Beyond greater infrastructure spending and better governance, the Philippines needs to pursue not just tax reforms but constitutional change to open up the economy to more foreign direct investments (FDIs), an economist from British banking giant HSBC said.
In a research note dated Jan. 26, Hong Kong-based HSBC economist Joseph Incalcaterra said that for the Philippines to realize the goal of achieving high middle-income status by 2040, a the reform agenda was fundamental.
After all, the economist said that growth based on fiscal spending and remittances was not a sustainable recipe for long-term development, noting that the Philippines was “far too dependent” on two export industries: Business process outsourcing (BPO) and electronics.
Despite the country’s high-growth trajectory, he said the economy was still grappling with high poverty levels, particularly in rural areas; low agricultural productivity, and lack of industrial diversification.
Based on official data, poverty incidence among Filipinos in 2015 was estimated at 21.6 percent, improving from the previous Family Income and Expenditure Survey (FIES) that showed a poverty incidence of 25.2 percent in 2012 and 26.3 percent in 2009. In 2015, a family of five needed at least P6,329 every month to meet the basic food requirements and at least P9,064 every month to meet both basic food and non-food needs.
Within the Association of Southeast Asian Nations (Asean), the Philippines is getting only a meager share of FDIs, which investors oftentimes attribute to restrictions on foreign ownership of certain crucial industries.
“A simple answer, beyond the sustained increase in infrastructure spending and better governance, is to improve the Philippines’ laggard status in terms of inward FDI—since 2010 the country has absorbed only 2.5 percent of Asean’s direct inward FDI stock (not counting any recycling by way of Singapore),” he said.
But Incalcaterra said the potential was bright, noting that just in the last few months, the Philippines had seen over $30 billion worth of investment and loan intentions from China and Japan. He said the country could boast of some of the highest profit margins in Asia.
“It isn’t hard to see a positive FDI story materializing over the coming years, but for this to happen we would need to see constitutional reforms to reduce legal impediments. The government has prioritized tax reform first, but we hope that constitutional reform is next on the agenda,” he said.
Among the areas often sought for liberalization whenever Constitutional reform discussions arise in the Philippines were mass media and advertising, land ownership, educational institutions, utilities and natural resources.
On tax reform, Mr. Duterte’s tax reform package seeks to reduce maximum personal income tax from 32 percent to 25 percent and the corporate income tax from 30 percent to 25 percent. It also seeks to expand the value-added tax (VAT) base by reducing the coverage of its exemptions.