Jord Jharoah B Valenton of Valenton Loseriaga assesses the Philippines’ growth drivers and the role of FDI in helping the country reach its economic potential
Robust economic growth, sound monetary policy, strong macroeconomic fundamentals, and limited vulnerability to common risks have recently earned the Philippines upgrades from rating agencies Standard & Poor's, Fitch and Moody's.
Likewise, the World Economic Forum referenced the country as one of the most dynamic and rapidly improving economies in its Global Competitiveness Report for 2013-2014. This report showed that, since 2010, the Philippines has moved 26 places up the list of the most competitive economies.
The Philippines ranks fifth in the list of the world's most mineral-rich countries, with deposits of approximately $1 trillion. Moreover, the country has an estimated 9, 728, 800 hectares of agricultural land. It also boasts of world-renowned tourist destinations. However, agriculture, mineral development, and tourism have yet to reach their full potential and play a significant role in the country's economic growth.
The average growth rate of the country's GDP stands at 6.2% from 2010 to 2015. This growth was largely due to export of services through Filipinos working overseas and information technology-business process outsourcing (IT-BPO).
Cash remittances from overseas Filipino workers have been the steady source of foreign exchange earnings. As of 2015, total remittances through banks alone amount to $25.76 billion.
However, the IT-BPO industry is projected to surpass this amount. Despite only starting in the early part of 2000, it reported almost $22 billion in total revenue in 2015.
The IT-BPO industry has greatly diversified and matured. It started with basic call centers and low-end non-voice back-office services. It has since expanded to high-end services, including knowledge, financial, medical and legal process outsourcing, software development, technical support, product support, animation and graphics, as well as advertising, publishing, and data services.
These two growth drivers have been the catalysts for further economic activities. Their multiplier effect has been shown in the surge in urbanisation and real estate business.
Foreign direct investment
The foregoing shows how the Philippines' rich human resources have spurred economic growth. Nevertheless, there is an urgent need for capital for this growth to be sustainable and inclusive, and for its positive effects to trickle down to the wider population.
However, at this point the country still has limited capital and access to financial markets. It has exhausted means to attract foreign direct investment (FDI), which would bring in not only capital, but also additional employment, technological advancement, improved research and development, superior management skills, and an expanded marketing network.
Based on the 2013 World Investment Report of the United Nations Conference of Trade and Development (UNCTAD), the Philippines ranked low in the list of FDI flows to East and Southeast Asian economies in 2012. Nonetheless, the country had still been considered a bright spot, with the 15.5% FDI growth rate registered in 2012 being among the highest. This had even been more remarkable as there was a seven percent decline in FDI inflows during that year in the region.
In 2013, the Philippines received FDI totaling $3.74 billion and improved its ranking to number 19. But based on the 2015 report, the Philippine FDI reached $ 6.2 billion in 2014, which was a growth of 65.9%. The country thus advanced to number nine in 2014.
Incentives
Despite attracting some FDI, billions have yet to be tapped and channeled to further industrialisation and manufacturing of diverse, sophisticated, and value-added products. To attract FDI, fiscal and non-fiscal incentives have been made available:
(i) For those registered with the Board of Investments (BOI) and engaged in preferred areas of investment as listed in the Philippines Investment Priority Plan or in export-oriented enterprises, fiscal incentives include: an income tax holiday; exemption from taxes and duties on imported spare parts; exemption from wharfage dues and export tax, duty and fees; tax exemption on breeding stocks and genetic materials; tax credits; and, additional deductions from taxable income.
(ii) Fiscal and non-fiscal incentives are likewise available to those registered with the Philippine Economic Zone Authority (PEZA) and operating within economic and information technology zones.
Fiscal incentives still include an income tax holiday. In addition, PEZA-registered enterprises can enjoy another incentive of a final tax at a preferential rate of five percent of their gross income earned, in lieu of all other local and national taxes, except real estate taxes.
Special economic zones have in recent years been created in Cagayan, Zamboanga, Aurora, and Bataan provinces. Enterprises registered and located in these zones are granted similar incentives as those registered with PEZA.
(iii) Fiscal and non-fiscal incentives are also available to those located in special economic zones, such as Subic Bay, Morong, John Hay, Poro Point and Clark Freeports. However, the incentives do not include the income tax holiday. Nevertheless they are entitled to the same five percent tax on gross income as enterprises registered with PEZA, provided their income from the domestic market does not exceed 30% of their income from all sources.
Concerns and reforms
Investors have identified corruption, inadequate infrastructure, and investment restrictions as major concerns. The Philippines has initiated reforms to address these concerns.
Corruption
The current administration has pursued the goal of clean, transparent, and honest governance. Accordingly, a former president has been prosecuted and remains under arrest, a Chief Justice of the Supreme Court has been impeached, and several legislators and high-ranking officials have been indicted for graft charges.
A new president will be elected and sworn in by June 30 of this year. All candidates have so far declared a relentless fight against corruption as their most important policy.
