Updated: Mar 26
The country’s ability to compete with its regional rivals for foreign direct investment (FDI) will be key to meeting its long-term economic targets.
The Philippine government is banking on a rebound in economic activity this year, after the coronavirus (COVID-19) pandemic saw the country fall into recession in 2020.
The Department of Trade and Industry (DTI) believes the worst to be over for the economy, noting in January that green shoots of growth had begun to emerge. Key to the country’s recovery and long-term growth opportunities, however, will be the government’s ability to position the country as a destination for foreign direct investment (FDI).
While the announcement of vaccine rollouts around the world will be welcome news, the local and global economic response is far from certain. Growth from last year’s economic low point is something of a safe bet, given the rapid digialtisation of business over the last 12 months and the distribution of vaccines over the next 12 months, but the pace of that growth is another matter.
Global FDI levels have already suffered and as the global economy rights itself, the Philippines is likely to encounter fiercer competition from regional rivals for limited funds.
“We are still facing risk, but I would also say that the worst is over. 2020 was really the height of the lockdown and we saw the economy really dropping,”
Department of Trade and Industry (DTI) Secretary Ramon Lopez
A better year
Philippine gross domestic product (GDP) contracted by 11.5% in the third quarter, after shrinking by 16.9% in the April-June period, according to the latest government figures. Unemployment figures improved to 8.7% in October from April’s high of 17.6%.
“We are still facing risk, but I would also say that the worst is over. 2020 was really the height of the lockdown and we saw the economy really dropping,” CNBC Asia quoted DTI Secretary Ramon Lopez as saying on January 18. “We have been reopening the economy gradually and safely toward the latter part of 2020. That is the reason why we have been seeing signs of recovery in many aspects.”
The Philippine government expects the economy to expand by 6.5-7.5% this year, following a projected contraction of 8.5-9.5% in 2020. But while Manila is almost certainly right to look forward to a better year, there are still hurdles that must be cleared before its growth projections can be realised.
Near the top of that list will be convincing foreign investors to commit to the country over regional rivals such as Vietnam and Thailand. This could prove to be a hard sell, however, given depressed global FDI levels and the Philippines’ restrictions on foreign investment levels.
The Organisation for Economic Co-operation and Development (OECD) has reported that global FDI plunged 50% year on year in the first half of 2020 and has warned that it could contract by as much as 30% for the year as a whole.
The Philippines began to feel the effect of this in the second half of last year, after net FDI inflows improved between May and July.
The Bangko Sentral ng Pilipinas (BSP) has reported that FDI inflows contracted by 14.3% year on year in September to US$523mn and by another 24.5% in October to US$423mn.
While the Philippines can blame the global pandemic for falling levels of foreign investment, the country must start looking for domestic solutions or it risks losing out to more business-friendly countries in the region.
Even before COVID-19 rocked the global economy, the Philippines was in the midst of addressing the fact that it had the highest corporate income tax (CIT) rate among its Southeast Asian rivals.
Legislators had discussed how to lower the 30% threshold for more than a year, with an initial plan to lower the rate to 20% over a 10-yer period first suggested in 2019. Initially dubbed the Corporate Income Tax and Incentives Rationalization Act (CITIRA), the Department of Finance (DOF) amended bill in the middle of last year to slash the tax rate by five percentage points immediately, while rationalising various incentives for industry.
Rebranded to Corporate Recovery and Tax Incentives for Enterprises (CREATE), Congress ratified the final version on February 5 and the bill is only awaiting Philippine President Rodrigo Duterte’s signature.
“Considering the tedious and highly political process of amending the Constitution, removing these constitutional limits will demand significant time and resources. So, while I’m not saying that this reform initiative should be shelved, time and resources may be better directed towards more incremental changes and urgent efforts”
Philippine Senator Sonny Angara
Tackling the problem
In order to attract new flows of FDI into the country, the Philippine Board of Investments (BOI) launched an international marketing campaign in late November 2020. The campaign – entitled “Make It Happen in the Philippines” – aims to highlight the country’s potential as a regional business destination.
The BOI, which is a unit of the DTI, said it hoped to leverage the country’s highly skilled and English-speaking workforce, abundant natural resources, strong domestic consumer market and strategic location in Southeast Asia as key competitive advantages.
Philippine Senator Sonny Angara, who is chairman of the Senate Committee on Finance, told Conventus Law that such marketing efforts would be essential to bolstering FDI. While legislative reform efforts are essential to improving the country’s ease of doing business, the process remains a lengthy one at a time when the country needs more immediate action.
