By Euben C. Paracuelles
FOREIGN direct investment (FDI) has received increased attention from locals in recent days after Senator Franklin Drilon from the opposition highlighted a “very alarming” drop in FDI this year as a “serious concern (ABS-CBN News).” He cited that the equity capital component of FDI fell by 90.3% year on year in 1st half of 2017.
We think this represents only part of the FDI picture and thus may be misleading. Overall FDI inflows fell by a much smaller 14% year on year in 1st half of 2017. In addition, year-on-year FDI data are distorted by a large base effect from the foreign purchase of a large stake in a local bank last year, which led to a surge in inflows of about $2 billion in April 2016.
After stripping out this base effect, we estimate total FDI inflows are up about 65% year on year in 1st half of 2017.
Given the chunky nature of FDIs, we prefer to gauge underlying trends by looking at FDI levels on a 12-month rolling sum basis, which are still clearly showing a pickup despite the political transition.
The latest release from the Bangko Sentral ng Pilipinas (BSP) also shows that, for July, equity capital already rose sharply to $131 million from the monthly average of $23 million in 1st half. This is likely to pick up further in the near term due to two large impending acquisitions. One is for a stake in an energy company ($1.3 billion) (Reuters) and the other is a buyout of a tobacco operator ($1 billion) (Rappler).
Moreover, debt instruments have been the bigger driver of FDI over the last few years. Although some investors argue that this category of FDI does not represent actual foreign exchange flows (which may be why Drilon excluded these data), it is defined as “lending by parent companies abroad to their local affiliates to fund existing operations and business expansion,” which is consistent with international standards and alleviates these concerns. (The other component that’s growing on a year-on-year basis is retained earnings. However, on a trend basis, this has also been very stable.)
Importantly, in the longer term, we think equity FDI is set to pick up given rising potential growth and more FDI-friendly reforms.
Following the 2014 liberalization of the banking sector, ten new foreign entrants are already operating in the country and, as we understand it, there are eight more in the pipeline.
Other reforms such as the shortening of the negative investment list and the roll-out of some foreign-funded infrastructure projects are also likely to be implemented.
We are watching political risks, particularly from a further decline in President Duterte’s popularity, as these could have implications on the execution of reforms.
However, our view of a positive growth outlook remains. We believe this bodes well for underlying FDI prospects, even if monthly volatility in the data continues.
Euben C. Paracuelles is the ASEAN economist of Nomura.