The Philippines implements reforms and builds trade partnerships to attract investment

The Philippines is a key bridge between the Americas and Asia, making it a natural conduit for global trade flows. The country also has some of the strongest economic growth rates in the Asia-Pacific region, with growth at 6% or more for 16 out of the 20 quarters between 2014 and March 2019.

The nation will continue to have considerable demand for imports as major public infrastructure projects are rolled out and industries expand and move towards higher value-added products. Demand for intermediate goods, as well as building materials and finished products, is therefore high. At the same time, insufficient upstream output of oil, gas and coal means that energy imports are also growing as the economy expands.

Meanwhile, exports rely heavily on a few key sectors, with machinery and transport equipment, electronics, semiconductors and other manufactured goods the three largest sources of export revenue as of January 2018. Export diversification is a central aim of current trade policy, particularly as adverse global conditions such as the US-China trade dispute impact the market, especially for electronic goods.

Nevertheless, the Philippines has also been growing as a destination for foreign direct investment (FDI) as a result of recent measures aimed at improving the business environment and easing restrictions on sectors included in the negative investment list.

Sector Structure 

The National Economic Development Authority (NEDA) is the inter-governmental body responsible for formulating overall economic policy. Alongside NEDA, the Department of Trade and Industry (DTI) is responsible for coordinating and implementing trade-related policies, as well as promoting the Philippines as a location for FDI. Several other organisations come under the remit of the DTI. These include the Philippine Economic Zone Authority (PEZA); Committee on Tariff and Related Matters; the Technical Committee on World Trade Organisation (WTO) Matters; the Committee for the ASEAN Economic Community (AEC); the Tariff Commission; and the Inter-Agency Committee on Trade in Services. Another body under the DTI is the Export Marketing Bureau, which seeks to promote Philippine exports worldwide.

Trade Agreements 

The Philippines is a signatory of a number of regional and global trade agreements. In 2016 the country accepted the WTO trade facilitation agreement, which sets out to enforce cooperation between Customs and other relevant authorities, with the aim of reducing costs and encouraging trade, particularly in developing countries. In addition, the Philippines is a member of the G33 and the Non-Agricultural Market Access 11, which lobby developing countries within WTO negotiations on agricultural matters.

As a member of ASEAN, the country benefits from the association’s regional trade agreements with Australia, New Zealand, China, India, Japan and South Korea. The Philippines has also been involved in ASEAN’s efforts to establish the Regional Comprehensive Economic Partnership with these Asia-Pacific countries. As of May 2019 talks were still in progress. The country has also signed trade agreements with individual countries in the region; for example, the Philippines entered a bilateral economic partnership with Japan in 2008, which is still providing benefits for both countries a decade on. In May 2019, 26 new business deals were signed between the two countries worth an estimated $5.5bn.

The Philippines is further engaged in trade agreements with Europe. Since 2014 the country has been a beneficiary of the EU’s Generalised Scheme of Preferences Plus (GSP+) trade regime, and in 2018 it signed a free trade agreement with the European Free Trade Area. As a result, these countries – Iceland, Liechtenstein, Norway and Switzerland – are likely to expand their trade with the Philippines, with international media reporting in May 2019 that Norway plans to take advantage of the deal and increase its Philippine imports across a range of segments, including electronic goods, clothing, and fruit and vegetables. In May 2019 NEDA announced that the Philippines will continue to benefit from the same market access that currently applies under GSP+ in trade relations with the UK following Brexit. The archipelago nation also has GSP arrangements in place with the US, Russia, Switzerland, Turkey, New Zealand, Australia, Norway, Kazakhstan, Canada and Belarus.

National Plan 

In February 2017 NEDA launched the Philippine Development Plan (PDP) 2017-22. The PDP is a large-scale nationwide programme to boost physical infrastructure as part of the government’s Build, Build, Build (BBB) project. The PDP aims to expand economic opportunities, increase competitiveness and attract FDI, utilising the Philippines’ membership of ASEAN and the AEC to gain better access to international markets. The plan also sets out to develop stronger international connections through the WTO and regional groups such as the Brunei Darussalam, Indonesia, Malaysia, Philippines-East ASEAN Growth Area.

Particular sectors highlighted by the PDP include technology and knowledge-based industries, micro-, small and medium-sized enterprises, and the promotion and marketing of Philippine goods and services on the international market. Additionally, the PDP aims to create a database to integrate the Philippine Statistics Authority (PSA) and the Bureau of Customs, to enable real-time assessment of trade flows.