Angara pointed to the OECD’s FDI Regulatory Restrictiveness Index 2019, which ranked the Philippines’ legal framework for FDI as the fourth most restrictive among the 84 countries evaluated.
He said: “Our ranking puts us behind such countries as the Palestinian Authority, Algeria and Libya. The biggest contributing factor to our ranking is our constitutional restrictions on foreign ownership, especially over strategic industries.”
Angara said: “Considering the tedious and highly political process of amending the Constitution, removing these constitutional limits will demand significant time and resources.
So, while I’m not saying that this reform initiative should be shelved, time and resources may be better directed towards more incremental changes and urgent efforts.”
One incremental, but urgently needed, change would be the slashing of red-tape connected with the acquisition of business licences issues by local government units (LGUs).
“Foreign investors need confidence in every level of government. The national government needs to continue pushing reforms, especially as the SEC registration and business licence requirements have not helped eased doing business in the Philippines and foreign ownership limits are proving to be a disincentive.”
Judy Hao, head of ACCRALAW’s corporate and special projects department
The passing of Republic Act No. 11494 (Bayanihan 2) in September 2020 slashed bureaucracy relating to building and area permit applications for cell towers, reducing their number from 20 to two.
Francisco Lim, a Senior Legal Counsel at leading Philippine full-service law firm ACCRALAW and current president of the Management Association of the Philippines (MAP), told Conventus Law: “IT is extremely important under the new normal and the government was focused on improving the ease of doing business given the shift to working from home.”
Judy Hao, the head of ACCRALAW’s corporate and special projects department, agreed that this was an important step but noted that more could still be done to improve reduce the red-tape.
Hao told Conventus Law that while foreign companies had still expressed interest in both the business process outsourcing (BPO), retail and wholesale sectors during the height of the quarantine measures, the delay in the registration with the Securities and Exchange Commission (SEC) and in securing a business permit and other government registrations were still a hindrance to some of her clients’ investment plans.
She said that while Bayanihan 2 had given Duterte new powers to direct local authorities to speed up business licence application reviews, the reality was that the process could was at times slow or even slower than before.
Hao said: “Foreign investors need confidence in every level of government. The national government needs to continue pushing reforms, especially as the SEC registration and business licence requirements have not helped eased doing business in the Philippines and foreign ownership limits are proving to be a disincentive.”
“Getting the budget through is the first, most important step. But after that the government needs to focus on relaxing the investment regime.”
Francisco Lim, Senior Legal Counsel at leading Philippine full-service law firm ACCRALAW and current president of the Management Association of the Philippines (MAP)
The next steps
Lim said restoring foreign investor confidence would start with the country’s budget, noting that the government’s ability to be pass the budget late last year without re-enactment was a crucial step forward.
Duterte approved on December 28, 2020 a record PHP4.5 trillion (US$93.63bn) budget for 2021 to kickstart economic growth and underwrite the country’s vaccine programme. Lim said: “Getting the budget through is the first, most important step. But after that the government needs to focus on relaxing the investment regime.”
Lim pointed to two joint surveys of 161 Philippine CEOs by PwC and MAP that found that while greater funding of healthcare, infrastructure and agriculture would be key to renewing investor confidence executives also wanted to an easing of regulations on investment.
These are issues that the Philippines was already discussing before the pandemic, which has only made it more important to find an answer quickly. There are difficulties in changing the country’s Constitution, but urgent action is needed if the Philippine economy is to compete in a post-pandemic world where investors are likely to place greater value than ever before on the ease of doing business.
This article was written by Andrew Kemp for Conventus Law in association with ACCRALAW
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position or policy of ACCRALAW or its other employees and affiliates.
For information on FDI in the Philippines, please contact:
Judy Hao, Senior Partner, ACCRALAW
University of Michigan Law School, Ann Arbor, Michigan
LL.M., May 2002
University of the Philippines, Diliman, Quezon City, Philippines
LL.B, April 1996
University of the Philippines, Diliman, Quezon City, Philippines
B.A. in Psychology, April 1992
Senior Partner, Head Corporate and Special Projects Department
Angara Abello Concepcion Regala & Cruz,
22nd Floor ACCRALAW Tower, 2nd Avenue corner 30th St.
