After years of slow growth in foreign direct investment (FDI) following the global financial crisis, the Philippines is now showing high potential for a return to 2007 FDI levels. The country still lags behind some of ASEAN neighbours in overall investment per capita levels, although strong economic growth and new anti-corruption measures, combined with a recent credit rating upgrade from Fitch Ratings, have improved the Philippines’ international reputation.

In March 2013 Bangko Sentral ng Pilipinas (BSP), the central bank, announced that FDI in the Philippines had reached $2bn in 2012, up nearly $500m from earlier projections released by the UN Conference on Trade and Development (UNCTAD) in January. According to the BSP, these figures represent 10% growth compared to 2011, and the highest level of FDI the country has seen since the $2.92bn recorded in 2007.

Growth was driven largely by an infusion of capital equity, which reached $1.3bn in 2012, compared to just $558m the previous year. Foreign powers leading the charge in FDI include the US, Australia, The Netherlands, Japan and the British Virgin Islands, with investment inflows directed primarily towards the manufacturing, real estate, retail, mining and financial sectors.

Also helping FDI growth were reinvested earnings, which increased 7.9% to $1.1bn, and intercompany borrowing and lending between foreign investors and their subsidiaries, which reached net outflows of $373m in 2012, compared to $311m net inflows in 2011.

This is another strong sign of recovery for the Philippines, which has been dubbed one of South-east Asia’s greatest comeback stories by HSBC, and is now the third-fastest-growing country in in the region in terms of FDI (after Cambodia and Myanmar), according to UNCTAD’s January projections.

In terms of overall numbers, however, the country continues to lag behind other ASEAN members. Though both showed lower FDI growth rates than the Philippines in 2012, neighbouring Vietnam and Thailand brought in $8.4bn and $8.1bn in FDI, respectively, compared to the Philippines’ $2bn. According to UNCTAD, the Philippines attracted only $32.3bn worth of FDI between 1970 and 2009, compared to a total of $285.8bn for Singapore and $104.1bn for Thailand.

Business in the Philippines has been hampered by perceived cost of doing business – the country slipped to 138th place out of 185 countries in the World Bank’s Ease of Doing Business Survey in 2013, compared to 136th in 2012. The growing unemployment rate and under-developed manufacturing sector could also pose problems to future growth.

However, changing demographics and government initiatives will help mitigate these problems. Unlike its neighbours, the Philippine’s working population is set to grow to 70% of its overall population by 2015, while the rest of Asia will see its working population shrink. With its population projected to grow to 160m by 2015, the Philippines has a distinct demographic dividend within the ASEAN community.

Additionally, President Benigno Aquino has been implementing strong anti-corruption reforms, as outlined in the government’s Philippine Development Plan 2011-16, and has committed to actively pursuing corruption charges involving prominent public officials.

These measures, combined with a strong overall performance in 2012 – the country’s GDP grew by 6.5% in 2012, making it one of the fastest-growing economies in South-east Asia – have helped increase investor confidence and improve the country’s international reputation.

On March 26 Fitch upgraded the Philippines’ economy to “BBB-” from its previous “BB”. This moves it into “investment grade” territory. The resulting influx of FDI is expected to bolster economic performance in 2013, and reduce the persistently high unemployment rate, which stood at 7.1% as of January.

Fitch lauded the government’s resilient economy, strong balance sheet and strong fiscal management, noting that country’s debt-to-GDP ratio fell to a 14-year low of 51% in 2012.

Though Standard & Poor's and Moody’s Investors Service both still rate the Philippines at one notch below investment grade, Amando Tetangco, the governor of the BSP, said he expected the other two agencies to follow suit soon. The government is also moving to reform its foreign investment and foreign exchange rules, including relaxing rules on foreign exchange transactions to facilitate increased outflows and dampen the peso’s strong appreciation.

As a result of new fiscal reforms and the credit upgrade, the BSP now predicts FDI in the Philippines will reach $2.2bn in 2013. With GDP growth expected to hit 6-7% in 2013, and President Aquino planning to achieve 8.5% growth by the time he leaves office in 2016, foreign investors have the potential to reap lucrative rewards.

original source: www.oxfordbusinessgroup.com