Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said the proposal to rationalize fiscal incentives and the conduct of mid-term elections this year may affect the flow of foreign direct investments in the country.
Guinigundo issued the statement following the latest data showing that net FDI in 2018 fell 4.4 percent to $9.802 billion from the record $10.256 billion a year ago.
The full-year number missed the official target of $10.4 billion net inflows set by the Bangko Sentral last November 2018.
“For 2019, FDIs are projected to be broadly the same as that in 2018 although this will be reassessed in April/May. There are ‘pull’ factors coming from sustained positive developments in the economy and continuation of PPP projects that were approved in previous years…,” Guinigundo said in a text message.
“… But there are also elements of uncertainty from the proposed fiscal incentives rationalization bill and the upcoming 2019 midterm elections that may lead to investors’ wait-and-see stance,” Guinigundo said.
Earlier, Finance Secretary Carlos Dominguez III said the second package of the tax reform program of the Duterte administration includes the reduction of corporate income tax rates and the rationalization of fiscal incentives.
Dominguez said the corporate income tax rates would gradually be reduced from 30 percent to 20 percent to bring the Philippines closer to the regional average. He said having a corporate income tax rate higher than those of neighboring economies at 30 percent was a barrier to investments.
A companion measure of this package is the rationalization of the fiscal incentives program, he said. “For years, we relied on granting fiscal incentives as a means to draw investments into our economy. The results are hardly spectacular,” he said.
He cited a global survey conducted by the World Economic Forum in 2017 on investor appetite for the Philippines indicating that tax incentives were only the fifth most important concern of investors.
The first four were government inefficiency, the infrastructure gap, corruption, and the high cost of doing business which, Dominguez said, were being “decisively addressed” by the Duterte administration.
The Bangko Sentral said net inflows of foreign direct investments in 2018 fell 4.4 percent to $9.802 billion from the record $10.256 billion a year ago on the back of lower investments of equity capital for the period.
Data showed that net investments of equity capital in 2018 significantly declined by 32 percent to $2.3 billion from $3.4 billion recorded in 2017.
The bulk of equity capital placements last year were sourced mainly from Singapore, the United States, Hong Kong, Japan, and China.
These were channeled primarily to manufacturing, financial and insurance, real estate, electricity, gas, steam and air-conditioning supply, and arts, entertainment and recreation industries.
Reinvestment of earnings also declined slightly by 0.4 percent to $859 million in 2018 from $863 million in 2017. By contrast, net availment of debt instruments rose by 11.3 percent to $6.7 billion in 2018 from $6 billion in 2017.
For the month of December alone, net FDI declined by 4.8 percent to $677 million from $712 million a year ago.
The decline in FDI was due largely to the 57.6-percent drop in net investments of equity capital to $132 million from $312 million a year ago.
Equity capital placements during the month originated mainly from Thailand, the
United States, Japan, Singapore, and the Netherlands. These placements
were invested largely in financial and insurance, electricity, gas, steam and air-conditioning supply, wholesale and retail trade, manufacturing, and real estate industries.
Reinvestment of earnings also fell by 6 percent to $61 million from $65 million on year.
Meanwhile, net investments in debt instruments (consisting mainly of intercompany borrowings/lending between foreign direct investors and their subsidiaries/affiliates in the Philippines) increased by 44.7 percent to $484 million in December 2018 from $335 million in December 2017.
ING Bank Manila senior economist Nicholas Mapa said the contraction in the so-called “fresh FDI” or the “equity other than reinvestment of earnings” account in 2018 was likely due to base effects after seeing fresh FDI pour in strongly for three straight years.
“Perhaps uncertainty over the tax reform program may have some investors on wait and see attitude,” Mapa said.
This year, Mapa said FDI flows would remain steady as onshore firms continue to plow back money into the Philippines and their parent companies to send money back to their subsidiaries given the still upbeat prospects for GDP.
“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.
Last November, Bangko Sentral revised upward its net FDI projection for 2018 to $10.4 billion from the earlier estimate of $9.2 billion, taking into account the country’s strong macroeconomic fundamentals.