Bonifacio Global City, Taguig, Philippines
Ms. Hao is the Head of the Firm’s Corporate & Special Projects Department. She advises on the entry of foreign investments to the Philippines including the establishment of branch offices, subsidiaries, representative offices and regional operating headquarters of foreign enterprises. She has advised on the registration of incentives with the Board of Investments and the Philippine Economic Zone Authority, including the Clark Special Economic Zone.
Ms. Hao has provided advice on various business transactions of clients involving joint ventures, mergers and acquisitions, legal due diligence reviews, privatization, reorganization, build-operate-transfer projects, franchising and licensing agreements, construction contracts, and real estate transactions. Ms. Hao has been involved in acquisitions covering, among others, an airline, a food manufacturer and other manufacturing plants, a toll road project, an airport development project, a metro railway construction and development project, hospitals, cement companies, and a power plant.
Ms. Hao has also provided banking advisory services to local and foreign banks and has assisted in the preparation and documentation of loans, other credit transactions, and security documents. Ms. Hao also advises clients on projects involving securities laws and has represented issuers and underwriters on equity and debt capital raising transactions such as the offering of bonds, stock rights offering, establishment of MTN program and private placements.
Ms. Hao has been consistently cited by IFLR 1000, Asia Pacific Legal 500, Chambers and Partners and Asialaw Leadings Lawyers as one of the leading lawyers and market expert in the field of corporate, mergers and acquisitions and capital markets.
Francisco Ed Lim, Senior Legal Counsel, ACCRALAW
Senior Legal Counsel, Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
President, Financial Executives Institute of the Philippines (FINEX), Immediate Past President, Management Association of the Philippines (MAP); Director, FINEX Foundation of the Philippines; Trustee, CIBI Foundation, Inc.; Trustee, Judicial Reform Initiative, Inc. (JRI); Trustee, Shareholders’ Association of the Philippines (SharePhil); Member, Institute of Corprate Directors (ICD); Member, Committee on the Revision of Rules, Supreme Court; Vice-Chair, Committee on Commercial Law, Philippine Judicial Academy.
Former President and Chief Executive Officer of the Philippine Stock Exchange and the Securities Clearing Corporation of the Philippines; former President, SharePHIL.
Bar Examiner in MERCANTILE LAW, 2019 Bar Examinations, Supreme Court of the Philippines.
Columnist on Analysis/Point of Law, Rappler Online Publication (on leave).
Co-author, “The Philippine Competition Act: Salient Points and Emerging Issues”.
Professor of Law, Ateneo de Manila University, San Beda Graduate School of Law.
Member, Corps of Professor, Philippine Judicial Academy.
Director/trustee of several companies – ACCRA Holdings Corp., Alphaland Corporation, Converge ICT Solutions, Inc., DHL Summit Solutions, Inc., Energy Development Corporation, The Insular Life Assurance Co., Ltd., and Producers Savings Bank Corporation.
Recipient of various awards from several institutions such as “Lawyer of the Year – Philippines” by Benchmark Litigation, Asia-Pacific Awards 2019; “Market Leader: Banking and Mergers & Acquisitions (2019) by the International Finance Law Review (IFLR1000); Deal Maker of the Year by Thomson Reuters Asian Legal Business Philippine Law Awards 2017; “Commended External Counsel of the Year” by the In-House Community Counsels ( 2016-2017, 2019); Punong Gabay Award from the Philippine Council of Deans and Educators (PCDEB); Professorial Chair in Commercial Law from the Philippine Supreme Court, Philippine Judicial Academy and the Metrobank Foundation, Inc.; Advocacy Management (2015) and Shareholder Rights Advocacy Awards (2016) from BizNewsAsia.
Actively assisted in the enactment several Philippine laws such as the Financial Rehabilitation and Insolvency Act (FRIA), Credit Investment System Act (CISA), Real Estate Investment Trust Act (REITA), Personal Equity Retirement Account Act (PERAA), and the Philippine Competition Act.
Member, Supreme Court Sub-Committees on several rules of procedure such as the Interim Rules on Intra-Corporate Controversies, Rules on Electronic Evidence, Rules on Notarial Practice, Rules on DNA Evidence, Financial Rehabilitation Rules of Procedure, Financial Liquidation and Suspension of Payments, Rules of Procedure on the Liquidation of Closed Banks, and Interim Rules on Electronic Notarization.
Bachelor of Laws, Ateneo de Manila University and (LL.M.), University of Pennsylvania.
Member, Philippine Bar and the New York State Bar.