Data from the Asian Development Bank shows that Indonesia, Malaysia, Thailand and Vietnam have attracted large amounts of FDI over the past two to three decades. A key factor behind this trend has been the offshoring of lower-value-added manufacturing activities by East Asia’s advanced countries, such as Japan, South Korea, Taiwan and Singapore, which created the value chains that today crisscross the region. A notable absence from these lists, however, is the Philippines.

“The Philippines missed out on this wave of FDI due to political instability, poor governance and inadequate infrastructure,” says Dr Cielito Habito, a former Philippines economic planning secretary. “The country has suffered from not only a shortage of FDI, but domestic investment too. It is critical to improve the investment climate for all investors.” Acting vice-
president of the Philippine Institute for Development Studies, Adoracion Navarro, adds: “It is only since 2010, when Benigno Aquino became president, that we have seen a sustained rise in inflows of FDI.”

Inward FDI reached an all-time high of $6.2bn in the Philippines in 2014, up from $1.1bn in 2010, according to data from the Bangko Sentral ng Pilipinas, the Philippine central bank. These investments were made across a range of different industries, including finance and insurance, manufacturing, real estate, mining and quarrying, and wholesale and retail trade. Japan and the US are the most active foreign investors in the Philippines.

Better governance

Ms Navarro attributes this upward trend to the Aquino administration’s efforts to reform governance and fight corruption, ensure the sound management of public finances, improve the country’s infrastructure, and lift some restrictions on inward FDI.

One measure of the Philippines’ improved policy performance is its great strides in the World Economic Forum’s (WEF) Global Competitiveness Index, where it is now ranked 52nd out of 144 countries. 

“The country’s gain of 33 places since 2010 is the largest over that period among all countries studied. The results suggest that the reforms of the past four years have bolstered the country’s economic fundamentals,” says the WEF. The Philippines has been rewarded by the major international credit rating agencies – Moody’s, Standard & Poor’s, Fitch and the Japan Credit Rating Agency – with upgrades in its sovereign credit ratings to ‘investment grade’.

Improved governance and FDI have contributed to great strides in the Philippines’ economic performance. With economic growth averaging 6.3% over the past five years, the Philippines has one of the fastest growing economies in the Asia-Pacific region. This has led many, including Mr Aquino himself, to declare that the Philippines is no longer “the sick man of Asia”.

Looking ahead, there are many positive signs for the future of investment in the Philippine economy. In light of China’s rising cost structures and geopolitical issues, Japanese investors are taking a greater interest in shifting to the Philippine market, and local officials from the president down are actively courting them. Japan and the Philippines already have an economic partnership agreement dating back to 2006.   

There are already 1700 Japanese companies in the Philippines, according to the Japan Chamber of Commerce and Industry of the Philippines. Toyota reportedly has plans to expand its manufacturing operation in the country, while Mitsubishi is planning to upgrade its production capacity. 

“The Philippines is now studying the possibility of joining the Trans-Pacific Partnership [TPP],” says Mr Habito. “Now that US president Barack Obama has secured trade promotion authority, it seems that the TPP could happen. It is better to be in rather than out, otherwise you lose from trade diversion.”

Agricultural potential

Joven Balbosa of the Asian Development Bank highlights the potential of the Association of South-east Asian Nations (Asean) Economic Community, due to be realised this year, as a facilitator of FDI and other economic integration, including in the agricultural sector.

“Agricola Holdings is a Singapore-based company that is now successfully investing in sustainable plantation development in the southern Philippines,” says Mr Balbosa. He adds that the Philippines has huge potential to supply halal products.

Mr Balbosa also points to the renewable energy sector as a target for foreign investors in the Philippines. Indeed, a recent EY report emphasised the potential for renewable energy in the country. The Philippines is already a leader in the sector: 30% of its energy comes from renewables. It is also the world’s second largest user of geothermal energy. One key company active in this sector is Alternergy, which is building wind farms in the Philippines in a joint venture with Alternergy Viento Partners, a unit of Korea Electric Power.

Despite these encouraging trends and prospects, the levels of FDI flowing into the Philippines remain relatively modest compared with Indonesia, Malaysia, Thailand and Vietnam. The Philippine government continues to limit foreign investment in many sectors of the economy, even though the investment climate has improved in recent years. The Philippines has some of the most restrictive FDI policies in south-east Asia, according to a recent study by the Economic Research Institute for Asean and east Asia.   

According to the US Department of State’s investment climate statement on the Philippines: “Restrictions on foreign ownership, poor infrastructure, including very high power costs, and corruption continue to be significant concerns for investors.” Investors also report that “Philippine bureaucracy can be difficult and opaque, business registration and procedures are slow and burdensome”, although there is reportedly “a more predictable business environment within the special economic zones”.

Political instability

More recent data from the Bangko Sentral ng Pilipinas indicates a sharp fall in inward FDI in the Philippines in the first half of 2015. Market reports suggest that political uncertainty in the run-up to the May 2016 presidential election may be a factor, along with softening growth prospects in Asia. 

“There is always a risk to policy continuity in the Philippine system, where presidents are elected for only one six-year term and where political leaders have weak political party affiliation compared with Western countries,” says Ms Navarro. “But one important factor is that the next Philippine president will be judged by the moral ascendancy of Mr Aquino.”

The government will clearly need to maintain and deepen improvements to governance over the long term. As the US Department of State says: “If the country can maintain its reform momentum, particularly after a new president takes office in 2016, and continue to improve its infrastructure, the prospects for investment in the Philippines will continue to brighten.”