Chinese President Xi Jinping shows the way to Philippine President Rodrigo Duterte in a file photo. Photo: AFP

A robust third-quarter rebound (7.1%), a strong fourth-quarter finish (7.4%), and stepped-up vaccination bode well for the Philippines’ economic recovery despite the threat of the Omicron variant of the virus that causes Covid-19.

The Asian Development Bank (ADB) has forecast the country’s gross domestic product to grow by 6% this year, making it one of the fastest turnarounds in Southeast Asia. Free-trade agreements (FTAs) and the influx of more international capital may serve as growth drivers to fuel post-pandemic revival.

To this end, two developments are worth watching, namely the country’s pending ratification of the Regional Comprehensive Economic Partnership (RCEP) and reform of its foreign investment regime.

2022 GDP growth and inflation forecast 
GDP Growth forecastInflation forecast
Vietnam6.53.8
Philippines6.03.7
Malaysia5.92.3
Indonesia5.02.7
Singapore4.11.4
Thailand4.01.4
Source: ADB

As the Philippines deliberates on the RCEP and opens more industries to foreign capital, China looms large in the background. Being the biggest member economy in the new FTA, the influence that Beijing may bring to bear and a possible deepening of the trade imbalance raise concerns in Manila.

That said, China’s rise as the world’s largest trading nation and a leading outbound investor have made it an indispensable economic partner for countries far and wide, wariness aside.

Friendly ties in the last five years under President Rodrigo Duterte’s government have made for more robust bilateral trade and greater investment from Beijing. But as elections near, there will be no shortage of candidates susceptible to the protectionist lobby or the security sector wary of China’s growing investment footprint in the country. In such an atmosphere, insulating trade and capital flows from politicking becomes a serious challenge. 

RCEP ratification

RCEP is the world’s largest free-trade agreement and came into effect on January 1. Six members of the Association of Southest Asian Nations (Singapore, Brunei, Cambodia, Laos, Thailand and Vietnam) and five ASEAN dialogue partners (China, Japan, Australia, New Zealand and South Korea) have already ratified the deal.

Free-trade hub Singapore and mainland ASEAN countries went ahead with embracing the blockbuster trade pact, while insular ASEAN countries mired in domestic politics have yet to formalize their participation. 

In the Philippine case, ratification was distracted by the pandemic and typhoon response and a legislative probe on alleged anomalies in procuring medical supplies. The coming May polls may present some hurdles in fast-tracking accession to RCEP.

No leader would want to be seen as wavering on defending vulnerable domestic sectors. Rent seekers and groups opposed to multilateral FTAs may thus play this card to their advantage. Arguments against the mega trade deal include losses of tariff revenue, worsening of trade deficits, and harmful impacts on certain sectors such as agriculture. 

Government and businesses have to do a better job convincing the public and Congress that the gains outweigh the costs. Free trade can offer consumers more competitive choices, and local growers expanded access to key markets.

The competition that it brings forces local players to upgrade. Being part of RCEP will also give Manila a seat at the table in shaping rules for regional trade.

There may be some backlash if expectations are not met. The same goes if the benefits only accrue to a few groups while the burden is disproportionately meted to sensitive groups like local farmers. But the prospect of being left further behind by its neighbors acts as a strong push factor. 

Attracting FDI

Efforts to reform the foreign investment regime demonstrate Philippine resolve to catch up with its Southeast Asian counterparts. Despite great potential, the country continues to underperform in attracting foreign direct investment (FDI) compared with its more aggressive regional peers. Its outdated and obstructive legal framework has long held back its ability to woo FDI.

The president of the Federation of Filipino-Chinese Chambers of Commerce and Industry, Henry Lim Bon Liong, has urged legislators to craft globally competitive and less restrictive foreign investment laws so that the country can keep pace with its Asian neighbors.

