Foreign investors have become nervous over Philippine President Rodrigo Duterte’s tax reform. © Reuters
MANILA — Foreign direct investments in the Philippines fell 4.4% on the year to $9.8 billion in 2018, as investors grew nervous that President Rodrigo Duterte’s proposed tax reform could hurt the country’s investment environment.
FDIs fell for the first time since 2015. Duterte’s first two years in office saw record investments in the country. Though the 2018 figure is still high, economists are concerned that the country could lose out on foreign money if the investment environment continued to be uncertain.
The Philippine central bank had set a FDI target of $10.4 billion for 2018, slightly above the record $10.3 billion in investment flows in 2017.
Foreign investments are a key source of jobs in Philippines. But inward investments have lagged those of its neighbors. Vietnam, for example, received $35.5 billion in FDI last year.
Economists attribute Philippine’s moderate investment growth to infrastructure bottlenecks, erratic government policies and foreign ownership restrictions. Foreign companies in many industries are only allowed to own up to 40% equity. Sectors such as media are not even open to foreign investment.
New investments fell by a third to $2.3 billion from a year ago. Additional investments to existing facilities by foreign companies in their local affiliates helped stem the decline, growing 11.3% on the year to $6.7 billion. Such investments helped to support overall FDI numbers amid the sharp contraction in fresh investments.
Nicholas Antonio Mapa, senior economist at ING Bank N.V. Manila, said: “Perhaps uncertainty over the tax reform program may have some investors on a wait-and-see attitude.”
Philippines’ House of Representatives approved last year a bill to overhaul the country’s corporate tax rates and fiscal incentives. Duterte’s tax reform measure was aimed at reducing corporate income tax rates in 10 years to 20% from the current 30%, one of the highest among the 10 members of the Association of Southeast Asian Nations.
The government is also mulling new measures designed to benefit investors such as tax holidays for new industries like robotics and artificial intelligence.
To offset the revenue fall, a bill was proposed to cut tax incentives enjoyed by exporters, manufacturers, medical tourism and the business process outsourcing industry. BPOs are a steady source of foreign reserves and generates around a million jobs locally.
But a slowing economy is unnerving some investors. FDI was strong in the first seven months of the year, growing by as much as 161% in July before fizzling out. Philippine economic growth slowed to a three-year low in 2018 as high inflation and weak consumption dragged the country’s expansion down to 6.2%, below the government’s target.
ING’s Mapa said FDI flows could remain steady this year as existing investors are likely to continue inflows amid the still upbeat prospects for the economy.
“As for fresh FDI, we may need to get some more clarity on tax reform or substantial improvements in infrastructure quality before we see this account rise again,” Mapa said.