Infrastructure
Another policy presidential candidates have in common is the improvement or construction of roads, railways, sea and air links and the development of public transport. More than ever, the public is feeling how much time and resources are wasted due to traffic congestion.
The design, installation, construction, financing, operation, and/or maintenance of infrastructure facilities traditionally require only public funding. Pursuing this endeavour meant increasing taxes, securing loans, or aligning public funds that could have been used for other governmental purposes.
However, the alternative of tapping private resources has since been formulated.
Presidential Decree 2030, issued on February 4 1986, was the first initiative towards privatisation. Proclamations Numbers 50 and 50-A followed in December 1986. However, under these Decrees privatisation was more of divestment of ownership over government assets.
The enactment of Republic Act 6957, or the Build, Operate and Transfer Law, in 1990, its amendment in 1999, and the issuance of NEDA Joint Venture Guidelines in 2008, broadened privatisation to include lease, concession, build-operate-transfer, and even joint ventures.
The current administration has eagerly pursued this framework under the Public-Private Partnership (PPP) programme. The principle behind the programme, however, has gone beyond addressing the aforesaid budgetary constraints.
According to the Director of the PPP Centre, the programme's underlying principle is a 'market-based determination of the suitable performing entity'. Competitive advantage is born when private entities are confronted with the fact that they will prosper or perish, while exposed to the full brunt of economic forces. This is not the case with government entities which will not be allowed to 'die', no matter how poorly they perform.
Of the 55 projects under the PPP programme, the government has awarded projects for the: Southwest Integrated Transport System; South Integrated Transport System; NAIA expressway project (phase two); modernisation of the Philippine Orthopedic Centre; Mactan-Cebu international airport passenger terminal building; Cavite-Laguna expressway; LRT line one Cavite extension and operation and maintenance; and, the Bulacan bulk water supply.
The Metro Manila Skyway (MMS) stage three, the MRT line seven, and PPP for school infrastructure project (PSIP) – phase two projects are now being implemented. The Automatic Fare Collection System and Daang Hari-SLEX link road (Muntinlupa-Cavite expressway) are now completed and operational.
Investment Restrictions
The country has veered away from a restrictive and protectionist FDI policy.
Before, FDI had to be first scrutinised by the BOI. With the enactment of Republic Act 7042 in 1991, or the Foreign Investment Act, foreign equity participation up to 100% is allowed in all areas not specified in Negative Lists A, B, and C.
In 1996, the Foreign Investment Act was amended to further liberalise FDI by implementing restrictions only in sectors specifically identified by the Constitution or laws. Negative List C, which identified sectors where FDI was limited inasmuch as they are adequately served, was taken out.
Thereafter, Republic Act 7721 was enacted to allow the establishment of foreign banks in the Philippines. Under Republic Act 8791, a seven-year window was provided allowing foreign banks to own 100% of one domestic bank. Under Republic Act 10641, foreign ownership in banks has been further liberalised. Finally, under Republic Act 8762, foreigners are now allowed to engage in retail trade business, subject to capitalisation requirements.
Significantly, the incumbent President issued Executive Order 184 in May 2015 providing an updated list of enterprises with FDI restrictions.
It bears noting that, in the case of Heirs of Wilson P Gamboa v Finance Secretary Margarito B Teves et al., the Philippine Supreme Court ruled that the grandfather rule applies in cases where there are corporate shareholders in a domestic corporation engaged in a nationalised activity. Thus, the nationality of the second or even the subsequent tier of ownership is taken into account to determine the nationality of the domestic corporation.
Outlook
There is a symbiotic relationship between FDI and growth. Growth promotes FDI; FDI promotes growth. The remarkable growth of the Philippine economy, and its commitment to address concerns and implement reforms, should encourage further FDI. The increasing confidence of investors is likewise expected to push the Philippines to grow exponentially.
Some said that growth in the region would slow down as a result of the continued weak recovery of major industrial economies, the decline of China, and intensification of global financial volatility.
However due to the foregoing, all forecasts of the Philippine economy remain positive.
First published by our sister publication IFLR magazine. Take your free trial today.
Jord Jharoah B Valenton
Valenton Loseriaga
Makati City
About the author
Jord Jharoah B Valenton is a partner at Valenton Loseriaga Law Offices and focuses on civil and commercial litigation, arbitration, taxation, estates and trusts, offshore transactions, foreign investments, business process outsourcing and intellectual property law.
He received his Bachelor of Laws from San Beda College in Manila, Philippines where he also finished his Master of Laws. He completed the summer programme for UScorporate law and international business agreements at Boston University School of Law in 2008. He also completed a course on trust and investment management from the Trust Institute Foundation of the Philippines at the Asian Institute of Management in 2007. He has attended various conferences, including the Licensing Executive Societiesconference on intellectual property in Arizona in 2005.
The firm has, in recent years, assisted the Philippine government in several big-ticket PPP infrastructure projects, advising mainly on the contractual, legal and regulatory frameworks.