China pivot seen boosting investment flow
The potential inflow of huge Chinese investments to the country as a result of President Duterte’s efforts to establish a new alliance with the economic superpower could be a catalyst for the market if the Philippines would play its cards well, local stockbrokerage Papa Securities said.
In a research note titled “Red Tide” dated Sept. 29, Papa Securities projected—based on how much China historically invested in other countries—that the Philippines might be able to lure in $450 million to $680 million in new annual foreign direct investment (FDI) from China and for the equity investment portion of the FDI to be coursed through the China-Asean (Association of Southeast Asian Nations) Investment Cooperation Fund (CAF).
As the likelihood of a “Chinese pivot” increases, Papa Securities said it only made sense for China to use the existing groundwork for funding Philippine projects, adding that CAF had been seemingly made for the purpose of boosting China’s influence in the region.
CAF, a quasi-government private equity firm, helped Negros Navigation buy out Aboitiz Transport Services in a deal that eventually led the combined company to rebrand as the 2Go Group.
Papa Securities noted that CAF had a focus on infrastructure—toll roads, rail, container ports, airports, telecommunications and oil and gas pipelines—alongside energy/power, and natural resources like industrial metals, precious metals and natural plantation-related goods such as rubber.
“These seem to be strategic investments in industries tied to the country’s lifeblood. That’s why, on the debt side of FDI, China would likely focus on the same kinds of industries. Of course, nothing is stopping the fund from investing in industries the Philippine government would demand for,” the research said.
Looking at China’s historical FDIs in the Philippines, Papa Securities noted that the country was typically in the lower end of the past decade at $84 million. But it noted certain instances in the past when the country received at least five times as much.
FDI measures the value of foreign investors’ equity and net loans to businesses in the country and thus constitute long-term or more durable investments, in contrast to portfolio investments, aptly called “hot money”, which are perceived to be short-term and more volatile.
The high point of the past decade was in 2012, when Hong Kong, China and Macau collectively invested $680 million in the Philippines, the brokerage said.
“The administration might also use historical U.S. FDI as a bargaining tool by demanding that a partnership with China should somewhat offset the loss in U.S. investments. The average annual U.S. FDI inflow to the Philippines is $450 million, so that might serve as another benchmark,” the brokerage house said.
It noted that compared to other countries, the Philippines had attracted relatively little FDI from China in the past three years. This was a “large point of improvement” for the current administration, it noted.
“In thinking about future Chinese FDI, we suspect that any inflow less than an annual $550 million is out of the question. If the administration wants to demonstrate the improvement in Chinese investment, then having FDI less than Cambodia’s (with a gross domestic product less than a tenth of the Philippine size) might be a sore point,” the research said.
But since Cambodia’s GDP is small, the brokerage said China’s investments in the country seemed massive and unreliable as a benchmark. The brokerage suggested Vietnam as a more useful measuring stick as a peer country.
“The country’s GDP is near ours and it has historically close ties to China. By extrapolating our 2015 FDI to Vietnam’s levels in terms of GDP, we arrive at a figure of $600 million,” Papa Securities said.
“To recap, this gives us a few figures: The historical high of $680 million, the average U.S. FDI from the past 10 years of $450 million, China’s FDI to Cambodia at $550 million and an estimate based on Chinese FDI-to-Vietnam GDP, which gives us $600 million,” it said.
