Op/Ed by Michael Machica
Dezan Shira Asia Alliance, Manila
In Asia’s competitive investment environment, the Philippines is currently more than holding its own. The Philippines is actively generating increasing amounts of FDI, capitalizing on our demographic dividend that provides us with young and energetic new workers aged 20 to 45. This is a positive situation that is estimated to be sustainable for the next 30 years to 2050.
It is hard to imagine that the Philippines will be the 16th largest economy in the world come 2050. Indeed, it is even more amazing that we will be the biggest economy in Southeast Asia at that time. But this is how development in our country is set to rise, based on a new study from HSBC Global Investors.
At the recent Philippine government and private sector trade mission in New York, pitching the country to foreign investors, some things really struck home. On the negative side, the Philippines remains one of the smallest recipients of foreign investment in Asia. We have not attracted as many tourists as our neighbors; we have an underdeveloped agricultural sector; we continue to impose restrictive investment laws; and we are not one of the easiest countries to do business in.
Despite this, the Philippines has achieved an average GDP growth rate of six to seven percent over the past five years, helping bring the economy back to a healthier position – healthy enough to be called Asia’s next tiger. The HSBC report says that the route to the Philippines’ success over the next 30 years is to achieve seven percent growth, year on year, and fundamentals point to this being the case.
However, the potential of our neighbors in Asia cannot be underestimated, and the tide of funds could go in any direction. Growth in the region is beneficial to the common ASEAN market, but we in the Philippines still need all the help we can get – including by amending our own laws. Additional assistance comes from other regional powers – a less aggressive stance from China over the South China Sea would be welcomed not just by the Philippines but by many of our neighboring countries as well.
Among the internal solutions the country needs to implement to attract more foreign investment, constitutional amendments are some of the most pressing. The lifting of foreign investment limitations that exist due to nationalistic pride, such as those in ownership of land and public utilities, would greatly improve the environment for foreign investors. We can be worried about real estate prices being driven up beyond the affordability of the common Filipino if foreign land ownership is liberalized. But certainly, this would be welcome in places outside Metro Manila where development, as well as improvement of quality of life, is vitally required. Allowing foreign ownership of land outside Metro Manila would help decentralize urbanization and encourage other Filipino cities to catch up. If ownership of public utilities can also be regionally directed, then all will benefit.
Another emphasis is that foreign investment in the agricultural sector need not be spent on land – it needs to be spent on the farmers themselves. The multinational purchaser must play the role of enabler, be it in tobacco, coconut oil, or abaca, for instance. An enabler offers farmers favorable contractual terms, gives them financing (for equipment and farming needs), and mentorship for the quality of the produce. Success therefore is not in the supply contract, but in the partnership between farmers and multinationals (and of course, local business).
Tourism numbers, while still low, are improving. Our country has five international gateways (Manila, Laoag, Subic, Cebu and Davao), more than many of our neighbors. However, unless we get investments going into hotels, restaurants, convention centers, theme parks, and infrastructure, especially in our secondary – but no less attractive – tourist destinations, our inbound foreign tourism numbers will remain low. Nevertheless, tourism is a priority area of the Filipino government. Airports and transport systems are being improved to accommodate the growing traffic of overseas travelers. Additionally, Disneyland has just announced its entry into the domestic market with its planned site in Clark.
Various investors are also intrigued by the Philippines’ growing manufacturing sector. Many Japanese multinational companies are considering exiting China due to political posturing affecting the relationships between the Chinese government and Japanese business interests and security. These companies are seriously mobilizing efforts to transfer operations to the Philippines. We also enjoy most-favored nation trade status with the United States, and our country is home to many big ticket as well as smaller American investors. The Disney project I am sure will usher in many of their partner companies to our country.
In terms of more general foreign investment opportunities, the Philippines’ banking laws have been liberalized and our offices expect to work with the finance industry for risk management consulting. Further, with the growing services sector and as BPO operators continue to expand in the Philippines, we are positioning ourselves to support inward investments in this sector. This includes services on corporation formation, tax, and transfer pricing advisory.
In summary, the Philippines has plenty to offer the foreign investor. A friendly and largely English-speaking workforce familiar with both Asian and Western values, a long-awaited business friendly, reform minded Government, and a sustainable trend in GDP growth make the Philippines an increasingly attractive destination for foreign investment.
Michael Machica is the Dezan Shira Asia Alliance Partner in Manila, and is a qualified Philippines and American CPA. For assistance in the Philippines, please contact Philippines@dezshira.com or visit our website at www.dezshira.com
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