By Jovee Marie N. Dela Cruz, Cai U. Ordinario & Elijah Felice E. Rosales
Three years into the Duterte administration and Manila has yet to significantly improve the ability to lure a critical mass of foreign investors.
That remains an enigma as the country’s economic managers have been undertaking key reforms that seek to strengthen the Philippines’s macroeconomic fundamentals and address development constraints. Manila has also crafted measures meant to not only bring down poverty but also narrow the gap between the rich and the poor.
Socioeconomic Planning Secretary Ernesto M. Pernia said these measures include the implementation of Republic Act (RA) 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act. According to Pernia, RA 11032 aims to eliminate unnecessary and irrelevant laws and regulations that hamper the provision of public services and programs.
Pernia also noted the Seal of Good Governance Act as fostering service improvements and good governance among local government units (LGUs). He said this law also complements RA 11032, demonstrating a whole-of-government approach in ensuring efficiency of public service delivery.
Albay Rep. Jose Sarte Salceda also believes the country’s solid macroeconomic fundamentals and efforts make the Philippines one of the most attractive investment destinations in the world.
Numbers from a United Nations agency, however, show a different landscape.
Concerns on growth
LATEST data from the Bangko Sentral ng Pilipinas (BSP) showed that Foreign Direct Investment (FDI) inflows in the January to October period contracted 32.8 percent to only $5.8 billion in 2019 from $8.6 billion in the same period of 2018.
The BSP was quick to explain that this was largely caused by external factors.
“The lower FDI net inflows reflect subdued investor sentiment due to the continued sluggish global economic activity,” a statement by the central bank said.
This explanation is not without basis. The US-China trade tiff, concerns surrounding Brexit and the slowdown of growth in Europe, the US-Iran conflict and other external concerns have been cited by economists as major headwinds that will cripple global growth this year.
Apart from these, the United Nations Conference on Trade and Development (Unctad) cited another reason for low FDIs. Based on its recent investment policy monitor, the Unctad found that investment destination countries are blocking certain investments due to national security.
Always suspect
THE Unctad said there were at least 20 instances when planned foreign takeovers with a value exceeding $50 million were blocked or withdrawn for national security reasons between 2016 and 2019.
The Unctad said these transactions amount to over $162.5 billion. In 2018, the value stood at $150.6 billion, representing 11.6 percent of global FDI flows in that year.
The UN agency expressed concern that this will only continue, given that various pieces of legislation being proposed globally aim to expand the “screening scope” of countries when it comes to foreign investments.
For economists like Albay’s Representative Salceda, however, countries like the Philippines have always been suspicious of foreign investment. This has led to foreign restrictions in the country’s Constitution and other mechanisms that prevent foreign involvement in the country’s economy.
“Having been occupied [by] so many foreign powers, our mindset has always been suspicious of foreign involvement in our economic and social life,” Salceda said. “Call this some kind of economic isolationism, and it is a mindset we endow with so much importance that we have enshrined foreign direct investment restrictions in our Constitution. We have stuck with 50-year-old restrictions in our laws.”
Investment restrictions
SECTION 10, Article 12 of the 1987 Constitution stated that “Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments.”
Article 12 of the Constitution also states that the government “shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.”
These provisions have long been at the center of the debate on increasing FDIs in the country. This has also been cited among the reasons for the failure of the National Economic and Development Authority (Neda) to shorten the country’s Regular Foreign Investment Negative List (RFINL).
The Neda is tasked to review and revise the country’s RFINL every two years. The “negative list” contains restrictions on foreign investments and the practice of professions based on the Constitution and Philippine laws.
The RFINL contains investment areas and activities where foreign equity participation is limited by mandate of the Constitution and specific laws, under list A.
These include, among others, the following: investments in Mass Media, which is under Article 16 of the Constitution; retail trade enterprises with paid up capital of less than $2.5 million, which is stated in the Retail Trade Liberalization Act (RTLA) of 2000; and, utilization of marine resources under Article 12 of the Constitution.
Endorsing amendments
THE RFINL also consists of the following: investment areas and activities where foreign equity participation is limited for reasons of defense, security, risk to public health and morals; and, protection of small- and medium-sized domestic market enterprises. These are placed under list B.
These contain, among others, the following: manufacture, repair and storage of firearms, explosives and other ammunitions; products that require clearance from the Department of National Defense (DND); manufacture and distribution of dangerous drugs; and, all forms of gambling except those covered by agreements with Philippine Amusement and Gaming Corp. (Pagcor).
The amendment of the list is headed by the Neda Secretariat, as provided for under Section 8 of RA 7042. Also known as the Foreign Investments Act of 1991, the law states that amendments may be made upon the recommendation of the secretary of national defense or the secretary of health, or the secretary of education, endorsed by the Neda, approved by the President, and promulgated by a Presidential Proclamation.
Under the 11th RFINL, the government now allows 100-percent foreign ownership in “internet businesses” which, Neda earlier said, included the following: internet service providers in the provinces; professions that foreigners are allowed to practice subject to reciprocity; and, teaching at higher education level where passing the board or bar is not required.
