Can the Philippines catch up with its neighbours?

Can the Philippines catch up with its neighbours?

Despite structural, governmental, and financial reforms, the Philippines is struggling to catch up with its neighbours. Will the country be able to achieve President Aquino’s dream of making the Philippines a top investment and tourism destination?

Known to investors as the underdog of the region, the Philippines struggles to attract foreign investors or successful businesses, and for good reason.

The continuing lack of transparency in judicial and regulatory processes, irregular trade balancing requirements, and higher export performance requirements on foreign owned enterprises (70% of production) have become impediments to a welcoming environment for foreign investors, particularly from the U.S.

In addition, pervasive corruption only serves to exacerbate the problem.

Over recent years, FDI inflow has decreased as a result of multiple investment challenges that the Philippines’ government has had difficulties confronting. U.S. and other foreign companies have expressed concerns about delayed procurement decisions, payments, and different interpretations of the procurement law among Filipino government agencies.

Indeed, despite a Government Procurement Reform Act in 2003, the government procurement laws and regulations have principally favoured Filipino-controlled companies and locally produced materials.

In certain sectors, the Philippines has detailed restrictions on investments due to reasons of national security, public health, and protection of small enterprises. This means investors have found themselves highly constrained in sectors such as natural resources, technology, retail trade, banking, and investment in SMEs.

These challenges remain longstanding problems in the Philippines and place U.S. and foreign companies at a disadvantage in the Philippines’ market, making the country the lowest recipient of FDI in the region in the past decade.

The Philippines transforming itself

However, with a population of 98 million (18 times more than Singapore), President Aquino has aimed to transform the Philippines into a major leisure, foreign investment, and tourism destination in Southeast Asia.

Over the past few years, the Philippines has begun making structural reforms in order to improve its competitive business environment. This includes liberalizing foreign investment restrictions in infrastructure, tourism, telecommunications, and other power industries.

In 2014, the Philippines made it easier to apply for construction permits, acquire credit (particularly access to credit information), and pay taxes.

President Aquino also allocated bigger funds to agencies involved in social services delivery and improved government transparency through stronger internal anti-graft policies.

Thus, as a result of new economic and political reforms, the Philippines was named the most improved country in the World Bank’s 2014 Ease of Doing Business Report. It also jumped 49 ranks in Transparency International’s Corruption Perception Index in the past four years, making it the biggest improvement among Southeast Asian nations.

Last year’s falling oil prices and growing consumer and business interests in the region also benefitted the Philippines, helping the country’s economy grow by 6.1%.

Furthermore, FDI inflows hit a record high of $5.7 billion in 2014, meaning that the underdog of the region has become Asia’s second fastest growing economy. As a result, Bloomberg expects the country to become the world’s second fastest growing economy in 2015.

The U.S.-Philippines relationship: a key driver for change in the Philippines

In the past three decades, the U.S. and the Philippines have signed key agreements to foster commercial and trade activities, and the U.S. has become the Philippines’ top trading partner and one of its largest foreign investors.

Since 1989, high-level senior officials have also participated in trade and investment policy discussions to expand bilateral, regional, and multilateral engagements between both countries.

The Philippines’s government has benefited from this strategic relationship to maintain a competitive business environment. For instance, international investors were reassured in regards of intellectual property rights problems once the U.S. recently removed the Philippines from its Special 301 Watch List.

Inherently, the Philippines’ skilled manpower, strong cultural proximity to the U.S., and strategic location in a dynamic region has made the country an interesting investment destination for the U.S., as well as other countries.

Some opportunities, some risks

As the Philippines has started to change its lagging status in Southeast Asia to become a leader in tourism, trade, and investment activities, there are new opportunities rising for foreign investors.

In particular, local investors and the Philippines’ government remain positive of the country’s ability to perform successfully due to the current aggressive local investments and growing consumption. Considering the significance of the U.S.-Philippines strategic relationship, U.S. investors may also benefit from focusing on the country.

However, while everything seems to be improving for the Philippines, the upcoming Presidential elections in 2016 pose an essential risk for the country, as many fear that the Philippines may revert back to its old ways. Indeed, President Aquino himself emphasized the importance of the 2016 elections.

Moreover, international institutions such as the World Bank have stated the need for the country to accelerate reforms in order to prevent the future elections from undermining Aquino’s recent efforts.

In addition,  the current administration fears Manila could become the “Wild West” of Asia without stricter implementation of anti-graft and regulation schemes. The absence of Filipino anti-money laundering law complicates efforts to stop the flow of illicit funds, especially through casinos and other financing industries.

Despite what President Aquino thinks, the country still has a long way ahead before becoming the “Darling of Asia”.

Categories: Asia Pacific, Economics

About Author

Alicia Chavy

Alicia Chavy has provided analytical and strategic support for Fortune 500 companies working to expand their business presence in the Asia-Pacific region at The Asia Group. Prior to her consulting experience, Alicia worked at non profit organizations where she conducted detailed assessments on foreign policy, security and economic issues in Latin America, Europe, and the Middle East. Alicia Chavy graduated from Georgetown University's School of Foreign Service, earning a Bachelor of Science in International Politics.