A recent article in the Financial Times by A. Anantha Lakshmi reported that the Philippines is pressing the U.S. (and Japan, I may add) to boost trade and investment in the country as escalating tensions between Manila and Beijing spark fears of a broader economic fallout. In an interview with FT, Secretary of Trade and Industry Alfredo Pascual commented: “It is significant because if we are economically secure, we could also afford to strengthen our defense capabilities. If you are not economically secure, you cannot divert or utilize resources for defense. We need to have credibility in our defense posture.” This message is primarily addressed to the U.S. and Japan, the two economies that would suffer most if war should break up in this Indo-Pacific region.
Even if the Chinese threat does not loom large in this region, there would still be a great need for the Philippines to attract large amounts of Foreign Direct Investments in the next decade or so. During this period, the Philippines must heavily invest in infrastructure, large-scale agribusiness ventures, manufacturing capabilities, mining, and renewable energy to avoid falling into the middle-income trap that has affected many Latin American countries in past decades. These heavy investments which would require the Government to continue the Build, Build, Build program started during the Duterte administration, the first to bring up the percentage of the GDP spent on infrastructures to the average five to six percent spent by our ASEAN neighbors from the historically low of three percent, can only happen with big dosages of FDIs.
As one of the most outstanding local government officials in the Philippines, Mayor Benjamin Magalong Baguio City pointed out in an address he recently delivered, the Philippine national debt is already P13.86 trillion. At this level, our debt-to-GDP ratio is already at an untenable 61 percent, double the pre-pandemic rate of 30 percent. It is now more difficult for our Government to continue funding its capital expenditures by borrowing more. In fact, the BBM Administration is committed to bringing down the debt-to-GDP to less than 50 percent by the end of its term. As an aside, I am glad that a local official is prodding our legislators to do something about this mountain of debt. Mayor Magalong is one of those honest and competent political leaders who give us hope that we can have future national leaders who will be able to address the serious problem of corruption and bad governance that still plague many of our national political institutions. I hope he decides to run for the Senate in the next elections since he shows familiarity with national economic problems and is able to propose very concrete solutions. May his tribe increase.
The ballooning government debt is compounded by the high interest rates and the depreciating peso that we are now experiencing. It does not help that we have the lowest savings to GDP ratio of 10 to 12 % in the East Asian region where the average ranges from 25 to 40 % (China has more than 40 %). This inevitably leads to low investments to GDP ratio of 20 to 22 % as compared to the average in the region of 25 to 40 %. Some economists may point out that if we use the savings to GNP ratio (Gross National Product includes the close to $40 billion earned by our OFWs), the savings ratio can go to as high as 25 %. The problem, though, is that the savings of these OFWs and their respective households cannot be used for long-term investments such as infrastructures and capital-intensive agribusiness and energy ventures. They are meant for short-term needs like paying for the college education of children, amortizing housing loans, paying for hospital and medicine bills, etc. All these harsh realities lead to only one conclusion: we have to attract large doses of FDIs, especially in airports, railways, ports, tollways, renewable energy, large-scale manufacturing (especially electronics and semi-conductor components), and mining. This explains why President BBM has been spending a great deal of time traveling all over the world announcing to potential foreign investors that we are no longer the “Sick Man of Asia” and has one of the fastest growing GDPs (together with India and Vietnam) in the Indo-Pacific region.
I have personally set a target for how much FDIs we should be attracting annually. I have closely watched the impressive performance of Vietnam over the last 10 to 15 years of attracting yearly some $15 to $20 billion of FDIs. Since 2014, Vietnam has been open to foreigners owning 100 % of investments in nearly all economic sectors and industries (except those related to military security). In fact, in 2023 Vietnam attracted a whopping $36.6 billion of FDIs and is poised for robust expansion again in 2024, with several opportunities in the technology , renewable energy, healthcare, banking and real estate sectors. Now that the amendment of the Public Service Act has opened 100 % equity to foreign investors and there are ongoing efforts to attract large-scale infrastructure projects (like the 33-kilometer bridge from Cavite to Bataan), we should be able to attract an amount yearly of $15 to $20 billion which Vietnam has been able to do for more than a decade now. The difference is in the short-run (the next three years or so), we will still be handicapped vis-à-vis Vietnam in attracting a wide variety of export-oriented manufacturing enterprises ( with the exception of electronics) because of our continuing high costs of energy and our still poor infrastructures.
That is precisely why our focus should be in attracting FDIs in infrastructures and energy projects that will help us lower the cost of electricity. The manufacturing sector can still attain reasonable growth with local capital investing in a host of manufacturing ventures selling almost exclusively to the large domestic market that is increasingly dominated by high middle-income consumers spending, as recent marketing surveys show, more and more on non-basic items such as eating out, luxury goods, domestic tourism, transport vehicles, health products, etc. This is what is also called spending on “discretionary” items.
Thanks to the stronger partnership we are striking with long-term allies, the U.S. and Japan, the prospects of attracting huge amounts of FDIs from these two countries have improved significantly. I am referring to these two countries investing heavily in critical infrastructures that will build what is now called the Luzon Economic Corridor. This Corridor will support connectivity among the ports of Batangas , Manila, Subic Bay, and Clark as well as facilitate strategic, anchor investments within each hub in high-impact infrastructure projects, including rail, port modernization, large-scale agribusiness, clean energy and semi-conductor supply chains and deployments. This corridor is especially important because the Batangas Port has been designated as a logistics hub within the ASEAN Economic Community, thus giving easy access to the ASEAN market for goods that will be produced in Manila, Subic and Clark. This is a brilliant strategy that is meant to reduce the handicap of the Philippines vis-à-vis Vietnam in attracting the U.S. and Japanese electronics manufacturing enterprises wanting to leave China for political reasons. The Philippines can at least have a chance to compete with Vietnam, Malaysia and Indonesia in attracting some of those export-oriented manufacturing firms, especially in the electronics and semi-conductor sectors. The Luzon Economic Corridor will thus hit two birds with one stone: in the short run attract billions of dollars in FDI spending on large-scale infrastructures and energy projects (possibly including a micro modular nuclear plant in the island of Corregidor) and in the medium term a large increase in manufacturing projects migrating from China to the Philippines. To be continued.