Foreign investment key to Philippine growth in 2014

Author: Cesar E. A. Virata, former Prime Minister of the Philippines

The Philippine economy is likely to register a GDP growth rate of 7 per cent in 2013. This comes even after many challenging events throughout the year, including the US tapering announcement, territorial disputes in the West Philippine Sea with China, and the calamities that hit several areas in the central and southern Philippines.

2013 saw consumption levels maintained and robust construction activities in both the government and private sectors. The services sector continued its projected growth of about 13 per cent, and manufacturing also increased by about 10 per cent, though agriculture weakened towards the year’s end.

For 2014, the country’s urgent priority is to rebuild in a better way the areas devastated by natural forces. Given the connection between global warming, climate change and natural disasters, the Philippines must become better prepared to deal with these challenges. The magnitude of damage from natural disasters in 2013 is estimated to be equivalent to the country’s yearly total infrastructure budget of about 3.5 per cent of GDP. But the Philippines’ infrastructure deficiencies are so great that there are plans to increase outlays on infrastructure to 5 per cent of GDP by 2016, with private sector involvement.

Reconstruction will contribute to an increase in GDP for 2014, but this growth will only restore what was destroyed, not add to what was lacking before. And while financing for reconstruction is assisted by grants and loans from foreign governments and international financial institutions, there will still need to be a shift of government resources away from the original budget to current urgent reconstruction priorities.

More foreign direct investment is needed in 2014 to sustain growth momentum. Various investment obstacles and possible reform measures must be resolved and implemented soon, otherwise the Philippines could miss out on investment opportunities, notwithstanding favourable ratings for improvements in governance achieved so far. Portfolio investments can help to some extent, but this could prove destabilising as well because of frequent in- and outward capital flows.

A number of restrictive provisions in the 1987 constitution are one impediment to foreign investment. In particular, pressure to pass constitutional and statutory amendments that would allow for participation in the ASEAN Economic Community 2015 and the Trans-Pacific Partnership is mounting.

Foreign investors have also been deterred by problems in expanding power plant capacities, with investors unable to find reliable electricity cooperatives for distribution of their electricity output, leading to delays in commitments and the risk of energy deficiencies during peak periods.

Still, in the manufacturing sector foreign investment is showing positive trends, with the Philippine Economic Zone Authority having been successful in attracting investment thanks to simplified taxation and the removal of local government red tape.

It is different story in the resources sector. The Philippines is known to be rich in mineral resources but the national government’s ongoing administrative and legal review has slowed down all major projects. Only the small mining groups continue to operate, employing crude ways of mining and processing that are bad for health and the environment.

In a similar manner, there has been a congressional review of incentives given to investors. A successful closure to all these reviews is desirable soon, so a more definitive investment policy will prevail in the long run.

It is necessary for government plans to emphasise inclusive growth, since high GDP growth alone has proven unsuccessful at reducing unemployment and under-employment levels, or the number of people below the poverty line. Rapid growth in the Philippines services sector, for instance, did not provide job opportunities to less educated and trained people in rural areas.

Agribusiness development is a possible solution since agriculture production and processing can employ people in these areas. The coverage of agrarian reform, which has been extended to this year, hopefully for the last time, gives an opportunity to promote corporate investment in agriculture for the benefit of rural workers.

Even if the Philippines’ agrarian reform were to end, there is still plenty of work to be done, particularly because the titling of land to individual beneficiaries has not been achieved to a great extent. Success requires infrastructure investment in roads, irrigation, farming implements, processing facilities, provision of credit, crop insurance and marketing activities.

Basel III regulations were also fully implemented in the Philippines on 1 January 2014, requiring banks to comply with capital ratios, unlike in other countries which are adopting a phased implementation up to 2019. Consequently Philippine banks will be more conservative in their lending, meaning loan growth will be lower.

Given these challenges, Philippine GDP growth in 2014 will probably be no higher than 6 per cent. To achieve higher levels into the future, basic improvements in investment policies of the kind identified above and more, that transcend presidential terms, is needed.

Cesar E. A. Virata is president and chairman of C. Virata & Associates, incorporated management consultants, and former Prime Minister of the Philippines.

This article is part of an EAF special feature series on 2013 in review and the year ahead.

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