By Luz Wendy T. Noble, Reporter
THE Duterte administration needs to put policy reforms in place to attract more foreign investments by end-2020, before the presidential election campaign gets underway, according to an analyst.
“With elections approaching in 2022, policy reforms are needed before end-2020, to bear fruit and pre-empt rising political uncertainty as presidential campaigning begins,” Michael Langham, Senior Asia Country Risk Analyst at Fitch Solutions, said in an e-mail to BusinessWorld.
“A cross-party commitment to attracting FDI (foreign direct investments), with a clear policy path would prove particularly effective in reducing uncertainty for foreign investors.”
Several key reform measures are still pending before Congress, which is also tackling the 2021 national budget. Legislators will soon be preoccupied with campaigning, with general elections scheduled on May 9, 2022. President Rodrigo R. Duterte’s term ends on June 30, 2022.
“In the very near term, the delays in containing the COVID-19 outbreak will hamper FDI into the Philippines. However, looking ahead to 2021 and 2022, when we expect both domestic and foreign investment into the country to rebound, reforms which liberalize barriers to investment could lure in some investment,” Mr. Langham said.
The government has been pushing for amendments to the Retail Trade Liberalization Act (RTLA) and Public Service Act (PSA), both of which have been approved by the House of Representatives but remain pending at the Senate.
The proposed revisions to the RTLA will lower the required minimum paid-up capital for foreign companies that seek to enter the local retail market, while amendments to the PSA would lift restrictions on foreign ownership in some sectors.
Mr. Langham noted the retail sector would be attractive to investors, especially since private consumption is a key driver of domestic growth.
“As such, FDI into the sector could ramp up over the coming years given the strong fundamentals driving the sector, namely a growing population and relatively fast-paced levels of economic growth,” he added.
However, Mr. Langham said FDI inflows that could come in from such reforms would not likely boost the Philippine economy’s long-term growth prospects.
“We believe reforms targeted at opening up export-oriented sectors or encouraging investment into infrastructure, including telecoms and utilities, would prove more effective for boosting longer-term growth. Delays over tax reforms, poor logistics and uncertainty surrounding government attitudes towards PPPs (public private partnerships) have hindered FDI inflows into these sectors,” he said.
Mr. Langham said the Philippines will need to catch up with regional peers that have acted swiftly with tax incentives to attract FDIs amid the pandemic and the continued US-China trade war.
Another key piece of legislation being pushed by the Duterte administration is the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, which would immediately reduce corporate income tax to 25% from 30%. It is still pending at the Senate.
Meanwhile, Christian de Guzman, senior vice-president at Moody’s Investors Service, said the country’s underdeveloped infrastructure as well as the “complex regulatory environment” are some factors that hurt its attractiveness to foreign investors, albeit some progress has been made in recent years.
“To the extent that the Philippines has shown improvement in these areas… there has been an uptick in FDI over the past few years versus the earlier part of this decade,” Mr. De Guzman said. He pointed out the country’s improved ranking in the World Bank’s Ease of Doing Business report last year where it ranked 95th from 124th in 2018.
Mr. De Guzman said “a more definitive containment” of the pandemic will be significant to investor sentiment as well.
The Philippines’ rules on FDI remained one of the most restrictive in the world. The country ranked fourth out of 84 economies on the FDI Regulatory Restrictiveness Index compiled by the Organization for Economic Cooperation and Development (OECD), using 2019 data.
In May, net inflows of FDI rose 28% year on year to $399 million from $280 million, reversing three months of decline due to the crisis. However, FDI inflows are still down by an annual 25% to $2.379 billion in the first five months of 2020.
FDI inflows were already in a slump in 2019, falling 23.1% to $7.647 billion as investor sentiment was clouded by global uncertainty, regulatory risks and delays in the Philippines’ tax reform program.