Weak Points

The main weaknesses of the country include:

 Political instability
 Poor quality of its infrastructure
 Restrictions on foreign investment in certain sectors
 Legal uncertainty and a lack of transparency of procedures (total
banking secrecy favouring money laundering) generating tensions and
a lack of confidence of the business community towards the legal system
 High level of corruption in the administration and various state agencies
 Strong disparities in development according to the regions: income and
security inequalities (problematic security situation in the Muslim
regions of the South)

Sectors Where Investment Opportunities Are Fewer

Monopolistic Sectors
The "Negative List" has several economic sectors reserved entirely or
partially for nationals. Among others there are: mass media, the retail
trade, advertising, public services, small-scale mining, private security
and utilization of marine resources.

Philippines Economic Outlook

November 13, 2018

Economic growth slowed to a three-year low in the third quarter, but grew at a healthy
pace nonetheless. A slowdown in private consumption reflected households’ loss in
discretionary income caused by near-decade high inflation throughout the quarter and a
contraction in remittance inflows growth in August. The government’s massive
infrastructure overhaul continued to power robust government spending and fixed
investment growth, which grew at double-digit rates in Q3. On the downside, the
investment program is putting pressure on the external economy as imports skyrocketed
in Q3, outpacing exports for the third consecutive quarter. Moving into Q4, business
conditions improved in the manufacturing sector in October. Meanwhile, in other news,
the country failed to receive bids from Thailand and Vietnam for a 203,000-ton import
tender of rice in early November. As the world’s top importer of the grain, possible tighter
supply could stoke inflationary pressures.

Philippines Economic Growth

The economy is projected to continue growing at a brisk pace over the medium-term.
Domestic demand should remain the key driver of growth, propelled by sizeable
infrastructure spending and a tighter labor market. Nonetheless, a weaker external
position and negative spillovers from a protracted U.S.-China trade dispute could cast a
shadow over growth prospects. FocusEconomics panelists see GDP growth of 6.4% in
2019, which is down 0.1 percentage points from last month’s forecast, and 6.3% in 2020.

WEAK POINTS
1. POLITICAL INSTABILITY (Political Risk)

First of all, they are looking for stability of institutions. We could have a president who talks
carelessly about matters that impinge on policy, but if there are functioning institutions to
provide a check on him, then it is ok. Thus, in the US, the court system or the judiciary
checked Donald Trump’s first executive order banning citizens from selected Muslim
countries from entering the US.

Still in the US, the Republicans may be in total control of both houses of Congress, but it
still functions well enough to publicly vet the Cabinet and Supreme Court appointments of
Trump. Congressional committees are also able to summon the FBI chief to testify on the
possible influence exerted by Russia to favor Trump during the last US elections.

Media, on the other hand, was able to force the resignation of the national security adviser
by exposing his hidden ties with Russia.

We don’t have that system here. Our Senate may still claim a weakened ability to provide
check and balance, but the House of Representatives is hopelessly captive. The
independence of the Supreme Court is still under test with the De Lima case. And media
is under constant threat from blind followers of the administration.

Angry statements from President Duterte threatening martial law suggest a preference for
one man rule, not rule of law. Indeed, the 3,155 cases (based on the verified count of the
investigative group of ABS-CBN News) of killings attributed to the war on drugs is causing
concern to foreign investors.
After all, the killings are all too real. Even the President admits as much. He has even
justified the killings. His justice secretary branded the victims as sub humans not worthy of
life and their killings do not matter... a shocking pronouncement from the chief protector
of the rule of law.

In September last year, Bloomberg reported that Standard & Poor’s or S&P, a credit rating
agency, has warned of a credit rating downgrade over the conduct of the war on drugs.
This may not seem like an economic or business concern, but the agency observed that
the way the war on drugs is being undertaken “could undermine respect for the rule of
law and human rights.”

The credit rating agency also expressed another concern: “Combined with the President’s
policy pronouncements elsewhere on foreign policy and national security, we believe that
the stability and predictability of policymaking had diminished somewhat. A higher rating
is unlikely over our two- year ratings horizon.”

Indeed, the nervousness of investors is starting to show. The peso has dropped to a seven
year low and the peso had been for a while, Asia’s worst-performing currency. Global funds
have been divesting themselves of their Philippine stocks for some months now. After 14
years of being a net lender to the world, we now have a current account deficit.

It is in this context that the impeachment complaints against the President and the Vice
President couldn’t have come at the worst possible time. While our politicians may just be
playing their usual political games, the very fact that our top officials may be kicked out of
office for no apparent good reason is being taken as a sign of political instability.