ASEAN countries by FDI inflows
CountryIn million $
20192020
Singapore114,16290,652
Indonesia23,88318,581
Vietnam16,12015,800
Philippines 8,6716,542
Cambodia3,6623,625
Malaysia7,8133,483
Myanmar2,7661,834
Laos557968
Brunei275577
Thailand3,063-6,100
Source: UNCTAD World Investment Report 2021

In a 2020 survey of 83 economies by the Organization for Economic Cooperation and Development (OECD), the Philippines ranked third after Libya and Palestine in terms of having the most restrictive environment for FDI. 

ASEAN countries ranked by restrictiveness to FDI* (2020)
Country FDI Restrictiveness Index Score
Philippines0.374
Indonesia0.347
Thailand 0.268
Malaysia0.257
Laos0.192
Brunei0.146
Vietnam0.130
Myanmar0.112
Singapore0.059
Cambodia0.054
Source: OECD*The index takes into account restrictions on foreign equity key foreign personnel and operations and discriminatory screening for approval mechanisms. The scale is from 0 (open) to 1 (closed)

But a whiff of change is in the air. Amendments to an archaic 85-year-old law show that the country is shedding more constraints to welcome foreign funds.

Last month, Senate Bill No 2094, which will amend relevant provisions of the Commonwealth Act No 146, also known as the Public Service Act, passed the third and final reading. The revisions opened more sectors for FDI.

Among the industries that stand to benefit from a more relaxed foreign investment climate are such public services as telecommunications, local shipping, air carriers, railways, and subways.

However, such public utilities as electricity distribution and transmission, petroleum and petroleum-products pipelines, water pipelines, distribution and sewerage, airports, seaports, public utility vehicles, and tollways continue to have a 40% cap on foreign capital. Hence, while the move is already a big leap of faith, many sectors remain restricted. 

The China factor

In both RCEP and steps to liberalize the Philippines’ foreign investment policies, China was an elephant in the room. There is concern that ratification may only exacerbate the Philippines’ deficit with its largest trade partner.

But this also cuts both ways, as local producers can also expect to cash in on greater penetration of the vast Chinese market. The fear that Beijing may dominate the world’s largest trade pact is also tempered by the countervailing presence of other large and mid-sized economies such as Japan, Australia, South Korea and New Zealand.

In addition, the view that RCEP is ASEAN-led reinforces the region’s central role in charting the evolving regional trade architecture in the broader Asia-Pacific.

Meanwhile, national-security concerns have likely played into limits for foreign state-owned enterprises, a move seen as exclusionary and targeting Chinese investments. Many global Chinese companies in the infrastructure, telecoms, transport, and utility sectors are government-run.

International-law expert Harry Roque has said that such discriminatory policy is patently unconstitutional and counterproductive to the spirit of attracting foreign investments. He also described how national security could be overplayed, citing that state-owned State Grid Corporation of China’s 40% stake in the National Grid Corporation of the Philippines since 2009 has yet to elicit a proven national-security threat.

Henry Lim cited how a world-class state-affiliated company like SingTel, a major shareholder of local player Globe Telecoms, was able to inject capital and technologies to deliver better service to Filipino subscribers. SingTel is majority-owned by Temasek Holdings, the investment arm of the Singaporean government.

Anvil Business Club chairman emeritus George Siy has called for a consistent, inclusive, and dynamic foreign investment framework. He added that conceptions of national security change over time with the evolution of culture and technology. 

Furthermore, Chinese companies have not only become active in investing abroad. They are also pacesetters in such foundational sectors as power, energy, construction, transport, and utilities. Hence a blanket exclusion of Chinese state-owned firms works to Manila’s disadvantage. If Chinese traders and investors feel unwelcome, they may take their business elsewhere, and the Philippines’ neighbors will not be slow to act on the opportunity. 

Tabling long-overdue reforms of its foreign investment laws and deliberating entry into the world’s largest FTA reveal how the Philippines is trying to turn a crisis brought by the pandemic into an opportunity to improve itself. The coming elections may spell whether such efforts will be sustained or derailed. 

Lucio B Pitlo III

Lucio Blanco Pitlo III is a research fellow at the Asia-Pacific Pathways to Progress Foundation. He writes on Asian security and connectivity issues.