Despite easing restrictions, the economy has not yet fully returned to its investment-led growth orientation seen before the pandemic struck, the Department of Finance (DOF) said on Sunday, April 16.
Finance Chief Economist Gil S. Beltran said that capital formation as a percentage of real economy, or gross domestic product (GDP), rose to 21.6 percent in 2021 from 19.2 percent in the previous year.
While there was an improvement, Beltran noted that the ratio was still below its pre-pandemic level of 26.5 percent recorded in 2019.
Capital formation is one of the foremost determinants of future growth, in addition to employment and factor productivity. It is also the most comprehensive measure of investment.
On the other hand, capital formation, which is tracked by the National Income Accounts issued by the Philippine Statistics Authority, registered a real growth of 19 percent in 2021. However, this only reversed a portion of the 34.4 percent plunge in 2020.
Of the major components of investments, fixed capital which consists of construction and durable equipment grew by 9.6 percent.
However, Beltran said other more important indicators of investment revealed optimism, such foreign direct investment (FDI) and portfolio investments tracked by the balance of payments account which is released periodically by the Bangko Sentral ng Pilipinas.
FDI and portfolio investments measure the amount of investment coming from foreign investors.
“FDI is the more important indicator because it measures the amount of investment in the form of a controlling ownership in a business in one country by foreign investors which implies more active participation and more commitment by the investor in management.
It is distinguished from a foreign portfolio investment by a notion of direct control.
In contrast, a portfolio investor may buy and sell stocks and bonds daily and generates profits on price differences. Portfolio investment is referred to as “hot money” because it can leave anytime.
FDI increased by 54.2 percent in US dollar terms last year. As a percentage of GDP, this showed a rise from 1.89 percent in 2020 to 2.67 percent in 2021, exceeding the 2.30 percent level set in 2019.
Portfolio investments which are minority holdings in local company stocks and bonds by foreign investors showed significant variability, declining to a negative level of -$4.2 billion in 2020 and –$574 million in 2021.
Beltran attributed this to the impact of the pandemic which made values of global stocks and bonds highly uncertain.
“During such periods, such investors shift their portfolios to developed economies. As a percentage of GDP, the ratio of portfolio investment to GDP remained nil,” Beltran said.