Economic Data Investment News Analysis

Fact from fiction

Philippines FDI and Economic Growth

Time for some more good economic news. And time, too, to put things in perspective. Foreign direct investment (FDI), much-needed overseas funds that’ll be used to build Philippine industry – further boosting manufacturing for one thing, and creating jobs in the process – is on the rise. In fact in October, Philippine FDI soared by a whopping 201.1% year on year.

In down-and-dirty dollar terms the picture is this. Net inflows of FDI in October 2016 were logged at US$670 million; in October 2017 they stood at US$2.02 billion. It didn’t just rise; it rocketed. Cumulatively, January to October, net inflows bounced up by 20.5% YoY – from US$6.52 billion in 2016 to US$7.9 billion in 2017.

Thus, supporters of the administration’s socio-economic agenda have once again been rewarded for their faith in the government’s economic policies. By any measure, this level of increase is a vindication of those policies and a tribute to the country’s financial managers.

This leaves the regularly out-of-touch critics of Philippine President Rodrigo’s macro-economic direction for his country with enough egg on their faces to make an omelette. A large omelette. Not only have the doomsday prophesies failed to materialise, when combined with other recent economic news – growth of 6.9% in the third quarter of last year, for example – the bullish outlook for the Philippines is becoming almost impossible for even them to ignore. Almost.

Economic analysis shouldn’t be coloured by political persuasion. This discipline can’t afford that luxury. If it’s to have any real value it must be dispassionate and deal with facts and conclusions drawn from facts. So let’s do that.

Philippine fundamentals are extremely healthy; economic growth is the highest of anywhere in Southeast Asia and the country’s fiscal and monetary affairs are in very safe hands – respectively those of the Department of Finance and Bangko Sentral ng Pilipinas (BSP), the country’s central bank. Meanwhile, the main ratings agencies, Moody’s; S&P; Fitch and Japan Credit Rating, are cognizant of these facts and all have the Philippines above investment grade.

Without belabouring the point, here’s what Fitch Ratings said last month when it upgraded the Philippines from BBB- (investment grade) to BBB: “strong and consistent macroeconomic performance has continued, underpinned by sound policies that are supporting high and sustainable growth rates. Investor sentiment has also remained strong, which is evident from solid domestic demand and inflows of foreign direct investment”.

Then there’s manufacturing which hit a 10-year growth high in the third quarter of last year and is expected to chalk up a 10% hike this year and rises of between 8% and 10% from 2019 and 2022 when Duterte’s term comes to an end.

These, then, are facts, however inconvenient they may be to some. In short, the Philippines is not falling apart as many would have us believe – that fiction is the product of deeply rooted political interests which, to put it bluntly, want Duterte to fail. However, as all the economic indicators show, he’s not prepared to oblige them.

On the downside, the government is undoubtedly faced with a number of challenges – the likely stepping up of guerrilla attack by the Maoist-Marxist-Leninist New People’s Army (NPA); the ongoing insurgency being staged by radical Islamic groups in the country’s south; law enforcement’s war on drugs and criminality; the inevitable pounding the Philippines will receive this year from typhoons, tropical storms and possibly earthquakes.

Certainly, none of these are welcome – but, viewed through the cold lens of analysis, none of them can derail the economic engine which will continue to pick up pace. There’ll be a price tag in terms of loss of life from the government’s operations against both the NPA and jihadist groups such as Abu Sayyaf and the Bangsamoro Islamic Freedom Fighters.

They may even cause damage to property – the possibility of another siege like the one carried out by the Maute Group at Marawi City, Lanao del Sur from May to October last year, should not be wholly discarded. For sure, the government and the Philippine military aren’t discounting that.

But the nature of these groups is that the damage and disruption they can cause is isolated. The re-imposition of martial law in Mindanao until the end of the year, was made precisely to ensure that. In other words, the potential impact of these groups on the wider economy is minimal.

That said, the regional economy of Mindanao will continue to be blighted by the insurgency – but no more so than in the past. And hopefully, as work gets underway on rebuilding Marawi City, and as the peace process to clear the way for the establishment of an autonomous homeland for the region’s 5 million Muslims also gains pace, economic prospects here will also start to take off.

