Thursday, Dec 14, 2017
Government | Asia-Pacific | Philippines

Investing in the Philippines

Opening up the economy to foreign investment


7 months ago

Mr. Benjamin Diokno, Secretary of the Department Budget and Management
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Mr. Benjamin Diokno

Secretary of the Department Budget and Management

Mr. Benjamin Diokno, Secretary of the Department of Budget and Management of the Philippines, gives his perspective on the country’s progress, infrastructure development and relations with China and Japan

While positive macroeconomic indicators such as GDP growth are nothing new in the Philippines, the government has put in place a 10-point economic plan to make sure that these economic gains trickle down to the real economy. How important is social inclusion and economic decentralization for the Philippines?

First, our priority is to invest in public infrastructure. This will improve the competitiveness of the Philippine economy, enhance connectivity, and generate jobs. Second, it would be good to invest in the improvement of education and healthcare so as to develop the children into agile and competent youth.

The third one would be the tax reform. The current tax system of the country does not compare well with its ASEAN neighbours. As much as possible, personal income tax should be reduced to about 25%, as opposed to the current 32% which equates to one third of a person’s income.

Fourth is the cost of doing business. One of the focuses right now is the attempt to speed up the process of conducting business. Setting up a power plant, for example, requires about 162 permits from the national government. Consider as well the fact that it takes two years to complete documentation for such matters and that delays are bound to occur. There is too much red tape in that alone. It would be better to follow the example of Davao, whereby a mayor’s permit must be issued within three days. Otherwise, you would have to report to them. And thus, Project Repeal is being pushed in order to address laws which need amendment.

If all those things could be accomplished, then the country is all set. This will further add to the Philippines’ already stable status as having the fastest growing economy in South East Asia.

 

The government has set its objectives to play a more crucial role within the region. The Philippine economy was a top performer in Southeast Asia in 2016 with YOY growth of 6.8%, up from the 5.9% posted in 2015. For 2017 the Philippines is expected to grow between 7-8% on the back of strong domestic demand and an expansionary budget with special emphasis on infrastructure and human development. Infrastructure is a big item on the budget representing 5.4% of GDP and the government plans to invest up to 200 billion USD up to 2020, what impact do you expect as a result of this infrastructure golden day policy in real terms? And what is the role of the hybrid PPPs?

For the last 30 years, no more than 3% of the GDP was spent on infrastructure – a reason for the evident congestion in the country. This is an issue that must be addressed before investors get discouraged to establish operations in the country.

We are focusing on several areas of improvement such as the construction of railways. One of the plans include building an entirely new railway system from Manila down to Legazpi, which would reach about 620 kilometers. Another would be a railway system in Mindanao, of about 1,200 kilometers.

These projects have led us to negotiate with China, as well as Japan, regarding specific and important projects that would possibly create several job opportunities for Filipinos. The infrastructure itself is not the only thing that is being taken into account but also the approach to executing these infrastructure projects and everything it entails. For example, shifts would be needed since the workers cannot work continuously.

 

The Philippines is currently refocusing its energies towards deeper regional integration, this shift in policy has already resulted in ODA worth over USD 19 billion China and Japan alone, the highest amount in the first 6 month of any presidency. FDI in 2016 also recorded an impressive 22% growth from 2015, the largest source was Japan which is also the second biggest trading partner for the Philippines. Why do you think there is big growth in confidence by Japan and China to invest in the Philippines?

The growth in confidence can be attributed to the President’s relations with these countries. Knowing that the Philippines is now in good terms with China, Japan is hoping to give better offers to the Philippines. In short, there is competition between Japan and China. There is also the country’s fair relationship with the United and States and South Korea, which can also be credited to the President.

 

What qualities does the Philippines possess, as compared to other Asian countries, that allow it to attract investors?

The Chinese economy is slowing, and therefore their companies are in search of potential places in South East Asia to do business. Among those places is the Philippines.

The Philippines’ most notable asset would be its people – fluent in English, hardworking, and very young. In contrast with our country, Japan mainly consists of an aging population. Statistics show that around 27% of their population are aged 65 years old or above. And when one falls under that category, he or she is likely to be generalized as one of those who does not consume a lot. On the other hand,  the Philippines, having quite a young population, has a median age of 23 years old, which is a big advantage for the country.

Many Japanese companies and banks have shown interest in coming to the Philippines to do business. Besides the great synergy between the two countries, Japan also sees strong potential in the Philippines just by investing in infrastructure, tourism and its people.

