting the scope of future negative lists to cover only equity investments.

In addition, Senate Bill No. 2133, known as the Authority of the Freeport Area of Bataan (AFAB) Act, was passed in June 2019. The new law will strengthen the powers and functions of AFAB, the government organisation tasked with managing the Philippines’ first free trade zone. This will be achieved by expanding the zone’s physical territory and creating a local one-stop shop for the area’s governance.

Senate Bill No. 2120, known as the NEDA Act, aims to reform the organisation and update its enabling legislation, which was originally passed in 1987. The bill, which was in the amendments stage as of May 2019, will make NEDA a fully independent economic and planning agency for the first time. It is hoped that this will enable a more coherent approach to economic planning, integrating local and regional development plans with national medium-term plans.

Easing Up 

These reforms, along with changes to the FINL, are all directed at the wider objective of improving the ease of doing business in the Philippines. This is also covered by a formal piece of legislation, which was signed into law in May 2018, known as the Ease of Doing Business Act (EODBA). In April 2019 the Anti-Red Tape Authority, an organisation established within the DTI to implement EODBA, published its revised rules and regulations for the act, which are expected to be rolled out by end-2019. EODBA aims to reduce processing time for transactions with government departments and agencies, as well as consolidate forms and automate business permit applications. The new legislation also amends and simplifies the Corporation Code, which has been in place since 1981. Some of the changes include allowing businesses with a sole proprietor to register for one-person company status; permitting the use of remote communication methods for board meetings; and enabling firms to use electronic filing methods.

Looking Ahead 

The act is part of the country’s efforts to boost its ranking in the World Bank’s ease of doing business index. The Philippines ranked 124th out of 190 countries in the most recent report, published in October 2018. This score has been disputed by the government, and the 2017 ranking of 117th is being taken as a baseline for efforts to improve its position to 95th by 2020. EODBA will be essential to this, as five of the 10 criteria measured by the index – starting a business, registering a property, signing up for electricity, paying taxes and obtaining construction permits – are likely to be made more efficient by the new legislation.

However, challenges remain in improving the business environment. One concern is the Tax Reform for Attracting Better and High-Quality Opportunities ( TRABAHO). Although the new law aims to reduce corporate income tax from 30% to 20% by 2029, it also removes or rationalises some fiscal incentives for investors in special economic zones. Some argue that this may generate uncertainty and deter foreign investors, given that TRABAHO would change the incentives stipulated in the contracts signed in order to operate under the Philippine Economic Zone Authority.

Indeed, there are concerns that some companies may consider relocating their production and directing new investments to countries in South-east Asia that offer better conditions. Nevertheless, the secretary of finance, Carlos Dominguez III, told local media in May 2019 that such fiscal incentives had outlived their usefulness and that investors were more concerned with overall improvements to the business environment.

Policymakers hope that streamlined incentives for innovation, value addition and job creation, combined with a lower corporate income tax rate, will prove to be more effective at promoting inclusive and sustainable growth than generous, long-term incentives that do not take into consideration national and regional needs.