Middle East conflict curbs FDI inflows

Risk aversion among investors at the height of geopolitical tensions in the Middle East sank foreign direct investments (FDI) in the Philippines to a fresh 10-month low in April, although inflows are expected to recover in the next months on growing hopes for relaxed financial conditions.

Data released on Wednesday by the Bangko Sentral ng Pilipinas (BSP) showed a net FDI inflow of $556 million in April, plummeting by 36.9 percent compared with a year ago.

READ: Foreign direct investments zoom to fresh 2-yr high in Feb

Unlike the so-called “hot money” that leaves markets at the first sign of trouble, FDIs are firmer capital inflows that generate jobs for people, like those invested to build factories and commercial property developments. That said, the government wants existing FDIs to stay, while attracting new ones.

A net inflow means more of this job-generating foreign capital entered the country against those that left during the period. Figures showed that the April net inflow was the weakest since June 2023. But despite the decline, the four-month FDI tally went up by 18.7 percent year-on-year to $3.5 billion, albeit still far from the BSP’s forecast of $9.5 billion FDI net inflow by the end of 2024.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., attributed the FDI slump to tensions between Iran and Israel which, he noted, had escalated in April and spooked investors. Conflicts in the oil-rich Middle East tend to easily scare markets as those crises can potentially push up global energy prices and stoke inflation.

READ: Foreign investment commitments down sharply in Q1 2024

But Ricafort said the lack of major retaliation from both sides so far was “a source of comfort,” adding that investors are now focusing on future interest rate cuts by central banks as inflation softens. At home, BSP Governor Eli Remolona Jr. said a rate cut in August is “somewhat more likely than before” as inflation eased to 3.7 percent in June.

‘Like a plague’

Leonardo Lanzona, economist at Ateneo De Manila University, said the decline in FDIs was “an indication of poor economic management.”

“Despite the BSP’s recent dovish announcements, investors stay away from our country like a plague,” Lanzona said. “Unless we formulate a comprehensive strategy to digital transformation and climate, the negative outlook is going to stay.”

Dissecting the BSP’s report, equity capital placements, a gauge of new FDIs, sagged by 47 percent in April to $84 million. Japan, the United States, Malaysia and Singapore were the top sources of fresh inflows during the month—with manufacturing, real estate and retail sectors cornering the largest share of new foreign capital.