Economic recovery needs foreign investments
FROM FAR AND NEAR - Ruben Almendras (The Freeman) - August 4, 2020 - 12:00am

The COVID pandemic is still ongoing and the Philippine government is now rightly positioning to jumpstart the economy to avoid a more severe recession. The needed monetary easing and the programmed fiscal stimulus spending are in place. Considering the 70% dependence of the economy on consumption expenditures, and the inability of government investments and expenditures to fill the shortfall in consumption due to the lockdowns, lower OFW remittances, BPO earnings, tourist revenues, and overall business slowdown and closures, there is a huge need for private domestic and foreign investments. With our P20 trillion Gross Domestic Product in 2019, consumption is P14 trillion, government is P2 trillion, and private investments is P4 trillion. If consumption expenditures drop by 20%, we would need at least P2.5 trillion in investments to fill the shortfall in 2020.

As a developing economy, the savings rate in the Philippines has ranged from 11% to 16% of GDP. This is understandable because a threshold income of $3,400 per year is needed before people start saving. The marginal propensity to save increases as income increases, so 45% of Filipinos still do not have bank accounts and no savings. Since we need to reach at least 20% as the investment component of the GDP, then we need 4% to 8% of the GDP as foreign investment and this translates to $14 billion and $30 billion.

Foreign investments in the Philippines are composed of the short-term investments in the stock and bond market (hot money), which comes in and out during the year. This is less preferable than the long-term foreign investments, (foreign direct investments or FDI) which are invested in long-term assets and stay in the country for years. This hot money, however, establishes or a sign of a vote of confidence in the country in terms of credit risk for the economy and country risk of the politics. They signal the attractiveness of the country for investments, and will lead to more long term FDIs. In the past 10 years foreign investments in the Philippines were in the $5 billion to $7 billion range, with $1 to $2 billion of this in hot money. This is less than half of the needed foreign investments for the size of our economy, and this year of the pandemic it looks like we will only get $3 to $4 billion in foreign investments.

In these same 10 years, Vietnam has been getting foreign investments of $20 billion a year and China has been getting $100 billion a year. These amount to 8% to 10% of their annual GDPs, and a major reason for the fast growth of their economies at 8% to 11% annually in these years. It is estimated that total accumulated foreign investments in China up to 2019 is nearing $2 trillion, which is 25% of their annual GDP or five times the Philippines’ annual GDP. Now, that foreign companies are pulling out of China this amount will decrease, but China had already derived the benefits of these investments over the years.

Definitely, we have to amend some of our restrictive investment laws and streamline regulations to make the Philippines more attractive to foreign investments. We also have to align our tax, licensing, and permitting regulations with other countries. But we also have to send the correct and right political signals to attract foreign investments. We have to assure investors of a level playing field in government treatment. Attacking the conglomerates and big business and changing the rules midstream is a sure way to discourage foreign investments. These conglomerates have international alliances and they will encourage or discourage foreign investors by their perceptions and actions. We are not getting any of the FDIs that are transferring out of China, as most are going to Vietnam and Indonesia.

At this time when we badly need to get out of our deep economic recession, we should really get our act together in attracting foreign investments.

ECONOMIC
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