Largely insulated from trade war, Phl urged to look into opportunities

MANILA, Philippines — Whenever the country’s prospects in the context of the present global economy is mentioned, talk invariably shifts to the impact of and the opportunities presented by the ongoing trade war between the US and China. 

Surely, when the world superpowers sneeze, the rest of the world catches a cold, some worse than others.

Fortunately and unfortunately, however, the Philippine economy is powered not by exports but by  domestic consumption made robust by the strength of remittances and improving employment conditions. 

This is why even among listed companies, those who do well are those serving domestic demand. 

Incidentally, while the rest of the world will be struggling with slower growth, the Philippines has entered a so-called Goldilocks phase characterized by high economic growth, low inflation and investor-friendly monetary policy. 

Economists and government officials believe this means the Philippines can make the best out of a bad situation within limitations. 

“The economy is doing quite well, it’s an outlier. While the rest of the world is facing grim prospects, the Philippines has a goldilocks economy,” said economist Bernardo Villegas of the University of Asia and the Pacific (UA&P). 

Villegas thus believes this is the perfect time for the Philippines to strengthen its economic relations with so-called “Asian Century“ economies — countries seen bucking the global downtrend within the next five to 10 years by growing anywhere from five to seven percent. 

These are India, the ASEAN economic community, and China — with which the Philippines has quite a complicated relationship with. 

He noted that with all the political noise emanating from the US-China trade war and the political noise in the Philippines, the business community may easily lose track of opportunities in engaging with the Chinese market. 

As it is, the Philippines is already failing to tap into China’s 500 million-strong middle class market. 

“It is crystal clear that the Philippines is failing miserably in tapping this consumer market in our very backyard. We have a trade deficit of about five billion dollars as we import about $12 billion from China and export $7 billion mostly electronic components,” said Villegas. 

The greatest opportunity for the Phillippines in this globally-coveted market, of course, is to export high value agricultural products like pineapples, bananas, and dried mangoes. But unless the country revives its agriculture sector, it will have to depend heavily on service exports. 

But even in this sector, China is seen to be receptive because its rapidly aging population needs more nurses, caregivers and teachers. 

And because of its proximity to the Philippines, the country’s numerous tourist attractions remains a draw to Chinese tourists. 

If the Philippines is able to increase its pool of Mandarin speaking workers, its may explore the possibility of IT-BPO exports to China to take advantage of rising wages in some of their industrialized cities, said Villegas. 

This language deficiency is already a missed opportunity for the Philippines as seen in the proliferation of Chinese in the local offshore gaming industry operations (POGO). 

“Incidentally, these workers do not take jobs away from Filipinos because there are very few Filipinos as the moment who can do their work that has to be in the Mandarin language,” said Villegas. 

But even so, the very presence of these Chinese POGO workers present opportunities in the real estate and health services sector as their elderly family members may be enticed to retire in the Philippines. 

“Such retirement villages may be marketed to some 200,000 or so young Chinese workers who are working in the POGO sector. These workers will surely have parents and other relatives who are among the aging population. Having enjoyed the hospitality and warmth of the Filipinos, these young workers may be able to convince their young relatives to consider retiring in the Philippines,” said Villegas. 

As the US continues to impose punitive tariffs on Chinese exports, many firms with operations in China are fleeing to Southeast Asia that have Generalized System of Preferences (GSP) privileges to the US. As the Philippines is one of these countries, the country should attract more Chinese investments in technology, said Villegas. 

Because of its huge consumer market, China can be number one in the future in the development of some of the products and services of the fourth industrial revolution like electric vehicles, smart phones, solar panels, biotechnology. 

Through these investments, the Philippines can build its competence in  technology because of knowledge transfer. 

The Duterte administration is fixated on obtaining Chinese financing for big-ticket infrastructure projects. 

In this regard, Villages advises the government to be mindful that it cannot expect the same level of aid commitment from China like those provided by Japan as it is trapped in debt problems of its own. As a result, big-ticket infrastructure projects for which Chinese funding is committed cannot be expected to move forward rapidly. 

“The Chinese have very little to lend to countries like the Philippines. Their entire financial system is caught in a debt trap. China is mired in debt,” he noted. “Already loaded with many non-performing loans, many Chinese banks will be hesitant to commit funding to the Belt and Road initiative because they are already saddled with many questionable infrastructure loans in their books,” he added. 

Villegas noted, however, that this should not prevent Philippine businesses from proactively seeking closer economic relations with the Chinese business community. From agriculture products to real estate, there is a myriad of possibilities in the Chinese market if Filipino entrepreneurs and professionals will exhaust opportunities, he said. 

