Philippines seeks reforms in forex and investments

Workers are seen at a construction site for a new four-tower development at Avida Tower Centera in Mandaluyong City, Metro Manila yesterday. The Philippines is rushing reforms in its foreign investment and foreign exchange rules as it prepares for stronger fund inflows following its promotion to an investment grade credit rating.

Reuters/Manila

The Philippines is rushing reforms in its foreign investment and foreign exchange rules as it prepares for stronger fund inflows following its promotion to an investment grade credit rating.

But it will take several months and possibly as much as a year before new rules aimed at opening up certain industries to more foreign investment can take effect, as they will likely require legislation, officials said.

Fitch Ratings delivered the Philippines’ first investment grade rating last week, citing a persistent current account surplus and an improved debt-to-GDP ratio that fell to a 14-year low of 51% last year.

Other debt watchers Standard & Poor’s and Moody’s Investors Service are expected to follow suit, with their actions closely watched by investors who want to put money into the country but are restricted from doing so in non-investment grade nations.

But Christian de Guzman, Moody’s senior sovereign risk analyst, said they want to see more proof that Manila’s economic and fiscal gains were sustainable before considering elevating the country’s credit rating from junk bond status.

Despite robust economic growth in excess of 6% a year, the Philippines has an investment problem, attracting paltry levels of foreign direct investment (FDI) compared to its Southeast Asian peers. That imbalance has kept the unemployment rate around 7% and the underemployment rate near 21%, among the highest in the region.

Policymakers need to attract more FDI into the real economy while curbing inflows of speculative “hot” money, which are forcing prices of stocks, bonds and the peso currency higher.

The government of President Benigno Aquino is reviewing archaic laws and regulations on foreign investment, with a view to possibly opening up areas now restricted to only Filipinos.

“We are trying to see which ones can be relaxed. It’s just a general review, we are not reviewing any particular sector,” said Trade Secretary Gregory Domingo.

Restrictions on foreign ownership in major industries and land acquisition by foreigners are part of the reasons investors have shunned the Philippines, resulting in net foreign direct investments of $2bn in 2012, or just under 3% of the total that flowed into a group of five peer economies including the Philippines in the 10-member Association of Southeast Asian Nations (Asean) in 2011.

The government wants to finish the review and prepare recommended legislation before a new Congress is sworn in in July, Domingo said, adding investors have been waiting in the wings for infrastructure, tourism and manufacturing projects.

“What all these developments will do is to accelerate those processes given the very high interest in the country right now (and) ... make the Philippines attractive as an investment destination,” Budget Secretary Florencio Abad said.

However, with the government not keen on amending the constitution to relax a 40% limit on foreign ownership in many sectors, there is little hope of a sharp jump in FDI soon.

“Clearly foreign businesses will see opportunities. I just don’t necessarily think the country is going to be able to capitalise on that in the best way,” said Kenneth Akintewe, portfolio manager at Aberdeen Asset Management in Singapore.

“There is a real hesistancy to allow foreigners to come in and have a major say on how businesses are run. Until that dynamic changes it is difficult to see foreigners being particularly enthusiastic,” Akintewe said, pointing to family-controlled big businesses which dominate the economic landscape.

The central bank has repeatedly expressed concern over the potentially destabilising impact of strong fund flows, which are expected to pick up further following the rating upgrade.

Ahead of the Fitch move, the central bank said it was studying relaxing rules on foreign exchange transactions to facilitate more outflows of money to dampen the peso’s strength.

Yesterday, Amando Tetangco, governor of the Bangko Sentral ng Pilipinas, said the rules may be released as early as this month.

Tetangco said the central bank was seeking to tighten rules on credit underwriting standards and real estate-related bank lending, as the property sector also has attracted some of fund inflows.

It is also fine-tuning bank reporting requirements to better capture current market activity and detect asset bubbles.

“We are working on all these fronts very intently because we are keenly aware that the markets are volatile and investor sentiment can shift,” Tetangco said in an email.

Foreign investors were net buyers in the Philippine stock market in the first quarter, with their purchases in the period nearly half of their net buying for the whole of 2012.

That helped the stock market become Southeast Asia’s best performer after Vietnam, with gains of about 17%.

The peso has extended its gains to become the third best performing emerging Asian currency this year after surging nearly 7% in 2012, driven by strong inflows and remittances from Filipinos working and living overseas.

In the local debt market, the volume of trades in government and corporate securities hit a peak of over 1tn pesos ($24.49bn) in March.

Total trades in the first quarter were equivalent to more than half the total 2012 volume, according to data from the Philippine Dealing and Exchange Corp.