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Net Foreign Direct Investment

FDI inflows fall to 5-month low in June

FOREIGN DIRECT INVESTMENT (FDI) net inflows to the Philippines dropped to the lowest in five months in June, as investors worry over slowing economic growth, elevated inflation, and high interest rates.   

Data released by the Bangko Sentral ng Pilipinas (BSP) on Monday showed FDI net inflows declined by 3.9% to $484 million in June from $503 million in the same month in 2022. This was also 0.6% lower than the $487-million FDI net inflows in May.

The June figure was the lowest monthly net inflows of FDI in five months or since $465 million in January.

The BSP attributed the decline in FDI net inflows to the decrease in nonresidents’ net investments in equity capital and their reinvestment of earnings, which offset the growth in investments in debt instruments. 

BSP data showed nonresidents’ net investments in equity capital (other than reinvestment of earnings) fell by 11.8 % to $111 million in June from $126 million in the same month last year. 

Broken down, equity capital placements slipped by 8% to $132 million, while withdrawals increased by 20% to $21 million.

Reinvestment of earnings also slumped by 26.8% year on year to $89 million in June from $122 million in the same month in 2022. 

The equity placements were mainly from Japan, the United States, and Singapore. These were invested mostly in manufacturing, real estate, and information and communication industries.

Investments in equity and investment fund shares also declined by 19.2% to $200 million in June from $248 million in June 2022.

On the other hand, nonresidents’ net investments in debt instruments of local affiliates jumped by 11% to $283 million in June from $255 million a year ago.

“Concerns about global growth as well as anxiety over slowing growth in the Philippines may have prompted investors to hold back on investing at this time,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a Viber message.

Philippine gross domestic product (GDP) grew by a weaker-than-expected 4.3% in the second quarter, lower than 6.4% a quarter prior and 7.5% in the second quarter of 2022. In the first half, GDP growth averaged 5.3%.

“Equity and reinvestment of earnings were down (in June) indicating a slow pickup for fresh FDI, and less money being plowed back into the economy from existing firms,” Mr. Mapa said. 

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort in a note said elevated inflation and high borrowing costs continue to weigh on FDIs as these raised the cost of investments.

The central bank maintained its key policy rate at 6.25% at its meeting in June.

For the first half of the year, FDI net inflows dropped by 20.4% to $3.9 billion from $4.9 billion a year ago.

BSP data showed foreign investments in debt instruments declined by 24.6% year on year to $2.71 billion in the January-to-June period from $3.59 billion a year prior.

Investments in equity and investment fund shares also slid by 8.8% to $1.2 billion during the six-month period.

Net foreign investments in equity capital fell by 7.3% to $744 million. Equity capital placements inched up by 3.5% to $923 million, while withdrawals doubled to $180 million.

Most of these placements were from Japan, Germany, the United States, and Singapore.

Reinvestment of earnings fell by 11.2% to $459 million in the six-month period from $517 million in the comparable period in 2022. 

“Given heightened uncertainty regarding the global economy, the Philippines may need to convince investors that second-quarter GDP was an aberration. Unless this is done, given our outlook for domestic growth, we could see FDI remain subdued in the coming months,” Mr. Mapa said. 

Economic managers have said GDP needs to grow by 6.6% in the second semester to be able to reach the government’s 6-7% full-year target.

Mr. Ricafort said the free trade agreement (FTA) signed between the Philippines and South Korea earlier this month could boost trade, investments, employment, and overall economic growth.

The Philippine Economic Zone Authority earlier said it expects South Korea to become a top-four source of FDIs into the country, following the recently signed FTA. 

Eventual policy rate cuts, especially in 2024, would also help reduce borrowing costs for investments, Mr. Ricafort added. 

The BSP expects FDI net inflows at $9 billion by end-2023 and at $11 billion by end-2024. — Keisha B. Ta-asan

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DTI sets sights on No. 2 position within ASEAN for attracting FDI

DTI sets sights on No. 2 position within ASEAN for attracting FDI

THE Philippines will seek to become a top two destination within the region for foreign direct investment (FDI) by 2028, Trade Secretary Alfredo E. Pascual said.

“Our dream target is to (have) the second highest FDI in ASEAN,” Mr. Pascual said in an interview with ANC on Monday. 

He said the projections are based on the results of government investment promotion missions overseas.

In a separate interview on the sidelines of the Asian Regional Conference in Support of Accelerated Life Sciences Innovation on Monday, Mr. Pascual said that the numbers suggest there is a basis to aspire to higher FDI.

“As of now the total is $71 billion… So, it is possible to aspire to be at a higher level,” he said, citing the combined value of investment leads generated by the Department of Trade and Industry (DTI) and the Board of Investments (BoI).

Mr. Pascual said that for this year, 16 big-ticket projects worth $1.2 billion are expected to flow in, nine of which are already operational.

He said that the remaining seven are registered with the BoI or the Philippine Economic Zone Authority and are awaiting implementation.

In total, he said 15 projects are being processed via the BoI’s Green Lane.

Some of the proposed projects are not registered but covered by “letters of intent or memoranda of understanding with their local partners, so it’s (only) a matter of time the investment (is realized),” he said. — Justine Irish D. Tabile

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PEZA sees trade deal helping South Korea climb FDI rankings

THE Philippine Economic Zone Authority (PEZA) said it expects South Korea to become a top-four source of foreign direct investment (FDI) after the recently signed free trade agreement (FTA).

“If they are currently number five right now, they might be number four,” PEZA Director General Tereso O. Panga said on the sidelines of a Philippine Information Agency briefing on Friday.

