PH a hot investment site, says group
THE PHILIPPINES remains to be one of the most attractive destinations for foreign investments globally, buoyed largely by a favorable demographic profile, improving governance, and expectations of sustained high economic growth rates.
Based on a country report recently released by global publishing, research and consultancy firm Oxford Business Group (OBG), the Philippines has been put on the spotlight by global investors, even as the country remains saddled by decades-old challenges of inadequate infrastructure and high power rates.
Interestingly enough, foreign multinational companies are finding even more reasons to look deeper into the prospects here, and to set up shop eventually, tapping the increasingly lucrative trade and investment opportunities the Philippines has to offer.
“The Philippines is one of the hottest, most attractive investment destinations not just in the region but also globally. It’s all about Southeast Asia now, which is seen as an alternative to China and India. A very serious proportion of multinational companies are here, and they’re looking at the Philippines for an investment opportunity,” explained OBG managing editor for Asia Paulius Kuncinas.
According to OBG’s “The Report: The Philippines 2015,” the country currently enjoys a period of rapid, broad-based expansion as the business process outsourcing (BPO) sector and growing remittances from overseas Filipino workers (OFW) drive growth in consumer oriented industries and construction. Although the country’s real growth decelerated in 2014 to 6.1 percent, it remained higher than that of its Southeast Asian peers, and is expected to remain near 6 percent for the remainder of the decade.
Compared to its neighbors in the region, the Philippines boasts of higher average growth rates as the first half of 2010s saw the local economy expanding by 6.3 percent. In Indonesia, growth was recorded at 6 percent; Malaysia and Vietnam, 5.8 percent; and Thailand, 3.6 percent, OBG revealed.
“Fortunately, the Philippines is insulated from being sensitive to export markets and so domestic consumption [is a main economic driver]. We’re still in the early stages of households basically investing into their first car, and other goods, while remittances [from overseas Filipino workers] have been very strong and steady,” Kuncinas explained.
Turnaround
What was crucial about the Philippines’ resounding economic success was the implementation of reforms by President Aquino, enabling the government to hike spending into infrastructure, and opening key industries to outside investors. The reforms, which allowed the Philippines to secure upgrades in its credit rating, were similar to the initiatives taken elsewhere in the region in preparation for the establishment of the Asean Economic Community, OBG said.
Gradual market reforms are also expected to further boost exports and the flow of investments into the country.
According to OBG, the turnaround of the Philippine economy has been gathering pace since 2010 as economic growth has accelerated and economic policies have generally improved. The results then turned the global investor community’s attention to the country’s positives, thus putting the Philippines in a sweet spot for rapid catch-up growth.
“After years of lagging behind its Southeast Asian peers, the Philippines is seeing a long awaited awakening of foreign direct investments … Although many of the challenges that impeded investment in the past have yet to be overcome, the faster economic growth of recent years and stronger efforts to attract investment have improved perceptions of the country’s prospects,” OBG said.
“Human capital, young demographics, and consumerist culture are the country’s key strengths. Growth has been led by investment in the business process outsourcing. But recently, investment in manufacturing has begun to pick up after a long period of stagnation. Large numbers of Filipinos who leave for higher paying work abroad still contribute to the local economy by sending money home to their families worth more than 10 percent of the GDP (gross domestic product), which supports healthy consumer market and current account surplus,” it added.
Meanwhile, the local banking sector is also enjoying a period of rapid growth.
“Given the amount of ground that Philippine banks have covered in such a short period of time, it is inevitable that the pace of growth will moderate from there. Still, Philippine banks have so much going for them: Rapid economic development, a largely underbanked country, and a government that is boosting infrastructure spending,” OBG said in its outlook on Philippine banks.
Sheltered
“Although Philippine banks have largely been sheltered by restrictions placed on foreign banks, there is another reason many foreign banks have withdrawn: It simply is not that easy to compete with the country’s local banks. By the time regional integration comes to pass, Philippine banks may be more competitive across Southeast Asia than many are expecting,” it explained.
Other opportunities that could contribute to sustained economic growth could be found in the agriculture, energy, industry, retail, transport, infrastructure, tourism, as well as the real estate and construction sectors.
Local demand, OBG said, is boosting motor vehicle manufacturing, while new growth segments are emerging in the electronics industry, as efforts are underway to move up the value chain. There are good prospects for retail with mall expansion shifting out of the urban centers.
In tourism, identified as a vehicle for rural development, new investments are reportedly being made to bring in more visitors to the country, with ecotourism seen to become a major segment in the future. Transport and infrastructure projects will meanwhile play a crucial role in creating new and better connections between islands, and in alleviating traffic around the ports to improve efficiency, among others.
‘Absolute leader’
For real estate and construction, demand for housing, office, and retail space is expected to keep pace with economic growth.
In the services sector, the Philippines is considered the biggest exporter of services in Southeast Asia and is deemed an “absolute leader” in a number of sectors such as business process outsourcing, seafaring, hospitality and medical services.
However, there are concerns that the Philippines must address. Among these are the high power costs and lack of adequate infrastructure links, Kuncinas said.
He likewise urged the government to remove restrictions on foreign equity holdings and deregulate certain critical sectors, such as infrastructure, to enable the country to sustain its gains.
Also, the Philippines needs to ensure continuity of policies, implement initiatives that will ensure stability on macroeconomic and fiscal conditions, and commit to further improve the investment environment, Kuncinas explained.
Institutional reforms
Addressing the skills-job mismatch and increasing focus on competitiveness and added value will help firms integrate into the Asean market, including new entrants.
“Our research indicated several positives for the Philippines ahead of the [establishment of the] Asean Economic Community. Many of these, such as the country’s rising consumer spending power and the expansion of BPO into secondary and tertiary cities, will be of key interest to investors, at a time when the Philippines, like other Asean members, is finding itself in the spotlight,” he said.
Kuncinas also cited the need for the region to promote the lowering of cost of cross-border transactions particularly for critical projects such as those relating to infrastructure. Smaller firms in particular are finding it hard to go across the border as the costs of transaction and compliance are high.
“In the longer run, the Philippines’ success will depend on whether it tackles the tough issues of institutional reforms and infrastructure investment. The latter has been a disappointment in recent years, as plans have been announced for infrastructure projects that foreign banks have shown clear interest in helping to fund, but few tenders have been issued. The recent pace of progress is encouraging, and also putting pressure on the government to take the next steps,” OBG said.
