MANILA Dec 19 The gathering had the air of a
post-mortem. About 100 executives and government officials
listened quietly as Guillermo Luz poked holes in the
Philippines' fairytale economic revival.
Luz, head of the Philippines' National Competitiveness
Council, projected a deck of slides onto two pull-down screens
that showed the fast-growing Philippine economy slipping in the
World's Bank's "Ease of Doing Business" index to 138 out of 185
countries, near Tajikistan and Sudan.
"It's a lousy neighbourhood," he said of the two-notch fall
this year. "I do not want to live with that ranking."
As the Philippines gallops ahead with the strongest economic
growth in Southeast Asia and one of the world's best-performing
stock markets, its shortcomings are being laid bare, including
stubborn problems that have already started to undermine its
While foreign funds have poured into Philippine assets this
year, driving the main stock index up around 30 percent
to a succession of record highs and lifting the peso currency
about 7 percent, foreign direct investment (FDI) remains
Total FDI is on course to hit around $1.5 billion this year
-- about half its level in 2007 and less than the average $1.7
billion received every month in remittances from Filipinos
That is only about 3 percent of the total that flowed last
year to a group of five peer economies including the Philippines
in the 10-member Association of Southeast Asian Nations (ASEAN).
In his presentation in Manila's Makati business district,
Luz highlighted the Philippines' lowly ranking in a range of
categories, from "paying taxes" (143rd), to "starting a
business" (161st) and "resolving insolvency" (165th).
Since coming to power in 2010, President Benigno Aquino has
made headway against long-standing problems of corruption, shaky
public finances and low infrastructure investment that earned
the country the unwanted sobriquet of the "sick man" of Asia.
But he has yet to show his government can translate the
torrent of hot money and improved market confidence that is also
fuelling a property boom into real gains such as an expansion of
higher-paying jobs and better transport links.
Calls by congressional leaders to loosen constitutional
restrictions on foreign ownership have met with a lukewarm
response from Aquino, a scion of an elite family whose mother,
democracy icon Corazon Aquino, passed the 1987 constitution as
"I do not believe that foreigners would be that foolish to
come here and put their money in business," Juan Ponce Enrile,
the Senate president who is calling for the constitution to be
revised, told Reuters. "They are at the mercy of local people
who are not quite familiar to them. That is to me the reason why
we lag in investment attractiveness in Asia."
"SALESMAN IN CHIEF"
The absence of FDI is a missing link that raises doubts over
how much has really changed in the nation of 96 million people,
where many an investor has been stung by copious red tape,
unpredictable policymaking and graft.
Aquino has vowed to change the country's tarnished
reputation among foreign investors, billing himself as the
country's "salesman in chief". But to do so he needs to tackle
vested business interests who benefit from a protected domestic
market. So far, there are few signs he is doing so.
The constitution and current rules allow foreign investors
to own no more than 40 percent in most industries and bars
foreigners entirely in areas such as media and the practice of
licensed professions such as engineering, law and medicine.
From 2000 to 2011, net FDI to the Philippines totalled $18.9
billion, according to United Nations Conference on Trade and
Development, less than a third of what Singapore attracted in
2011 alone. As a proportion of the economy, the Philippines' net
FDI stood at 0.6 percent last year, compared with 2.2 percent in
Indonesia and 6.2 percent in Vietnam.
Strong foreign investment has been a vital ingredient in the
rise of better-off Asian neighbours like Malaysia and Thailand,
boosting job creation and deepening technological capabilities.
Foreign executives here are quick to complain there has been
little concrete improvement on the ground, despite a surge of
money into financial markets and credit rating upgrades on the
back of improving fiscal health and lower borrowing costs.
"For me it's extremely frustrating," said Hubert D'Aboville,
former head of the European Chamber of Commerce.
"We should welcome foreign investment, giving them the
majority of 51 percent or 100 percent. What is important is to
create jobs. We are not creating jobs."
EXODUS OF WORKERS
The Philippines has among the highest jobless rates in
Southeast Asia at around 7 percent, helping to fuel an exodus of
about 10 million Filipino workers in total that has yet to
reverse course or even slow significantly.
Officials close to Aquino say he recognises the need to
attract more foreign investment, but is wary of broaching a
reform of the constitution that could open up a complex, messy
and energy-sapping political process.
"I don't think it's going to be touched for now," Budget
Secretary Florencio Abad, who is also vice president of Aquino's
party and one of his close advisers, told Reuters.
"You create another uncertainty. Investments are coming in
anyway, predominantly by local guys."
Combined investment by the public and private sector grew an
annual 7.9 percent in the first nine months against just 1.1
percent a year earlier, with more than half made up of
investments in machinery and equipment.
While policy transparency is widely seen as improving under
Aquino, the Philippines' volatile political and legal systems
regularly throw up unpleasant surprises for foreigners.
Aquino's government has halted new mining projects, stalling
development of an estimated $850 billion in mineral reserves,
until Congress approves a mining tax reform -- a vote that is
unlikely to take place before May 2013 mid-term elections.
In October, Manila added to restrictions on ownership of
real estate, lending firms and professions.
Meanwhile, the Securities and Exchange Commission is looking
at expanding the 40 percent foreign ownership limit to apply to
all classes of shares in a company, rather than just common or
voting shares, following a Supreme Court ruling last year that
telecoms firm PLDT had breached the cap.
"The Philippines will be shooting itself in the foot because
it will severely restrict the available shares for foreigners,"
said Francis Ed Lim, managing partner of the Accra law firm and
a former head of the stock exchange.
While service sectors such as call centres, retail and
tourism are growing strongly, the manufacturing sector - an
engine of development in countries like Vietnam and Thailand -
struggles to compete with neighbours and attract investment.
Ford Motor Co announced in June it was closing its
Philippine production factory, citing an inadequate supply
network and a lack of economies of scale.
Foreign executives here tell a tale of two Philippines. One
is the country's special export zones, where companies can set
up wholly owned units easily and receive incentives and
efficient services as long as they ship their output abroad.
Total investments by local and foreign firms in economic
zones totalled nearly 660 billion pesos ($16 billion) by the end
of 2011, more than doubling since Aquino took office in 2010.
The other Philippines is encountered when companies try to
tap the domestic market, running a gauntlet of heavy
bureaucracy, local government corruption and sometimes
troublesome partnerships with Filipino firms.
Companies have to go through 16 separate procedures to start
a business in the Philippines, compared with three in Singapore
and nine in Indonesia, according to the World Bank report.
Japanese firms have rekindled their long-dormant interest in
the Philippines this year, prompted by rising wages in China and
Beijing's territorial dispute with Japan. Still, a potential
flood of money has been slowed by ownership limits and other
restrictions, said Takashi Ishigami, president of Japanese
trading house Marubeni Corp in the Philippines.
Marubeni is teaming up with a local firm to bid for a $1
billion railway project, among at least eight major
Public-Private Partnerships (PPPs) that make up Aquino's
flagship plan to improve infrastructure.
But Ishigami said Marubeni was only supplying equipment as
part of the bid, and had been deterred from taking an
operational role by the government's refusal to guarantee rail
fares. That shortcoming would likely deter Japanese firms from
bidding for other PPPs, he said.
"The Filipino PPP is far away from our standard."