Liberalizing the economy
FOREIGNERS are also allowed to fully own short-term high-level skills development that does not form part of the hierarchical structure of the formal educational system excluded from educational institutions and wellness centers.
However, no foreign participation is allowed in professions such as marine deck and engine officers. Foreign participation in adjustment, lending, and financing companies as well as investment houses have been deleted following RA 10881, or the amended Insurance Code.
The government also allowed more foreign ownership in contracts for the construction and repair of locally funded public works and private radio communications network.
Pernia said, however, that the latest negative list should be accompanied by the passage of laws such as the amended versions of the Retail Trade Liberalization Act (RTLA) and the Public Service Act (PSA) that, he said, would allow foreign investments to surge to $40 billion a year.
Pernia earlier said liberalizing the economy would boost the country’s FDIs and the overall health and growth of the Philippine economy. He said Asean countries like Vietnam are open to a lot of foreign investors, allowing even up to 100-percent foreign participation.
The passage of laws such as the amendment of the Consumer Act to include e-commerce transactions, as well as the proposed national competition policy, are being seen as efforts to improve the business climate and attract more foreign investments into the country.
Uncertainty
THE uncertainty that these laws would change the FDI landscape brings to mind the poem “Love at First Sight” by Polish poet and Nobel laureate Wislawa Szymborska.
If Szymborska is to be asked, certainty is beautiful. But uncertainty is more beautiful still, she argues.
In certainty, there’s the routine, the practice, the mechanics to be followed for something to be successful. In uncertainty, however, there’s space for creativity, for originality—even for absurdity—in finding ways on how to get things done.
The feeling of uncertainty may arguably be exciting for poets and persons in love; not for persons in business.
In the case of the Philippines, it is uncertainties brought about by changing policies, mostly on taxes, that have been pulling down investment figures.
Such was revealed by data from the Philippine Economic Zone Authority (Peza). The Peza has suffered another year of decline in terms of capital inflow.
According to official data, investments registered with the Peza last year crashed 16.18 percent to P117.54 billion, from P140.24 billion in 2018.
Jolting reminders
THE year 2019 was the second straight year the investment promotion agency’s haul fell by double digits. In 2018, investments applied in economic zones declined 40.97 percent to P140.24 billion, from P237.57 billion in 2017.
Last year’s data also showed a general slowdown in capital poured into the country by domestic firms, and especially foreign investors. Investments from foreigners fell 27.91 percent to P49.25 billion, from P68.32 billion in 2018, while those from locals slipped 5.04 percent to P68.28 billion, from P71.91 billion.
Peza Director General Charito B. Plaza explained that the Philippines is facing left and right threats and challenges on doing business. She attributed the drop in investment registrations mainly to the prolonged process of crafting the Corporate Income Tax and Incentives Rationalization Act (Citira) bill.
“The Philippines is facing a lot of threats and challenges. First, the uncertainties brought about by the Citira bill, and then we are facing a lot of disasters now,” Plaza said in an interview with reporters on January 20.
“That’s why our appeal, hopefully, [is that] the final version of the Citira will consider the vulnerability of our exporters because they are the most vulnerable to world events and local events. Right now, we are suffering from these disasters,” she added, referring to the volcanic activity of Taal that partly dented economic zone operations in Southern Tagalog.
A menu of incentives
THE Citira bill is the second package of the government’s comprehensive tax reform program.
The proposed law aims to reduce corporate income tax (CIT) rate to 20 percent by 2029, from 30 percent at present—the highest when pitted against Southeast Asian economies.
However, the measure will also rationalize fiscal incentives granted to firms in economic zones. And this provision, Plaza and her constituents warned, will compel investors to pack up their operations here and relocate to another Southeast Asian country.
When passed in its current version, the Citira bill will overhaul the existing menu of incentives that economic zone firms are enjoying. This includes the 5-percent tax on gross income earned (GIE) paid in lieu of all local and national taxes, which investors find crucial for maintaining their businesses in the Philippines.
Philippine Ecozones Association President Francisco S. Zaldarriaga told the BusinessMirror that the Peza’s investment slowdown is a consequence of the unfinished legislation of the Citira bill. Economic zones can weather any vulnerability, including natural disasters, such as the Taal eruption, but they suffer when there’s a policy uncertainty, he argued.
“I personally do not think our vulnerabilities are the real threat. I am more concerned about the Citira, which, if passed, will have negative effects on our investment climate,” Zaldarriaga said in a text message.
“I personally do not think our vulnerabilities are the real threat. I am more concerned about the Citira, which, if passed, will have negative effects on our investment climate.”
Zaldarriaga
Hope floats
AS such, Plaza disclosed that Peza is doing everything to get firms to invest in economic zones in spite of the uncertainties.
One of the programs the Peza is focusing on this year is attracting investors to set up shop in the countryside in a bid not only to decongest Metro Manila, but to put up business centers in the rural areas as well.
“As far as the Peza is concerned, we are now very aggressive in inviting to the countryside to identify and create economic zones so that we can encourage investors to go to the countryside, especially in areas that are not disaster-prone,” the Peza chief explained. “We make the other areas more attractive so that not all of the focus is here in Metro Manila.”
