MONDAY MACRO: This indicator shows the Philippines is still an attractive investment, giving confidence to both local and foreign investors
2020 has been a challenging year for the Philippines to say the least. The eruption of Taal volcano, the coronavirus pandemic, two super typhoons one after the other—these are just some of the things that have caused major strains to the local economy.
To recover from this recession, the Philippines would need more than just local efforts to stimulate economic growth—the country would need investments from more sources to spur a faster recovery.
This economic indicator has fallen from its peaks, continuing its decline since 2018. However, it’s showing signs of improvement amid a challenging global economic environment, highlighting the Philippines’ growth potential.
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Foreign Direct Investment (FDI) refers to a controlling ownership of a foreign entity in a business operating in a country. Before the pandemic, analysts were expecting an improvement of FDIs in 2020 thanks to looser government policies for foreign ownership and lower corporate income taxes approved in September 2019:
The second amendment in the Foreign Investment Act (FIA) of 1991 enables foreign investors to take full ownership of their small and medium-sized enterprises (SMEs) by complying with certain requirements
The Corporate Income Tax and Incentives Rationalization Act (CITIRA) stipulates the gradual reduction of corporate income taxes and rationalize specific tax incentives
As a response to the financial struggles businesses have been experiencing because of the pandemic, the government sought to recalibrate the CITIRA to be more relevant and responsive to the needs of businesses in the country, renaming it Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
CREATE aims to immediately reduce corporate income tax rates from 30% to 25% until 2022, then by 1% each year until 2027. It also proposes that any losses small to medium enterprises incurred in 2022 will be carried over for the next five years, instead of the current three years. Furthermore, the act includes government flexibility in granting incentives to attract more high-value foreign investments.
These fiscal policies have contributed to the Philippines’ ability to regain the confidence of foreign investors to invest in the country amid the pandemic.
For the month of August, FDI preliminary result was $637 million, which is a 47% increase from $434 million in August 2019. This marks the fourth consecutive month of growth in FDI net inflows due to the government’s stimulus packages and the BSP’s (Bangko Sentral ng Pilipinas) accommodative monetary policy stance, to reduce the negative impact of the pandemic. The easing of quarantine measures also contributed to better levels of business activity, resulting in recovering investor confidence in the country.
According to the BSP, these four consecutive months of growth since May have considerably narrowed the cumulative net FDI contraction of 28% recorded in April. This contraction can be attributed to net inflows in equity capital investments and debt instruments from May to August.
Mostly coming from Japan, the Netherlands, U.S., and Singapore, equity capital placements came at $1.2 billion, or an 8% increase from $1.1 billion last May to August 2019. These were invested in manufacturing, real estate, financial and insurance, administrative and support service, and wholesale and retail trade industries.
Furthermore, debt instruments also improved with lower declines of 19% or $2.8 billion, from 47% in April.
However, the cumulative FDI net inflows is still lower in the first eight months of 2020 compared to the same period last year. At $4.4 billion, FDI net inflows is 6% lower versus the $4.6 billion net inflows recorded in August 2019.
Given the recessionary environment the country is currently experiencing, this decline in FDI levels is not a reason to be concerned.
The Philippines previously experienced declining FDI levels (from $10.3 million in 2017 to $9.9 million in 2018) when a trade war began between the country’s two major trading partners, the U.S. and China, in 2018. Increased tensions between the two countries had a negative impact on the global economy, so when Democratic presidential candidate Joe Biden secured the required number of electoral college votes, winning against President Trump, stock markets all over the world celebrated.
Some see Biden as a continuation of what former U.S. President Barack Obama started, with Democrat initiatives likely to be revived, including the strengthening of ties with allies, prioritizing climate change concerns, and participating in the World Health Organization.
A number of multilateral trade deals are likely to be made under the Biden administration as he is more open to trade agreements with other countries.
Having a strong relationship with the U.S. and a shared commitment to democracy, the Philippines is expected to greatly benefit under this administration. This should bring in more foreign investments to the Philippines, increasing FDI levels going forward.
Besides the U.S., the Philippines will also have more opportunities for trade with other Asia-Pacific countries, specifically China, Japan, South Korea, Australia, New Zealand, and the 10 members of the Association of Southeast Asian Nations, when they all signed the Regional Comprehensive Economic Partnership (RCEP) agreement.
Together, these countries account for 30% of the world’s gross domestic product and population, making RCEP the world’s largest trading bloc. With regional barriers to international trade minimized in the trading bloc, this promises to help speed up the post-pandemic growth of its members.
Additionally, the Build, Build, Build (BBB) program is still in full swing, with a P1.1 trillion allocated budget for 2021 that is 13% higher than the previous P976 billion. President Duterte is expected to approve 24 pending infrastructure projects to help reverse the effect of the pandemic. Adequate FDI levels will greatly help in the infrastructure spending of the proposed infrastructures under the program.
In our September 21st Monday Macro report, we talked about how aggregate Uniform earnings or GDP growth is expected to reach a full recovery by next year. With the government’s clear signal in pursuing infrastructure spending, they will be able to regain the confidence of both local and foreign investors.
Coupled with accommodative monetary policy, including this month’s key rate cut, FDI will likely show some recovery for both the near and medium-term.
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“The Monday Macro Report”
When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.
Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.
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Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.
Hope you’ve found this week’s macro chart interesting and insightful.
Stay tuned for next week’s Monday Macro report!
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