MONDAY MACRO: A slowdown in FDI could mean a deceleration in economic growth
Philippine economic growth has been dependent on two main factors in the past decade. The first factor is Overseas Foreign Workers (OFW) remittance, where Filipinos working abroad send money back home. As of May 2023, cash remittance grew 2.8% from last year, contributing to Filipinos’ spending power.
The second factor is the Business Process Outsourcing (BPO) industry, where foreign companies delegate service-type business processes to local companies in the Philippines.
Given the BPO’s increasing significance as a contributor to the Philippine economy, it’s crucial to closely monitor the industry’s activity. A reliable approach for this assessment is by analyzing the capital inflows to this sector.
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The BPO industry stands as a vital factor to the Philippines’ economy, propelling economic growth and creating employment opportunities. To gauge the industry’s performance, we analyze Foreign Direct Investments (FDI) capital inflows.
FDI acts as a barometer of foreign companies’ confidence in the Philippines, encompassing their confidence in the business environment, infrastructure, and skilled workforce.
In 2022, 44.12% of the FDI was directed towards the manufacturing sector, while Financial & Insurance Activities and Real Estate Activities received 12.42% and 10.65% of the investments, respectively.
By analyzing FDI, we can uncover the destination of these funds and assess the growth potential within various industries contributing to overall economic expansion. As a result, it enables investors to gain insights into the country’s economic health and the diverse opportunities available in the Philippines.
However, in contrast to its record-breaking performance in 2021, FDI has experienced a recent slowdown, drawing our attention to the debt instrument component, which holds substantial weight in total FDI.
Over the last decade, foreign investments have been distributed with approximately 60%-70% in debt instruments, 20%-30% in equity, and 10-15% in earning reinvestments. Given the substantial share attributed to debt instruments, let’s explore any changes in this aspect.
An increase in debt instruments signifies heightened foreign loans or debt investments in the country, often influenced by favorable interest rates and perceived lower risks. Conversely, a decrease suggests foreign investors are stepping back from debt-related investments, possibly shifting to other financial instruments or responding to changing economic conditions.
This dip in debt instruments aligns with the prevailing macroeconomic headwinds of the year. Foreign investors express concern about a global economic slowdown, prompting central banks worldwide to adopt an aggressive hawkish approach to combat high inflation. The invasion of Ukraine by Russia further compounds inflationary pressures, affecting prices of goods and services on a global scale.
Considering the estimated 7.5% contribution of the BPO industry to the Philippines’s 2021 GDP, a deceleration in FDI could indicate a slowdown in economic growth. While there may still be some growth, it might not reach the levels we observed when the pandemic situation improved in the country.
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“The Monday Macro Report”
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Hope you’ve found this week’s macro chart interesting and insightful.
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