Even as the US continues to impose punitive tariffs on Chinese exports, it maintains GSP privileges with several countries including the Philippines. 

“Companies are moving their investments out of China to take advantage of these GSP privileges,” said Victor Abola, also an economist of UA&P. “So we do have an advantage in that regard. We have those GSP privileges that foreign investors can take advantage of,” he added. 

The Philippines’ GSP privilege has been extended for three years beginning March 2018. Under the GSP, zero or reduced tariffs are granted for 5,057 products or tariff lines, around 48 percent of total US tariff lines. As of May, the US remains to be the top market for Philippine exports with outbound shipments collectively valued at $1.08 billion, making up 17.6 percent of the total earnings from exports in May. This was a 9.8 percent rise from $878.26 million in May 2018. 

But for economist Calixto Chikiamco, president of the Foundation for Economic Freedom (FEF), these are opportunities bound by limitations on logistics and uncertainties on the future of the business environment. 

Constraints 

“The Philippines cannot immediately take advantage of the US-China trade war by attracting investors to relocate here.  The constraints are our poor infrastructure, which would make it difficult for companies to relocate here and ship goods to other countries,” she said. 

“The uncertainty over the tax regime inasmuch as the TRABAHO bill, which rationalizes fiscal incentives, have yet to be passed; and our rigid and inflexible labor policies, including new laws that will penalize labor contracting,” he added. 

As such, the domestic business environment may be more appealing to investors by forging through with the government’s aggressive infrastructure program and significantly easing restrictions on foreign investment. 

At the same time, he noted that the labor code should be modernized to become more flexible to the needs of labor-intensive industries. 

Rabboni Francis Arjonillo, president of First Metro Investment Corporation (FMIC), cautioned that while the Philippines will be less affected by the trade war in terms of trade in goods, consumption may be hit as several OFWs are in danger of losing their jobs overseas as the economies because of the slowdown in the economies of several host countries. 

Remittances are a key driver of domestic consumption that make up 70 percent of the national economic output from the demand side. 

“While we are bullish because we will be less affected by the trade war, there is a secondary effect on labor,” he said. “A good portion of this domestic consumption relies on foreign remittances.  But we still see a two up to four percent  growth in remittances which means that demand from other sources are coming in like nursing and caregiving professions,” added Arjonillo. 

Remittances by OFWs grew by 5.7 percent to $2.6 billion in May from $2.5 billion in the same month last year. 

Arjonillo noted that while jobs in oil producing regions like the Middle East are threatened because of falling oil prices, areas with aging population such Europe and Japan continue to have a huge demand for healthcare workers therefore keeping the growth in remittances steady. 

Government Efforts

The country’s economic managers said that despite the uncertainties created by the TRABAHO bill, foreign investors still look into economic fundamentals and the overall peace situation in the country, two areas that the government is exerting effort into. 

“Tax incentives are not the primary reason people invest. They invest in areas where they will not be kidnapped or killed. They invest where there is infrastructure. They will invest where they can export their products and services more easily,” said Finance Secretary Carlos Dominguez III. 

“So essentially that is what we are trying to do. The President has a very strong anti-crime and anti-terrorism effort so we are creating an environment that is safe. We are investing heavily in education. We are investing in Build, Build, Build,” he added. 

Trade Secretary Ramon Lopez said efforts are also underway to diversify export markets and maximize export privileges. “We’re talking to a lot of other countries not only to traditional export markets. We are talking to Russia, Middle East, and to other countries that we do not export to in a big way. At the same time, we want to maximize our GSP privileges to the U.S.,” he said. 

Socioeconomic Planning Secretary Ernesto Pernia said foreign direct investment (FDI) inflows into the country can be increased by threefold by amending three key investment laws. He urged the next Congress to pass the proposed amendments to the Foreign Investment Act, Retail Trade Act and the Public Service Act. 

“Here in the Philippines there are so many areas where FDI is only partially open to foreigners...and with those three acts passed and liberalizing the economy, we could really expect much more foreign investment, tripling or quadrupling what we have already achieved,” he added. 

Net FDI inflows reached $1.9 billion in the first quarter of 2019, a decline of 15.1 percent from $2.3 billion net inflows in the same period in 2018. 

For the entire 2018, net FDI inflows reached $9.8 billion, down by 4.4 percent from $10.3 billion in 2017. 

In the absence of strong global demand, exporters have for the meantime, been sustaining their business operations by supplying to the domestic market. 

“The fact that we have a very strong domestic economy is also a big help to us as we look deeply into this phenomenon,” said Lopez. “There are some anecdotes that there are some exporters who tend to supply the much stronger domestic demand rather than export given that the demand is already there.”