There has lately been heightened interest surrounding recent developments in foreign direct investments (FDI), particularly the decline observed in the first half of 2017. As reported by the BSP, FDIs registered net inflows of US$3.6 billion in January-June 2017, 14 percent lower than the US$4.2 billion net inflows posted in the same period last year.

The lower net inflows were due to the 90.3 percent decline in net equity capital to US$141 million from US$1.4 billion a year ago. Data showed that the significant inflow noted last year was attributed to a large investment flow that went to the financial and insurance industry. Equity capital infusions during the first semester of 2017 were sourced mainly from the United States, Japan, Singapore, and were invested in real estate, financial services and manufacturing. The decline in net equity capital was, however, offset in part by higher investments in debt instruments and reinvestment of earnings amounting to US$3 billion and US$416 million, respectively.

Meanwhile, the recently released July 2017 FDI outturn brought the first seven months net FDI level to US$3.9 billion, 16.5 percent lower than previous year's level. Net equity capital continue to register inflows amounting to US$272 million, but these were lower than the 2016 level. Investment in debt instruments and reinvestment of earnings remain on an uptrend as they reached US$3.1 billion and US$487 million, respectively, for January-July 2017.

The BSP's compilation of FDI statistics is based on international standards and concepts outlined in the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6) of the International Monetary Fund. Based on the BPM6, FDI includes net equity capital, reinvestment of earnings and net debt instruments. Regardless of the source, inflows from these components are geared toward business development and expansion.

These FDI statistics are released to the public by the BSP on a monthly basis and correspondingly, on a year-to-date basis. Year-on-year growth rates can be affected by the timing of entry of big ticket items, with resulting base effects. Thus, the monthly profile of FDI flows can be volatile and may not exhibit a smooth upward trend due to its lumpy nature.

Prospects for inward flows of FDI into the country continue to be favorable as both push (e.g., subdued global economic growth) and, more importantly, pull (e.g., sustained robust macroeconomic performance and investment grade status) factors remain.

The BSP expects the Philippines to sustain FDI inflows this year, close to the US$8.0 billion level in 2016. These prospective FDIs are expected to be channeled mainly to the manufacturing sector (e.g., electronics and motor parts), which can help create employment and more growth opportunities.

There is a huge potential in attracting further FDIs, which can put the country at par with the large levels of FDI seen in neighboring Asian countries. Such potential can be realized by reforming the rules on foreign ownership, addressing infrastructure gaps, and reducing the cost of doing business.

Addressing these challenges will require considerable support from the government. For the BSP, among the measures taken to promote a more supportive environment for higher foreign investments have been the liberalization of foreign bank entry in the country (R.A. No. 10641 or the Foreign Bank Liberalization Act passed in July 2014) as well as the phased-in liberalization of the foreign exchange regulatory framework that started in 2007. The BSP will continue to promote an enabling environment for investments to thrive in line with its primary mandate of maintaining price and financial stability.

Source: Bangko Sentral ng Pilipinas (BSP)