The country’s solid macroeconomic fundamentals continue to attract foreign direct investments despite the prolonged COVID-19 pandemic, the Department of Finance said over the weekend.
It said in an economic bulletin capital formation, the most comprehensive measure of investment, improved last year.
The Philippine economy recovered partially its investment-led growth orientation in 2021 as lockdowns were eased and vaccination was rolled out. As a percentage of real gross domestic product, capital formation rose from 19.2 percent in 2020 to 21.6 percent in 2021. However, this was still lower than its 26.5-percent investment-GDP ratio in 2019.
Capital formation is one of the foremost determinants of future growth, in addition to employment and factor productivity.
Capital formation, which is tracked by the National Income Accounts issued by the Philippine Statistics Authority, showed a real growth of 19 percent in 2021, reversing part of its 34.4-percent plunge in 2020. Of the major components of investments, fixed capital which consists of construction and durable equipment grew by 9.6 percent.
“The continuing rapid rise in capital formation and FDI, particularly for those sectors not seeking fiscal incentives, implies that investors are attracted primarily by the country’s favorable economic fundamentals,” the DOF said.
Another measure of investment is foreign direct investment and portfolio investments tracked by the balance of payments account which is released periodically by the Bangko Sentral ng Pilipinas. These measure the amount of investment coming from foreign investors.
FDI is the more important indicator because it measures the amount of investment in the form of a controlling ownership in a business in one country by foreign investors which implies more active participation and more commitment by the investor in management.
It is distinguished from a foreign portfolio investment by a notion of direct control. In contrast, a portfolio investor may buy and sell stocks and bonds daily and generates profits on price differences. Portfolio investment is referred to as “hot money” because it can leave anytime.
FDI increased by 54.2 percent in US dollar terms. As a percentage of GDP, this showed a rise from 1.89 percent in 2020 to 2.67 percent in 2021, exceeding the 2.30 percent level set in 2019.
Portfolio investments which are minority holdings in local company stocks and bonds by foreign investors showed significant variability, declining to a negative level of -$4.24 billion in 2020 and –$574 million in 2021 due to the impact of the pandemic which made values of global stocks and bonds highly uncertain.
“During such periods, such investors shift their portfolios to developed economies. As percent of GDP, the ratio of portfolio investment to GDP remained nil,” the DOF said.
The third measure of GDP is the approved investments compiled by the PSA from the investment promotion agencies. These are applications for fiscal incentives filed by investors with incentive-providing agencies, primarily the Board of Investments and Philippine Economic Zone Authority.
Approved investments went down by 13 percent in 2020 and further dropped by 33.6 percent in 2021.
“Note that this refers to approvals which will be implemented in the future. Note also that this dropped from 36.5 percent of capital formation in 2020 to 18.5 percent in 2021,” it said.