The President must be given time to carry out his programs. The Vice President has done
no impeachable offense. What she has said in her message to a UN committee does not
bring dishonor to the country. Indeed, it tells the world that there is effective opposition
to the party in power.
The impeachment of Leni Robredo, if it progresses, will deliver the alternative message
that the opposition is under siege and democracy is in grave danger. Yet, it could happen
because impeachment is a political act. All you need is a compliant Congress.

The problem with our country is that we have too much politics. We have made it an
industry. We have elected people who are power hungry and who think everything is
justified in politics. They forget that of paramount importance is the good of the country...
the common good.

President Duterte can be frustrating to some of us, but I have not given up on him. His
single-minded focus is on the war on drugs, but he will in time see the connection of the
drug problem with the country’s economic poverty. That’s why they are killing almost
exclusively poor people. A war on poverty should not mean killing the poor.

He leaves economic matters to the very capable Finance Secretary Sonny Dominguez, but
he must start to use his immense political capital to help Sonny get tax reforms through
Congress. Analysts are banking on these tax reforms being passed. Failure to do so in the
manner the reforms are currently framed may mean a ratings downgrade.

You and I may laugh at the suggestion that we are politically unstable. But the impression
that we are unstable, a banana republic, could prove prophetic if it persists. It will damage
our economy.

President Duterte must start using his political capital to get his congressional allies to
behave and to address the urgent tasks at hand. All the silly diversions may be good for
the next morning’s headlines, but will injure the national interest in the long run.

No one person can shame us in the eyes of the world, but our own leaders going against
accepted norms of civilized behavior can. Patriotism demands we stop playing our political
games and just focus on the enormous task of building our nation. That should keep us
busy for a full presidential term.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

2. POOR QUALITY OF ITS INFRASTRUCTURE

The Philippines enjoys tremendous endowments of natural, and human resources

that provide great potential for economic development and poverty reduction. However,
overall development outcomes over the last decades have fallen short of potential. The
gap can be largely attributed to weak performance of public institutions in providing
services to citizens, which leads to a vicious cycle of weak public services, lack of trust in
the government, and unwillingness on the part of citizens to provide adequate resources
to the government.

The key development challenge, therefore, is to reverse the cycle to one of virtuous
development where increased government revenue translates into improved service
delivery and greater public trust in the government. Infrastructure plays an important role
in this development process.

Insufficient infrastructure has been a major constraint to economic growth and

poverty reduction in the Philippines. Though the country has relatively high access levels
to water, sanitation, and electricity, service levels have failed to keep up with rapid
population growth and urbanization.
Infrastructure development in the country is hampered by a poor business
environment; weaknesses in planning, coordination, and financing; and a decrease in
private sector involvement in infrastructure provision. The report presents a road map
which will help spur the expansion, and improvement of infrastructure services, and move
the country into a virtuous circle of growth and development. It suggests that, in order to
ease infrastructure constraints, the Philippines need to achieve a gradual increase in
infrastructure investments to at least 5 percent of GDP, and an increase in the efficiency
of spending. Furthermore, it is strongly suggested that the way forward for sustained
development in infrastructure requires instigating a rigorous fiscal reform program;
pursuing continued reforms in key sectors-particularly power, roads, and water-to improve
cost recovery, competition, and institutional credibility, and to sharply reduce corruption;
improving central oversight of the planning and coordination of investments; and, making
a few focused investments through public-private partnerships to address key
bottlenecks, and achieve quick gains in service delivery.
Investors think the country's macroeconomic environment is among the most attractive in
the world, but their interest in the Philippine economy is being dampened by slow
infrastructure development.
"Inadequate supply of infrastructure" is one of the top 3 reasons the Philippines' score
slipped even if it climbed a notch in the rankings. In terms of overall competitiveness, the
country climbed to the 56th spot out of 137 economies in this year's report, from 57th out
of 138 in 2016, even as its score slipped to 4.35 out of 7.
For example, the quality of air transport infrastructure is the lowest in the Association of
Southeast Asian Nations (ASEAN). The same goes for quality of overall infrastructure
and quality of roads.
"Infrastructure remains quite low, especially ports and airports. This is kind of holding
steady. Investors just want to see more airports being rehabilitated," Luz told Rappler in
a phone interview.
President Rodrigo Duterte and his economic team unveiled details of an ambitious plan to
"build, build, build" projects worth up to P3.6 trillion until 2022.

MBC executive director Peter Perfecto said "implementing the plans under the
infrastructure program is critical for the effective functioning of a growing Philippine
economy." – Rappler.com

3. RESTRICTIONS ON FOREIGN INVESTMENT IN CERTAIN SECTORS

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.
“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.
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.

