Philippines FDI to Continue, But Domestic Risks Persist

A host of positive factors will likely keep foreign direct investments flowing to the Philippines but risks will continue to stem from domestic political environment, Japanese financial giant Nomura said.

In its Asia Economic Outlook report, Nomura noted that FDI inflows were on a structural uptrend. Inflows for the first nine months of 2017 totaled $5.83 billion and the Bangko Sentral ng Pilipinas continues to keep a full-year net FDI forecast of $8 billion, Yahoo reported.

“In our view, it will be driven by a host of factors such as the improvement in potential growth vis-a-vis the rest of the region, the reform agenda remaining intact, the upcoming relaxation of the negative investment list and the prospect of corporate income tax cuts as part of package two of the tax reforms which will likely be presented in 2018,” the think-tank said.

“The banking liberalization in 2014 is leading to an increasing number of foreign banks looking to establish onshore presence, which should, in our view, ultimately attract more FDI inflows as corporates from their home countries look to invest via clustering effects,” it also said.

Republic Act 10641, approved by Congress in July 2014, further liberalized the entry of foreign banks in line with the region’s economic integration plans. From 60% under RA 7721, the new law allowed foreign banks own up to 100% of an existing local bank or a new subsidiary, among others. The Monetary Board has to date approved the local operations of 11 foreign banks.

Nomura has raised its 2018 gross domestic product growth forecast to 6.9% from 6.8% previously. It has a 6.7% estimate for 2017 and also expects growth to rise further to 7.1% in 2019.

The key risks to the outlook, Nomura said, continue to emanate from the domestic political environment “even though we would argue that these risks have dissipated from last year, when the uncertainty around the war on drugs was complicated by foreign policy issues.”

“We will also watch closely President Rodrigo Duterte’s popularity ratings–results from more recent surveys have been more mixed, which is a departure from his uniformly high popularity ratings previously—particularly ahead of the 2019 midterm elections,” Nomura added.

If the president’s control over congress wanes, this could have implications on future phases of tax reform. “A significant delay of infrastructure projects due to capacity issues at the level of the implementing agencies could also hurt the growth outlook and overall business confidence,” Nomura added.