The Philippines receives the least amount of foreign direct investments in Southeast Asia because of constitutional restrictions on foreign ownership in several industries, Hongkong and Shanghai Banking Corp. said in a report over the weekend.
HSBC said the continued restrictions to foreign direct investments were among the reasons the Philippines lagged behind its neighbors in terms of attracting foreign capital. It said the government’s plan to remove tax incentives enjoyed by foreign companies could reduce capital inflows further.
“Not all countries are benefitting equally from the recent FDI windfall. Structural restrictions to FDI and the sustainability of investment incentives present downside risks for some countries, which means that the region must continue to find new ways to attract foreign investment in the long term,” the bank said.
HSBC said while total FDI flows to the six largest members of the Association of Southeast Asian Nations averaged nearly $117 billion per year since 2010, much of it went to Singapore.
It said the Philippines and Indonesia received a relatively small part of inflows, despite constituting almost half of the region’s population.
FDI as a percentage of GDP in Singapore increased to over 20 percent since 2010, while the Philippines and Indonesia’s share remained below their regional peers.
“We believe these are primarily due to structural issues, such constitutional restrictions to FDI in the Philippines and souring foreign investment sentiment in Indonesia, which their respective governments must address to take larger part in the broader region’s FDI windfall,” HSBC said.
It said the US and Japan remained the primary investors in Asean’s most valued-added and productive industries such as services and manufacturing, while China was finding its footing in the region’s
smaller economies and in several niche sectors such as real estate and mining/quarrying.
HSBC said the intra-regional investment was also a key in the recent FDI surge. The most developed economies (Singapore, Malaysia and Thailand) were the largest sources of intra-Asean FDI, with their largest recipient being Indonesia–the biggest economy in the region.
Intra-regional investment to Indonesia averaged around $9 billion per year since 2010.
The Philippines received the least amount of FDI from its Asean peers, averaging just $200 million since 2010. “This may be partly due to the country’s onerous restrictions on foreign ownership of certain key industries, as protected by its constitution,” HSBC said.
HSBC said many countries in the region should find ways to remain competitive in the long term. It said the sustainability of investment incentives could be in question for countries with reduced fiscal space such as Vietnam, while the Philippines was also considering amending its incentives to corporations and investments in the second phase of tax reforms.
Finance Secretary Carlos Dominguez III earlier said the country’s exciting growth prospects were the main reasons that it was attracting foreign direct investments and not the fiscal incentives
the government was offering to businesses for years.
Dominguez cited the latest data from the Bangko Sentral ng Pilipinas showing that FDIs rose to $10 billion in 2017, or double the amount recorded in 2015, and surged further in the first half of 2018.
FDIs increased by 21.4 percent to $10.05 billion in 2017 from 2016 and further by 48.9 percent in the first five months of 2018 to $4.86 billion.
Dominguez said reducing the corporate income tax while modernizing the country’s investment incentives under the second package of the Duterte administration’s comprehensive tax reform program, would make the business climate more conducive for small and medium enterprises.
“I’m not against giving tax credits. But it’s time to modernize our system. It’s time to move ahead,” Dominguez said.