In addition, the PDP seeks to lower the cost of doing business by speeding up logistics chains and import-export procedures, as well as increase the quality of exports and improve the human resources side of trade promotion and development. The development plan has a series of targets, which the government hopes to achieve by 2022: to increase merchandise exports from $32.8bn in 2016 to $61bn-62.2bn; boost services exports from $24bn in 2016 to $61bn-68.6bn; and reduce the current account-to-GDP ratio from 0.7 in 2016 to 0.001. A major boost in exports is planned in order to reach these targets.

Exports 

According to data from the PSA, the first year of the PDP recorded a positive start towards these targets, with total export revenue rising by 22.5% between 2016 and 2017 from P4trn ($74.4bn) to P4.9trn ($91.1bn). This upwards trajectory continued into 2018, when revenue grew by 14.3% to reach P5.5trn ($102.3bn). Results from the first quarter of 2019 were also promising, seeing exports rise by 7.8% year-on-year (y-o-y) to P1.4trn ($26bn).

Goods Exports 

PSA figures show that goods exports expanded by 14.3% between 2017 and 2018, from P2.8trn ($52.1bn) to P3.2trn ($59.5bn). Results from the first quarter of 2019 also suggest steady growth in merchandise exports, which totalled P710.9bn ($13.2bn), up from P706.7bn ($13.1bn) in the same quarter of the previous year. The largest export category was electronic goods, contributing P1.8trn ($33.5bn) in 2018, up from P1.5trn ($27.9bn) in 2017. The second-largest category was agricultural products, such as fruits, coconut oil and sugar, which accounted for P180bn ($3.35bn) in 2018, up from P178.4bn ($3.32bn) in 2017. The third-largest category was metal components, which increased considerably in 2018, reaching P106.1bn ($2bn) compared to P83.8bn ($1.6bn) the previous year. The remainder was divided between other categories such as ignition wiring sets, with P104bn ($1.9bn); apparel and clothing, with P52.7bn ($980m); refined copper, with P48.3bn ($898m); fishery products, with P26.7m ($497m); and petroleum goods, with P24m ($446m).

Although the overall result for the first quarter of 2019 was positive, the most recent PSA figures indicate a mixed result for Philippine exports. In April 2019 a number of exports fell, with metal components declining by 27.2% y-o-y; chemicals by 12.9%; and mineral products by 11.9%. However, there were promising trends for the export of bananas, which grew by 76.7% y-o-y; gold, which increased its export revenue by 36.1%; and machinery and transport equipment, which expanded its share by 28.5% y-o-y.

Service Exports 

Meanwhile, revenue from service exports grew by 14.3% from P2.1trn ($39.1bn) in 2017 to P2.4trn ($44.6bn) in 2018. This growth is expected to continue into 2019, with results from the first quarter of the year totalling P694.6m ($12.9m) compared to P638.7m ($11.9m) in the first quarter of 2018.

The largest category was miscellaneous services, with a share of P1.7trn ($31.6bn) in 2018 compared to P1.5trn ($27.9bn) in 2017. The second-largest segment in 2018 was travel services, which accounted for P436.8bn ($8.1bn) and P363.7bn ($6.8bn) in 2017. This was followed by transport, which expanded from P125.3bn ($2.3bn) in 2017 to P140.8bn ($2.6bn) in 2018. Government services generated P30.6bn ($569.2m) compared to P16.6bn ($308.8m) in 2017. Lastly, insurance accounted for P2.12bn ($39.6m) in 2018 and P2.11bn ($39.2m) the previous year.

Imports

The value of imports has also risen in recent years, increasing from P5.4trn ($100.4bn) in 2016 to P6.5trn ($120.9bn) in 2017 and P8trn ($148.8bn) in 2018, representing an overall growth of 48.1% between the two years. This trend is expected to continue into 2019, with the value of imports reaching P2trn ($37.2bn) in the first quarter of the year, an increase on the P1.9trn ($35.4bn) recorded in the same period of 2018. Figures from the PSA show that in 2018 goods accounted for P6.3trn ($117.2bn) of total imports, compared to P5.2trn ($96.7bn) in the previous year. The value of goods imports is growing steadily, according to results from the first quarter of 2019, which was up by 13.3% y-o-y from P1.5trn ($27.9bn) to P1.7trn ($31.6bn).

