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Philippines: New Opportunities and Prospects for Foreign Investments
Asia's Choice: Open Markets or Government Control?
Asia Society's 10th Annual Corporate Conference
Shangri-La Hotel, Makati City
February 24-26, 1999
Mr. Nicholas Platt, Mr. Kevin Quigley, Honorable Directors and Trustees of the Asia Society, Distinguished Speakers and Guests, Ladies and Gentlemen: it is a privilege to be here today to talk about new opportunities and prospects for foreign investment in the Philippines, especially at a time when the country is expected to start recovering from the Asian crisis.
Philippines: Low Levels Of Foreign Investments
Developing countries such as the Philippines depend a lot on foreign funds to increase productive capacity. Having insufficient domestic resources and a savings rate historically below 20% (compared to 30-40% in Indonesia, Malaysia and Thailand), the Philippines frequently turns to foreign loans, grants and investments for its additional financing needs.
Foreign direct investments (FDIs) came in trickles in the 80s and early 90s largely due to the political uncertainty prevailing in those times. With the implementation of structural reforms, investor confidence in the country slowly returned. In 1994, FDI inflows breached the $1 billion mark for the first time. The country's FDI level of $1.2 billion in 1997, however, is still low compared to those in our ASEAN neighbors.
Aside from political uncertainty, inadequate infrastructure was also cited as a major reason for the slow inflow of foreign investments into the Philippines. Currency instability in countries affected by the Asian crisis further aggravated the situation as it brought about the loss of investor confidence in the entire region.
Restoring Investor Confidence In The Philippines
Notwithstanding the setbacks of the previous years, now may be the best time to take a closer look at investment prospects in Asia. The region is expected to rebound from the recession experienced in 1998, with the Philippines and Singapore as the countries in ASEAN most likely to recover first from the crisis. The Philippines has the advantage of already having instituted several structural reforms and free market policies. The deregulation of major industries, privatization of government-owned corporations; trade and tariff reforms; and the liberalization of foreign exchange policies and the banking sector have resulted in an improvement in the country's business climate. The issue of political instability has also been resolved via a democratic process that works.
The Philippines was not spared from the financial crisis. The damage, however, was not as severe as the other countries. In 1997, the economy managed to grow by 5.1%. In 1998, when all the ASEAN economies fell into recession, the Philippines registered a negative 0.5% GDP growth rate which is comparatively better than the GDP contraction of -5% for Hong Kong, -6% for Malaysia, -7% for Thailand, and -15% for Indonesia . Strong inflows of remittances from Oversees Filipino Workers or OFWs provided the much-needed boost to the weak domestic economy and contributed to the positive 0.1% growth in Gross National Product or GNP.
The economy performed moderately well in other aspects. Interest rates have declined; inflation and the peso-dollar rate were kept at manageable levels. Exports continued to exhibit strong growth (18%) while imports have gone down significantly (-18%) . This greatly improved the trade balance and allowed the country to post a Balance of Payments surplus of $1.4 billion compared to a $3.4 billion deficit in 1997. Gross International Reserves (GIR) as of year-end 1998 stand at $11.8 billion, equivalent to 4.5 months of imports.
One major factor which allowed the Philippines to weather the crisis is the strength of its banking sector. The Philippine banking system has proven itself to be more resilient and relatively more sable than those in the other Asian countries impacted by the crisis. Most major Philippine banks have high capacity adequacy ratios of over 12%. This surpasses the minimum 8% set by the Bank of International Settlements and provides substantial cushion to support higher levels of non-performing loads (NPLs) and allow significant load write-offs. The Philippines is also perceived to have sounder banking practices, more prudent credit controls and a well-monitored regulatory environment. Barring any other adverse domestic or external development, the Philippine economy is projected to grow by at least one percent in 1999. Inflation and interest rates are expected to decline further while the peso-dollar rate is likely to remain stable.
Other Advantages Of Investing In The Philippines
There are other good reasons to invest in the Philippines. Aside from its strategic location in Asia, the Philippines has a growing consumer market. Even though per capita GDP has fallen below $1,000 as a result of the Asian crisis, personal consumption expenditures still continue to exhibit positive growth. With total population estimated at 70 million people and an annual population growth rate of around 2.2% a year, the country offers a large domestic market base for consumer goods and a growing market for infrastructure services and facilities.