4. Legal uncertainty and a lack of transparency of procedures (total

banking secrecy favouring money laundering) generating tensions
and a lack of confidence of the business community towards the legal
system

There is a pending bill in Congress to relax the Bank Secrecy Law. According to
Isabel Pastor, head of enforcement and cooperation and senior advisor for special
projects at IOSCO, transparency will attract investors to the Philippines and protect
securities and derivatives products from cross-border fraud risks.
The Philippines is one of the three countries that still have a bank secrecy law, with
Lebanon and Switzerland being the other two. We want to be fully compliant with all laws
and also be consistent with international best practice.

FDI in Figures
Foreign direct investment inflows (FDI) to the Philippines have been rising steadily
in recent years. In 2017, FDI inflows in the Philippines hit an all-time high at USD 9.5
billion (UNCTAD World Investment Report 2018), surpassing the full-year target of USD
8 billion set by the Central Bank of Phillipines.

Japan, US and Singapore are the main investors, while inflows are concentrated
in the manufacturing and the real estate. Despite constantly increasing FDI inflow levels,
the Philippines continue to lag behind regional peers, in part because the Philippines'
constitution limits foreign investment, and also due to the threat of terrorism in some parts
of the country. This can be partially explained by the fact that the country is evolving into
a service society with low capital strength, which means that it needs only minimal
equipment.
In addition, the government favours subcontracting agreements between foreign
companies and local enterprises rather than FDI in the strict sense of the term. Lastly,
factors such as corruption, instability, and inadequate infrastructure, high power costs,
lack of juridical security, tax regulations and foreign ownership restrictions discourage
investment. As such, the country is only ranked 113th out of 190 economies in the Doing
Business 2018 ranking of the World Bank. Nonetheless, the country offers many
comparative advantages, including an English-speaking and well-skilled workforce, a
strong cultural proximity to the U.S. and a geographical location in a dynamic region.
5. Strong disparities in development according to the regions: income
and security inequalities (problematic security situation in the Muslim
regions of the South)

Income Inequality is the extent at which household income is unevenly distributed

amongst a population. In other words, it also refers to the gap in income between who
can be considered the rich of the population as opposed to the income of those who can
be considered the poor of a population.
Income inequality in the Philippines is the extent to which income, most commonly
measured by household or individual, is distributed in an uneven manner in the
Philippines. The difference of income between the rich and the poor could cause tension
in society and political instability.
** It has demonstrated that poverty reduction has proven to be difficult
to achieve in a sustained and inclusive manner. Two features stand out.
First, while the traditional core areas within the Philippine geo-economy
remain the least poor, the poverty incidence among families in various places
of these areas has increased considerably since 2006. This is alarming since
it implies that the formal labour market, most notably ITBPO in the NCR and
manufacturing in surrounding provinces, is not capable of absorbing the
thousands of annual in-migrants.
Second, despite a substantial decentralisation scheme and decades-long
efforts to create a better balanced pattern of regional development, most
regions and provinces find it hard to create processes of endogenous
development which not only result in regional economic growth, but also in
regional poverty reduction.
Decentralisation, then, should not be considered a guaranteed stepping
stone towards improved regional socioeconomic capabilities and regional
competiveness. Furthermore, given the geographical diversity in a complex
country like the Philippines, further research could explicitly address the
sequencing of regional and transport policies as well as the balance between
regional and national policies.
Given limited fiscal space it might impossible to implement many policies
simultaneously. Since the presidential campaign of Mr. Rodrigo Duterte,
president of the Philippines since June 30, 2016, there has been a debate on
the idea to transform the country into a federation. Proponents argue that
states and local government agencies will then be better positioned to spur
economic growth and poverty reduction. Moreover, many people outside the
core areas of the NCR and adjacent provinces have also repeatedly voiced
their anger against “Imperial Manila”. Nevertheless, there is no guarantee that
federalism leads to poverty reduction. Changing the administrative set-up
does not automatically trigger 108 Vol. 71 · No. 2 a process of more inclusive
development. This article shows that a significant retreat from “Manila” might
further complicate matters in the poorest provinces, especially provinces that
are highly prone to natural disasters, have limited opportunities for
endogenous private sector development, are dominated by local political
dynasties and do not benefit from the remittance economy.
Therefore, federalism will only succeed if local–state–federal relations
provide safeguards and mechanisms, for example related to appropriate
sequencing of policies, to support communities in need. The Philippine
experience provides food for thought for other Southeast Asian countries
wishing to expand on policies to curb the persistence of regional disparities
and to provide more economic and political opportunities for local government
agencies. Most notably, Myanmar/Burma needs to have a constitution that
secures peace in the long run and keeps the country together. Thailand is in
the process of enacting a new constitution, and in the future the Greater
Mekong Subregion countries of Laos, Cambodia and Vietnam could embark on
democratisation and formal decentralisation schemes as well. In conclusion,
the trends and patterns observed in the Philippines constitute valuable inputs
for connecting structural drivers of regional disparities to specific empirical
contexts in neighbouring countries and for improving regional policies.