Electronic goods were the largest category, accounting for 17.5% of total imports in 2018. In that year electronic imports grew by 26%, from P848.2bn ($15.8bn) to P1.1trn ($20.5bn), demonstrating the globally interconnected nature of the electronics and electronics trade, and the rise in demand for these goods. The second-largest import category was mineral fuels, which contributed P787.7bn ($14.7bn) in 2018 compared to P519.8bn ($9.7bn) in 2017, representing an increase of 33.1%. This was followed by transport equipment with P738.7bn ($13.7bn) in 2018 and P639bn ($11.9bn) the previous year. The third-largest category was machinery and mechanical appliances with P467.4bn ($8.7bn), up from P400.6bn ($7.5bn) in 2017. Lastly, base metal imports grew by 41.6%, from P294.6bn ($5.5bn) in 2017 to P417.3bn ($7.8bn) in 2018.

Preliminary results for 2019 from the PSA showed that for the first quarter of the year, imports of electronic products comprised 26.6% of the total, with 17.5% of this made up by components and devices, such as semiconductors. The mineral fuels segment remained in second place in terms of its share of imports, although its value was down 12.6% y-o-y. Transport and iron and steel also fell in terms of total value, while industrial machinery and equipment rose by 11.1%.

Service Imports 

The value of service imports has steadily increased, from P1.1trn ($20.5bn) in 2016 to P1.3trn ($24.2bn) in 2017 and P1.4trn ($26bn) in 2018. In the first three months of 2019 service imports increased by 7.3% y-o-y from P337.9bn ($6.2bn) to P362.4bn ($6.7bn). The largest category was travel services, accounting for P639.3bn ($11.9bn) of the total in 2018, compared to P589.6bn ($11bn) in 2017. The second-largest category was miscellaneous services with P443bn ($8.2bn), up from P408.4bn ($7.6bn) in 2017. This was followed by transport, with P270.7bn ($5bn), compared to P234.7bn ($4.4bn) the previous year. The fourth-largest was insurance, with P30.2bn ($561.7m) in 2018 and P27.6bn ($513.4m) in 2017. Lastly, government services accounted for P27.3bn ($507.8m), up 84.5% from P14.8bn ($275.3m) the previous year.

Trade Deficit 

The composition of imports and the continuing trade deficit is characteristic of an emerging economy. According to local media, the trade deficit amounted to $26.7bn in 2016, increasing slightly to $27.4bn in 2017 and reaching a record $41.4bn in 2018. Figures for March 2019 showed a monthly trade in goods deficit balance of $3.1bn, up from the $2.3bn recorded in March 2018. There are several reasons for this sharp increase in deficit. A range of external factors were at play, including rising oil prices and the effects of the global economic slowdown on export demand, particularly as the US-China trade dispute continued to disrupt supply chains. In addition, the devaluation of the Philippine peso affected the import bill. The currency experienced its worst level against the US dollar since 2005 in September 2018, and lower export prices failed to close the gap. The trade balance was also affected by internal factors such as the BBB infrastructure programme, which required the import of large quantities of equipment and materials.

Trading Partners 

China is the country’s top trading partner, a position it has held for several years. In 2017, the most recent year for which figures were available, China accounted for 15.5% of total trade, or $25.5bn, with export receipts at $8bn and imports at $17.5bn. Some 58.7% of the country’s exports to China were electronics, while imports in the same category amounted to 20.5% of the total.

Japan was the Philippines’ second-largest trading partner in 2017, accounting for 13.2% of total trade, or $21.8bn. The country was the largest recipient of Philippine exports in that year, accounting for $10.9bn of the total. Some 30.2% of this was made up of electronic goods, followed by furniture and wood products, and transport equipment. Japan was also the second-largest importer at $10.9bn, with electronic goods making up one-third of this total. The US was the third-largest trade partner, at 10.6% ($17.4bn); followed by South Korea at 7.8% or $12.8bn; and Hong Kong with 7.1% ($11.7bn). The EU accounted for 9.9% of total trade in 2017, at $16.3bn, with Germany the largest individual market, contributing $4.7bn, or 28.6%, of the EU total. In terms of export markets, Japan has been the leading partner for several years. The country was the largest recipient in 2016 and 2017 but was overtaken by the US and Hong Kong in 2018. However, Japan made a recovery in the first quarter of 2019, receiving $880m worth of Philippine exports, compared to $830m to the US and $650m to Hong Kong. Nevertheless, this may change in the coming years, with exports to Japan falling by 18.9% between 2016 and 2018, while exports to the US rose by 19.1% over the same period. The Philippines runs its largest bilateral trade deficit with China, whereas it maintains a trade surplus with the US. This may help to explain why Philippine CEOs in the 2018 OBG Business Barometer: ASEAN CEO Survey were more concerned about commodity price rises and trade protectionism than declining Chinese demand.