The Philippine labor force is competitive, with educated, efficient, highly-trainable and English-speaking workers. Philippine manufacturers have also demonstrated technological innovation capabilities, moving up from simple subcontracting to increasingly complex operation. In the auto industry, for example, the Philippines used to mainly assemble completely knocked-down parts from Japan. Now, the country is a component manufacturer for car parts, making transmissions and wiring harnesses. Philippine manufacturers also make hard disk dries for computers rather than just assemble PCs.
Infrastructure bottlenecks are being addressed. Significant gains have been made in build-operate-transfer (BOT) schemes as an alternative way of encouraging private sector investment in infrastructure development. The BOT Program, also known as the Philippine Infrastructure Privatization Program, has been hailed as one of the more successful BOT efforts in the world and has become a model in Asia. As of the end of 1998, twenty-three infrastructure projects worth $15 billion have been awarded to private sector proponents. Eighteen (18) projects worth at least $4 billion are also in the pipeline, either having undergone public bidding or under evaluation or negotiation.
Finally, the Philippines has numerous export platforms in the form of economic zones located in key areas of the country. There are currently 53 regular ecozones in operation plus special ecozones such as the Subic Bay Freeport and the Clark Development Zone. These export platforms have excellent infrastructure and communications facilities in place. Companies operating in these zones can also avail of numerous incentives such as duty-free imports and tax holidays.
Investment Opportunities In The Medium-Term
Infrastructure development is among the key areas where foreign investments can come in. The government's plan to decentralize economic activity will require substantial infrastructure investments in regions serving as a secondary growth link to the National Capital Region. Investment opportunities can be found mostly in sectors opened to competition as a result of privatization, liberalization, or deregulation. These include the energy, toll roads, transportation, water and sanitation sectors.
The BOT Program is now venturing into "non-traditional" areas which may include information technology and government services. Private sector participation in government projects could expedite solutions to contemporary social problems and environmental concerns such as the need for more efficient sewerage and solid waste management.
Aside from infrastructure development in key sectors, foreign investors can take a look at individual companies in the Philippines. There is much scope for mergers and consolidation for firms weakened by the currency crisis. The need to beef up capital in the face of stiffer competition will force many firms, especially those experiencing liquidity problems, to seek partners. We have seen such consolidation in the telecommunication, food and beverage, cement, and the banking sectors. Higher capitalization requirements and loan-loss provisioning are leading to the mergers of some banks. In fact, 100 percent foreign equity may be allowed in ailing banks if a bill which has been presented to Congress is passed.
There may likewise be opportunities to acquire shares inexpensively considering how share prices of some firms have gone down significantly since the crisis began.
AIG Investments In Asia And The Philippines
The American International Group (AIG) recognizes the various investment opportunities presented by the Asian region. It has established direct investment funds such as the Asian Opportunity Fund (AOF) and the Asian Infrastructure Fund (AIF) to invest in various projects in Asia. In the Philippines, the AIF partly provided funding for the Metro Skyway. AIG's Philippine subsidiary, Philamlife, has likewise made substantial investments in the Philippines such as those in road infrastructure (Manila-Cavite Coastal Road) and power generation (Bauang Power Plant).
Attracting Foreign Capital: The Role Of Government vs Market
In closing, I would like to say that many attractive investment opportunities may be found across the Asian region. In the Philippines, government's limited financial resources need to be augmented by foreign funds to help stimulate economic growth. Significant capital inflows, however, will only occur in an environment of political and economic stability. It is the role of the government to adopt measures to restore and maintain investor confidence in the country.
Investors place a very high premium on sound policymaking. The country's fiscal, monetary, foreign exchange, and trade and investment policies should therefore be consistent and conducive for attracting private capital. This would include bringing down interest rates to more reasonable levels; and maintaining stable inflation and foreign exchange rates. Regulatory reform should be pursued in sectors in need of such reforms. It is also necessary to promote transparency and good governance throughout the government. Finally, basic preparation for the efficient functioning of the private sector such as the development of financial and capital markets should be undertaken.
Thank you and I look forward to more enlightening discussions with you in the open forum.
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