President Duterte last year issued Administrative Order (AO) 18 seeking the establishment of more economic zones in the regions. AO 18 bans the putting up of further economic zones in the nation’s capital to force investors to locate in the countryside.
Zaldarriaga, for his part, argued that this policy must be maintained until such time there is enough capital inflow to the regions. He said the problem of congestion in Metro Manila still exists, and it is but necessary to implement AO 18 to address it.
“One of the objectives of AO 18 was to decongest Metro Manila. The problem still exists and AO 18 is still a good measure to address this,” Zaldarriaga said.
Jolting reality
THE onus of change falls on the shoulders of leaders like Salceda.
“But until we amend investment restrictions, it doesn’t matter. We are attractive but unavailable,” Salceda, chairman of the House Committee on Ways and Means, said.
According to the lawmaker, FDIs are primarily motivated by reasonable rates of return.
“That means lower operating costs and some level of confidence in the profit margins,” he said. “So far, the Duterte administration has sought to address structural issues that would lower costs and increase productivity for all businesses including foreign investors.”
“We have embarked on an ambitious infrastructure program to lower logistics costs,” Salceda added. “We are investing heavily in health and education to make our labor force more productive.”
According to Salceda, the House is lowering corporate taxes through the Citira and making doing business easier with key government reforms.
“In other words, this government is moving all its levers to boost investment,” he said.
“The question of attracting investments, however, becomes almost a moot and academic point in view of our foreign equity ownership restrictions,” Salceda added. “It’s not that we’re not attractive to investors. It’s that we do not allow investment in many areas in the first place.”
The lawmaker said among all countries surveyed by the Organisation for Economic Co-operation and Development in 2018, the Philippines is the most restrictive to FDI.
“In other words, this government is moving all its levers to boost investment,” he said.
“This government is moving all its levers to boost investment. The question of attracting investments, however, becomes almost a moot and academic point in view of our foreign equity ownership restrictions. It’s not that we’re not attractive to investors. It’s that we do not allow investment in many areas in the first place.”
Salceda
Old laws
SALCEDA said there are key measures that Congress has to pass that contributed to the country’s economic performance.
“Underperformance is due primarily to our constitutional restrictions on foreign equity ownership, and our archaic PSA and Foreign Investments Act (FIA),” he said.
The 18th Congress intends to correct much of this through amendments to the FIA, PSA and the RTLA.
The House also seeks to amend the provisions of the Constitution, particularly Section 2, Section 3, Section 4, Section 7, Section 10, Section 11, of Article XII or the National Patrimony and Economy by inserting the phrase “unless otherwise provided by law.” These amendments seek to relax the restrictive foreign ownership to attract more foreign investments.
“[These proposed] laws will boost labor productivity and competitiveness, encourage knowledge-creation and improve overall business environment,” Salceda said.
Very crucial
IN his recent 2020 report on the Road to A-level credit rating, Salceda said the Citira and other liberalization measures before March 2020 is critical to the success of “Road to A” strategy of the Duterte administration.
“The Citira is so pivotal that achieving A-level credit rating by 2022 becomes unlikely without its immediate passage,” he said.
With Citira, Salceda said 2020 economic growth could reach 6.8 percent to 7 percent, with the boost provided by the influx of deferred investments alone.
“The central reform in this strategy is Citira, an unprecedented public investment in the private sector whose value, considering safe rates of return, could be as high as P1.25 trillion over the next 10 years, whose effect on the gross domestic product could be as high as 1.01 percent above the baseline, and could create as much as 1.5 million jobs over the same period,” he added.
While increasing public investment in the broad private sector, Salceda said Citira will also reduce tax expenditures that are not productive, especially tax discounts that were supposed to incentivize pro-economy behavior among investors, but have not been performance-based, time-bound, targeted, or transparent.
Yoke of debt
THE Philippines’s current rating is BBB+, given by Standard & Poor’s in 2019, and a notch away from the A-level. The A-level means that the borrower has a strong capacity to meet its financial commitments.
According to Salceda, the passage of key reforms, primarily Citira and the liberalization bills, would help us achieve 38.0 percent debt-to-GDP ratio by end of 2020, 36.8 by 2021, and 35.3 by 2022, surpassing the 35.4-percent target of the government by 0.1 percent.
“Our debt-to-GDP targets were based on the assumption that Congress would expedite the passage of reforms critical to the success of our Road to A strategy. The immediate passage of a fiscally sustainable, economically impactful Citira, above all reforms, is now the motherlode of our catch-up strategy. Because economic growth takes time to respond to stimulus, we must pass Citira before March 2020; otherwise we risk limiting our growth for full-year 2020,” he said.
“All the liberalization bills—FIA, PSA and RTLA—are now also in advanced stage in the House. The FIA was passed in September 2019. For the reforms to take effect on the economy, the House must finish deliberating on the other two bills by March 2020, and the Senate must pass these bills before the President’s State of the Nation Address for 2020,” he added. “Otherwise, we postpone their economic benefits to 2021, compromising yet again our efforts to reach our debt-to-GDP targets.”
Image credits: ALEXEY KORNYLYEV | DREAMSTIME.COM