Hazy economic outlook sinks FDI pledges in Q1

MANILA, Philippines — Foreign direct investment (FDI) pledges in the country’s economic zones continued to contract in the first quarter, as lingering uncertainties brought by the pandemic continue to spook investors.

The government approved a total of P19.55 billion FDI pledges  from January to March, down 32.9% year-on-year, the Philippine Statistics Authority reported Thursday.

The data was the lowest recorded since the first quarter of 2018 when FDI pledges amounted only to P14.21 billion. 

FDI pledges are bets placed on the country’s ecozones, whose key attraction are tax holidays and other perks. While these commitments may or may not translate to actual inflows in the future, they serve as vital gauge of sentiment especially since investment decisions on this front are greatly affected by tax perks offered them. They are also different from the central bank’s own measure of FDI inflows, which is on a net basis.

That pledges were still on a downtrend over a year since the pandemic hit home means risk aversion among investors is pretty much still here. “The decline of pledges may still be related to the pandemic and the general sentiment on the Philippines’ economic recovery prospects,” Ruben Carlo Asuncion, chief economist at UnionBank of the Philippines, said in a text message.

As it is, the government is banking on fiscal perks offered by ecozones — and a hefty cut on corporate income tax rate — to lure back foreign investments potentially lost amid the pandemic, as well as attract new ones. This is contained in the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law which was enacted in late March.

The law, which departs from its original intention to reduce tax perks and raise revenues that was heavily opposed by ecozone operators, keeps incentives intact for a longer period as a way to entice investors to bet on the Philippines. For Asuncion, it’s “too early to tell” if CREATE contributed to last quarter’s drop in pledges.

Breaking down the PSA's first quarter report, P25.4 billion worth of pledges were approved by the Philippine Economic Zone Authority (PEZA), the country's largest ecozone operator. That amount was up 53.9% and accounted for 15.4% of total commitments during the period.

Meanwhile, commitments made to the Board of Investments soared 65.6% annually. The rest were in the red, led by the ecozone in Bataan (-98%). Those in Cagayan (-85.4%), Subic (-83.6%) and Clark (-72.5%) also posted double-digit declines.