Meanwhile, the war on drugs and criminality will continue to cost lives but, at the same time, it’ll be loosening the grip which organised crime has on sections of the community. And, although police and drug enforcement agency operations are nationwide – and are expensive and a drain on tight resources – the direct impact of them, per se, on the wider economy is small.

Where they do cost the economy is via the delirium of protest by groups which – let’s face it – are opposed to Duterte in any event. Simply put, they want him gone; and the War on Drugs will continue to be used by them as their ‘ace card’.

And certainly, it’ll succeed in putting doubt in the minds of some investors – particularly when their hysterical “this-is-the-end-of-the-world-for-the-Philippines-as-we-know-it” mantra is taken up by fellow Liberal/Left travellers on the international stage; the UN, the EU and cliques in the US Congress, as well as by committed propagandists within the mainstream media.

But even given all that opposition, the effect on the economy, as we’ve seen – this administration has already withstood a baptism of fire – will continue to be muted. It didn’t bring the government to its knees as it hoped; and it didn’t inhibit economic growth.

Of all the challenges the Philippines is faced with, then, it’s the last one on our list – natural disasters – which will be the most costly to the economy. This year, the archipelago can expect to be visited by around 20 typhoons and tropical storms. The death tolls from those will be anywhere from several hundred to a few thousand. The monetary cost will be in the billions of pesos; the agricultural sector being the hardest hit.

Here’s a few figures worth looking at. 2009 Typhoon Pepeng (Parma) cost the country PHP27.3 billion; 2012 Typhoon Pablo (Bopha) cost the country around PHP37 billion – some PHP27 billion of which was shouldered by agriculture; 2013 Super Typhoon Yolanda (Haiyan) left damages of more than PHP95.48 billion; 2014 Typhoon Glenda (Rammasun), PHP8.3 billion, around PHP5.16 being borne by the fisheries sector alone; 2016 Typhoon Nina (Nock-Ten), PHP5.2 billion.

These are certainly sobering figures but, unfortunately, severe weather systems are a fact of life in the Philippines. This country is the most exposed of any in the world to tropical storms. That’s nothing more than a caprice of geography – the archipelago lies in the warm waters of the western rim of the Pacific Ocean, in the immediate firing line of tropical storms careening out of the Northwest Pacific, the most active and volatile basin on Earth.

So, of course, every year there’s an economic price to pay in terms of crop and property damage. But, again, bad though these assaults by nature are, their effect on agriculture for example is localised – at worst regional. And they’re never going to bring the national economy grinding to a halt.

But what’s also going to happen this year is that the government’s massive infrastructure programme – a spend of PHP8 trillion over Duterte’s six-year term – will be kicked into higher gear following the passage of a package of tax reforms last month. Revenues from that are expected to be in the region of PHP130 billion.

Thus, investment – both foreign and domestic – is positioned to increase in everything from retailing to energy, and in all areas of construction from large civil-engineering projects to real-estate and resort development. If this is the “Golden Age of Infrastructure” it’s also the “Golden Opportunity for Investors”.

In fact, this country has never been so wide open to foreign participation and all the signs are that it’s going to get more so. For one thing, there’s finally a will to remove the biggest single impediment of all to foreign investment in the Philippines – the arcane 60:40 rule which limits foreign ownership to 40%.

Get rid of that anachronism – even reduce it to some more sensible ratio; flipping it to 40:60 in favour of investors for example, though preferably and more sensibly get rid of it altogether – and foreign funds will no longer be sat on the sidelines, they’ll be scrambling to get in.

Based on all that, we remain very bullish on FDI prospects for the Philippines this year. In fact, we’ll go further than that – 2018 looks to us like being a bumper year for investment inflows to the country. There’ll be political fallout as there has been over the past 18 months, but the constant negative reporting about the Philippines is gradually being discounted and replaced by verifiable positive data which investors will find increasingly difficult to ignore.

The Philippine story is about growth – and soon-to-be rapid growth. It’s to be found in facts and figures; in poured concrete as new infrastructure takes shape; in the rise-on-rise in manufacturing; in export growth and much more. It won’t be found in the disparaging remarks of Duterte’s political opponents; nor in the scorn of priests who seem to find the president beyond redemption. And so, investors who ignore the political rhetoric and let the facts speak for themselves will do well here.

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