Investing in the Philippines: Markets, and Hopes Rebound

Expectations are high that new president will reverse the economic mess under the previous regime

Mired in corruption and political uncertainty, the Philippines breathed a sigh of relief in January when its new president, Gloria Arroyo, assumed office following the ouster of former president Joseph Estrada in the wake of impeachment hearings.

Estrada’s lack of fiscal discipline put the country on the brink of recession, with economic growth expected to decline significantly this year even though business confidence will probably improve under the new administration. Although GDP growth was relatively strong last year, mainly as a result of strength in the agricultural sector and a pickup in manufacturing, the Asian Development Bank expects the Philippines’ growth in 2001 will be the slowest among Asian countries.

In addition, privatization initiatives were way off target last year, with the government showing little conviction. Foreign direct investment fell to a mere US$200 million in 2000, down from an annual average of almost US$1.5 billion over the previous five-year period. These factors, together with a widening budget deficit, corruption at the highest level of government, high oil prices and internal political strife, all combined to create negative investor sentiments toward the Philippines.

Noting the decline in business and investor confidence, the Philippines Board of Investment, a unit of the Department of Trade and Industry, said at the end of December that it expects total investments in the country to fall to a 12-year low because of continued erosion of investor confidence.

In October, Standard and Poor’s Corp. added to the country’s woes by downgrading its outlook to negative from stable, citing the widening political and economic crisis.

With political stability increasing under a new president, the Philippines market has rebounded this year, posting a gain of 15.8% in U.S. dollars on the Morgan Stanley Capital International emerging markets price index for the year ended Feb. 21. Last year, the market had a loss of 42.5%. Yet, in the 10-year period ended Feb. 21, 2001, the Philippines was the best-performing emerging market in Asia, with a return of 2.06% in U.S. dollars on the MSCI index, while all the other markets with a 10-year history, excepting Taiwan (up 1.96%), had losses.

Foreign investing in the Philippines is encouraged in specific areas through the Special Economic Zone Act, which grants incentives such as tax- and duty-free importation of inputs, income tax holidays and the waiving of certain fees. But several sectors, such as mass media, and licensed professions, such as engineering, law and architecture, are either off-limits to foreign investors or restricted. The retail sector was liberalized this past year. There are also caps on the percentage ownership of public utilities and natural resources. Two classes of shares — A and B — trade on the Philippines Stock Exchange with foreigners able to buy only B shares.

Canada has a strong trade relationship with the Philippines, with the latter enjoying a favourable trade balance. Two-way trade has increased steadily during the 1990s, reaching $1.3 billion in 1999. In the six months ended June 30, 2000, bilateral trade had already equalled total 1999 trade.

Major Canadian imports include electrical and mechanical machinery and parts, clothing, clocks and watches, and prepared seafoods. Primary exports include cereals, electrical machinery, ores, zinc and mechanical machinery and parts. Canada’s Department of Foreign Affairs and International Trade sees good opportunities in the Philippines in telecommunications and information technologies, agri-food products and services, power and energy, mining, the environment and transportation. Canada has a Foreign Investment Protection Agreement with the Philippines, which provides security for companies investing in either country.

Canadian companies in the Philippines include Country Style Donuts, Geac Computer Corp. Ltd., Nortel Networks Corp. and Sun Life Financial Services of Canada Inc.

In its efforts to deal with the lack of transparency and improve the business environment, the Philippines enacted reforms to its banking and securities acts last year and made progress in reforming its power sector.

It has also set up a framework for a comprehensive reform of the country’s public and private pension systems.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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