Things are aligned for the Philippines right now. And at this time when the world economy is slowing and is uncertain, it would be best for the country to just focus on its own affairs. Make up for past neglect for infrastructure, improve education for the children, and cease red tape.

 

What would you highlight as the main opportunities for companies such as Mitsubishi Financial group or Murata which have accompanied Prime Minister Shinzo Abe sentiment towards the Philippines?

The Philippines consistently comes out as one of the top tourist destinations in Asia. Considering the archipelagic structure of the country, developments in facilities, infrastructure, airports and seaports must be worked on. We already have a ready market of around 15 million Chinese tourists which will certainly contribute to the growth of this industry.

 

Do you see collaboration in the service industry to start exporting more services to Japan?

The exportation of services, especially in health care, is a possible development. BPO industries are no longer concentrated in Metro Manila, but all over the Philippines now. As a result, the construction of new buildings around the country will be more evident.

 

What impact do you expect to see from deeper regional integration?

Because Japan’s economy has been in and out of recession, their Return of Investment has become very low, resulting in negative interest rates. The Japanese are now in search of a more dynamic place which they can put their money in and that could offer them the benefit of earning a higher ROI. And the Philippines seems to be the best place to achieve this. 

Compared to its ASEAN neighbours, the Philippines has attracted quite a number of foreign investments. The President is in fact contemplating on striking out the restrictive provisions from the constitution. And so by opening up the economy, we hope that several more investments would enter, with the Japanese being first in line.

A major part of the tax reform involves reducing the personal income tax, which hopefully will benefit 99% of tax payers. This will lead to consumers putting more money in the bank, as well as a big improvement in consumer spending.

 

With access to financing resources, what can we expect from the 2018 budget?

I have been part of three administrations in the past and now, and I can say that the current administration is different from the other two. At the time of Cory Aquino’s presidency, the Philippines was heavily indebted to the point that we could not borrow money anymore to finance infrastructure and had experienced interest rates reaching up to 20%. Meanwhile, during the term of Joseph Estrada, the country was just coming out of the Asia Financial Crisis, yet money was spent so flexibly.

This current administration is different in the sense that we are now able to borrow money at a very low cost. As testament to this, Japan is actually offering to lend money with an interest rate of 0.25%, 40 years to pay. This is an opportunity that the Philippines should not overlook.

However, our plan in the medium term, not only in 2018, is to achieve an appropriate deficit to GDP ratio of 3%. Despite the deficit, it is expected that our debt to GDP ratio will decline to 35% by 2022, from its current 45%. The plan is to refrain from borrowing excessively abroad and to keep it at 80-20, 80% domestic and 20% foreign.

Currently, the government is content with how the country is fairing in terms of the economy. The Philippines is not as export oriented as countries like Singapore. In a slowing world economy, it is a problem to rely heavily on external trade. That is why our contribution in external trade does not measure up to that of other ASEAN countries, which is good at this time.

However, it seems that there will be an increase in the country’s agricultural exports such fruits and high value crops that are in demand in Japan and China.

We have a steady stream of remittances from our OFWs and BPO workers right now. Regardless of the existence of a crisis, there is no need to worry about the exchange rate since currently we have a significant amount of dollars and foreign exchange. Whereas before during the occurrence of a crisis, the country exhausted its dollars to service its debts.

It would be more beneficial, however, if we are able to export more services rather than goods. I hope our country would be able to export more professional workers like doctors and nurses, instead of domestic helpers.

 

What would be your main priority as a Filipino citizen? What objectives would you like to reach?

As of now, I am committed to compensating for past neglect of public infrastructure. With all the investments coming in, the next six years will be considered the country’s Golden Age of infrastructure. In the last 30 years, no more than 3% of the GDP has been allocated to infrastructure. And now, it has increased to about 5.3-5.4%, which is expected to round up to 7.2%-7.4% by 2022. The overall spending equates to around 8 to 9 trillion pesos.

I will be more satisfied to see funds going into more iconic projects, rather than small ones. This includes the 625-mile railway system, as well as bridges that will connect the three major islands of the country – Luzon, Visayas, and Mindanao.

Along with that, I would like to implement some reforms within the Department of Budget and Management. I have started a young professionals program where 30 of the brightest in the Philippines will be selected and educated at the University of the Philippines. By the time I step down, I would have 150 young professionals who will fill the positions of the aging staff.


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