FDIs fall to 16-month low as high rates, geopolitical tensions bite

Foreign direct investments (FDI) in the Philippines fell to their lowest level in 16 months in May, as persistently high inflation created a headache for investors who are already worried about geopolitical tensions.

Data released by the Bangko Sentral ng Pilipinas (BSP) showed FDIs posted a net inflow of $499 million in May, down by 1 percent year-on-year.

READ: FDI inflows reach US$499M in May

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. 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. While this was the case in May, figures showed the FDI net inflow during the month was the lowest since January 2023.

Potential slowdown

Despite the decline, the five-month FDI net inflows still grew by 15.8 percent year-on-year to $4 billion. The BSP projected a $9.5-billion FDI net inflow for the entire 2024.

READ: Foreign investment commitments down sharply in Q1 2024

“The May data suggests a potential slowdown. Factors such as global economic uncertainties, domestic challenges and regional competition may have contributed to this,” said Robert Dan Roces, chief economist at Security Bank.

“The sensitivity of FDI to interest rates, which remain elevated, adds further complexity,” Roces continued, adding that achieving the $9.5-billion FDI forecast for 2024 of the BSP will “require sustained investor confidence and a favorable economic climate.”

Separately, John Paolo Rivera, senior research fellow at state-run think tank Philippine Institute for Development Studies, said tensions in the West Philippine Sea might have spooked investors.

Strong fundamentals

“However, this may have been tempered by economic growth potentials and managed macroeconomic fundamentals,” Rivera added.

Dissecting the BSP’s report, equity capital placements, a gauge of new FDIs, contracted by 32.1 percent to $174 million in May. Most of the fresh foreign capital during the month came from Japan, with the manufacturing sector cornering 55 percent of the new FDIs.

But $14 million worth of FDIs headed for the exit in May, albeit 36.9-percent smaller than a year ago. This yielded a net equity capital of $161 million, down by 31.7 percent.

Reinvestment of earnings likewise declined by 3.7 percent to $97 million. But there was a bright spot in intercompany borrowings between multinational firms and their Philippine units, which soared by 43.4 percent to $242 million.