“If you look at the numbers, from January to September we saw a strong increase in Korean investment,” he said.

PEZA estimates that South Korean FDI in the January-Sept. 7 period was P1.41 billion.

Japan topped the list with P22.61 billion approved investments, followed by Singapore (P15.4 billion), the Cayman Islands (P11.63 billion) and the UK (P2.75 billion).

Mr. Panga said the FTA with South Korea is expected to drive increased FDI in electronics, agro-processing, renewable energy, automotive, and frontier technology.

Trade Undersecretary and Board of Investments managing head Ceferino S. Rodolfo said that the FTA, signed on Thursday, will correct tariff disadvantages hindering major Philippine exports to South Korea.

The Philippines was able to secure tariff elimination on 1,531 lines of agricultural goods, of which 1,417 lines will be removed upon entry into force (EIF) of the bilateral FTA.

Bananas, which are currently charged a 30% tariff, are set to go to zero tariffs over five years, while tariffs on processed pineapples, which are currently charged 36%, will obtain tariff elimination in seven years.

For industrial goods, the FTA led to tariff elimination for 9,909 lines, of which 9,747 lines are set for tariff elimination upon EIF.

Ateneo de Manila economics professor Leonardo A. Lanzona said in an e-mail that the FTA will likely lead to large domestic companies forging tie-ups with their Korean counterparts.

“It is crucial then also that the micro, small, and medium enterprises (MSMEs) are made to link with the domestic companies that are going to be tied to the multinational Korean companies,” Mr. Lanzona said.

“(The Korea FTA) is a welcome development. The more free trade agreements there are, the better,” he said.

“To maximize the benefits from these FTAs, we need to support more MSMEs and upgrade the skills of the workers to give them opportunities to participate in these activities,” he added.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the FTA will boost trade and FDI in the Philippines.

The Philippines can be positioned as “an alternative manufacturing hub as well as hedge (against disruptions of) the global supply chain for the international operations of South Korean global companies,” he said.

In turn, the FTA could also encourage the hiring of Filipino workers in South Korea, in view of improved economic ties, Mr. Ricafort said.

“Thus, the FTA will boost gross domestic product growth in view of the increase in external trade and investment,” he said.

He added that the agreement may also boost tourism from South Korea, already a leading source of visitors for the Philippines.

However, Ateneo’s Mr. Lanzona cited the need to amend the Constitution with the expansion of FDI to more industries.

“The Constitutional provision that limits foreign ownership of firms to 40% needs to be revised.  Greater flexibility in our trade agreements is needed as long as greater production with more and better jobs are achieved,” he said. — Justine Irish D. Tabile

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Chipmakers say incentive reform has had limited impact on FDI

By Justine Irish D. Tabile, Reporter

THE Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI) said reform of the incentive system has not yet made the industry attractive to foreign investors, who are also concerned about high costs.

“From the electronics industry perspective, the appeal (to the government) still is to study the effect of incentives rationalization and figure out why we’re still not getting as much foreign direct investment (FDI) compared to Vietnam, Thailand, or Malaysia,” SEIPI President Danilo C. Lachica told reporters last week.

Mr. Lachica said another factor behind the dearth of FDI is the high cost of power, logistics, labor and water.

Multinationals deciding where to locate chip operations will not look too favorably on the Philippines because of cost factors. Such investors “have sites in different countries outside the Philippines and can compare the numbers,” Mr. Lachica said.

“If you have high operating costs, if you have high power costs, and if you don’t have some measures to mitigate that like incentives, then where do you think the CEO will place these new products?” he said.

He said the industry will end up producing legacy products and be left behind as technology turns over very rapidly.

Mr. Lachica said another challenge to the electronic industry is the tax imposed on the depreciated equipment which the industry donates to educational and government institutions.

“The depreciated equipment is still in good working condition and so to aid our students and government agencies, the companies want to donate it, but they are charged the full tax on the acquisition value, even if it’s worth zero today,” he said.

“I think the legislators have agreed (to act on this). But it just hasn’t happened,” he added.

He added that the application process to avail of research and development incentives is burdensome.

“The companies are not able to avail of that easily because what will happen is filing for reimbursement for these incentives is just too difficult for the company. So if you look at the availment rate of these incentives, it is not that high,” he said.

“The clock is running. We have eight and a half years or so for the transition period under the CREATE incentives rationalization, and after that we’re already seeing some expansion projects that are not coming here, investments are not as high as we’d like. So, that’s a big threat to our industry,” he said, referring to the Corporate Recovery and Tax Incentives for Enterprises (CREATE), a component of the comprehensive tax reform program.

The CREATE law made incentives targeted, performance-based, time-bound and transparent. It allowed qualified exporters to enjoy four to seven years of income tax holidays (ITH), followed by 10 years of 5% special corporate income tax or enhanced deductions.

Meanwhile, domestic enterprises are eligible for four to seven years’ ITH, followed by five years of enhanced deductions.

Asked what amendments SEIPI would like to insert in the implementing rules and regulations of the CREATE law, Mr. Lachica said measures that will address the high operating costs will be high on the list.

“Specific measures that would one address the high operating cost and two not make it difficult for the companies to (access) the incentives that will help reduce the operating cost,” he said.

According to Mr. Lachica, the industry is being required to implement an electronic tracking system which adds to the cost burden on the industry, reducing its competitiveness.

“These kinds of things reduce the competitiveness of the industry and make it more difficult. Our appeal to the government really is to have a risk-based (assessment before) making these regulations,” he said.

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