Economic Zones

As an emerging economy with strong economic growth and a young, expanding population, and where English is widely spoken, investing in the Philippines has many advantages for international trade firms. Additionally, there are a number of programmes and initiatives that both exporters and importers can benefit from. PEZA specifically targets investments in export-oriented manufacturing and IT services, overseeing and administering a range of special economic zones (SEZs) where incentives for these activities are currently available. The SEZs are spread across the country, and include 74 manufacturing areas, 262 IT zones, 22 agro-industry centres, 19 tourism zones and two medical tourism areas.

PEZA’s non-fiscal incentives include simplified import and export procedures, and special non-immigrant visa arrangements for expatriates. The fiscal incentives include income tax holidays of four to six years, depending on whether the project qualifies for “pioneer” status – a title given to enterprises that are new to the Philippines, or use new or non-conventional production methods – after which a special 5% tax applies. Tax- and duty-free imports of raw materials, value-added tax (VAT) zero-rating for local purchases, and relief from expanded withholding taxes are also available.

Tax Reforms 

These arrangements may be affected by the next stage of the government’s Comprehensive Tax Reform Programme (CTRP), which began at the start of 2018 when the Tax Reform for Acceleration and Inclusion (TRAIN) programme became effective. Under this programme, a new law has been proposed, known as the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO). TRABAHO would lower the corporate income tax rate from 30% to 20% by 2029, unless changes are made in the draft of TRABAHO being discussed in Congress. However, in order to offset this, other incentives would most likely be removed or rationalised. Following the strong showing for candidates backed by President Rodrigo Duterte in the May 2019 mid-term elections, the passing of TRABAHO in the near future looks likely. In June 2019, after the 17th session of Congress, former president Gloria Macapagal Arroyo encouraged the government to pass 11 key bills, including TRABAHO. The bill is expected to be a priority for the 18th Congress, which begun in July 2019 and will run until 2022. The introduction of an enhanced VAT refund system under the first stage of CTRP in January 2018 has also challenged the VAT exemption provision. Under the TRAIN programme, a zero-rating on the sales of goods and services was vetoed, which led to uncertainty about whether this would alter the regulations for PEZA-registered entities. However, in early 2019 PEZA and the Department of Finance confirmed that enterprises registered under PEZA will continue to be subject to VAT exemption.

Recent reforms to the negative list also aim to improve the business environment by opening up new areas to foreign investors. Changes to the list enable overseas firms to hold a larger share in some ventures, such as public works and radio contracts (see analysis).

Investment Incentives 

The key laws governing investment are the 1987 Constitution and the Foreign Investments Act of 1991. The latter covers every sector except banking and finance, and allows for the establishment of the negative list, which limits or prohibits foreign investment in particular sectors and prioritises the use of the local workforce in certain professions. The negative list has recently been revised, opening up a series of new sectors and professions (see analysis).

At the same time, the Board of Investments (BOI) also offers incentives for businesses looking to invest in the Philippines. The BOI is attached to the DTI and acts as the lead agency for promoting and facilitating foreign investment, offering one-stop shop services ranging from research to advisory and marketing.

The BOI is also the lead investment promotion agency (IPA). There are another 19 IPAs operating in the country, which can be divided into three clusters: manufacturing, logistics, IT and business process management; tourism; and agri-business.

The first cluster includes PEZA, as well as with the Bases Conversion and Development Authority, which redevelops land formerly held by the US military, and the Subic Bay Metropolitan Authority, which works on the 262,678-sq-km Subic Bay Freeport Zone. The second includes the Aurora Pacific Economic Zone and Freeport Authority and the Tourism Promotions Board Philippines, while the third includes the Zamboanga City Special Economic Zone Authority.

While PEZA is primarily focused on providing incentives for export-oriented businesses, the other IPAs currently have their own incentive schemes tailored to particular trading partners and foreign investors. At the same time, the BOI offers the same package of incentives as PEZA. However, if passed, the TRABAHO bill is expected to streamline the different incentive regimes, with a focus on encouraging innovation, value addition and long-term job creation.

Outlook

As the BBB strategy accelerates, boosted by increased funding thanks to tax reforms, opportunities for trade and investment are likely to grow. The country faces the same challenges as any economy attempting to rise up the value chain, with initial dependence on imported services, raw materials and intermediate goods. Nevertheless, the government’s efforts should start to yield results in the near future, with exports and returns on investment improving.

Meanwhile, Philippines-based exporters are seeking to expand their markets and take advantage of the major wave of trade liberalisation that is currently working its way across the Asia-Pacific region, despite the trade war between the US and China. The AEC and other regional trade partnerships are likely to see increasing pressure for further reform of the Philippines’ negative list, along with improvements to the business environment and openness to international participation.