Banking giant HSBC revised downward its economic growth forecast for the Philippines over the next two years, citing the country’s poor infrastructure which it described as worse than Sri Lanka’s.
Frederic Neumann, co-head of Asian Economic Research at HSBC, is not all that negative about his outlook for the country.
The Philippines, he said, is still considered “less vulnerable” to what is going on in the developed world and the impact of the quantitative easing policy of the US Federal Reserve.
But he pointed out the importance of the inflow of foreign investment—a sensitive issue among nationalists opposing the expansion of foreign ownership of local companies, especially those that concern media and utilities.
“The Philippines can achieve its targets if there is a great increase in [foreign] investments,” Neumann told a press conference on Monday.
Reduced forecast
For this year, the bank sees gross domestic product (GDP) rising 5.9 percent, much lower than the government’s official 2014 target of 6.5 percent to 7.5 percent.
HSBC projects GDP growth for 2015 of between 5 percent and 6 percent, and roughly 5.8 percent for 2016. That reflects a revision for 2015 of a previous forecast of 6.1-percent growth.
HSBC’s forecast is also lower than the government’s growth targets of 7 percent to 8 percent for 2015, and 7.5 percent to 8.5 percent for 2016.
Actual growth in 2012 was 6.8 percent, and in 2013 it reached 7.2 percent.
For 2013, HSBC’s growth estimate was only 6.8 percent.
Growth drivers
The HSBC economist said the Philippines could learn from advanced economies where foreign investments were growth drivers.
“For advanced economies in Southeast Asia as well as China, most of the investments are foreign-led. For the Philippines, there is a constitutional restriction [in foreign ownership to 40 percent], but other countries like Japan have set up extensive economic zones [which help increase foreign investments],” Neumann said.
“Maybe not the whole country, but some regions should have lesser restrictions [for foreign ownership],” he added.
For his part, BPI Economist Nicholas Antonio Mapa said that infrastructure and manufacturing in different parts of the country are needed as the services sector “can only employ as many call center agents and salespersons while the scope for job creation in manufacturing and agriculture is so much more potent.”
“Thus, we exhort the government to institute investments in true cost-saving infrastructure and investment projects that will enhance these sectors of the economy,” Mapa said.
In his recent columns in The Manila Times, Rigoberto Tiglao discussed the 40 percent ownership limits on foreign investment that some foreign companies have managed to skirt.
Tiglao cited as an example the group of Indonesian tycoon Anthoni Salim, through Filipino businessman Manny V. Pangilinan, who were able to gain control of two vital companies in the country—Philippine Long Distance Telephone Co. and Manila Electric Co.
Alternative FDI site
Neumann said that foreign firms in the Philippines are largely not engaged in manufacturing, which is a key component of sustained GDP growth.
As China’s competitiveness declines due to higher wages, the Philippines can offer foreign firms an alternative site and “take that opportunity to be more competitive” compared to its Asian counterparts, he said.
“We can continue to grow on the back of the Filipino consumers purse, but unless true investments and reforms are carried out, inclusive growth will remain elusive as it always has been,” Mapa said.
“The labor cost in China had gone up. Vietnam and other countries have taken that opportunity but very little of those investments and opportunities are coming back to the Philippines,” Neumann said.
Comparing the Philippines and Vietnam, however, Neumann said that foreign direct investments (FDI) in the country reached $3.9 billion in 2013, which he said was not substantial compared with Vietnam’s $13.1 billion for the first 10 months of last year, and Thailand’s $33 billion projection for 2013.
Poor infrastructure
HSBC cited poor infrastructure development as one of the reasons why the Philippines is not able to attract more foreign investments.
Based on HSBC Philippines’ Asia Infrastructure Measure (AIM) data for 2013, the Philippines “ranked the last” in quality infrastructure out of the 11 economies it observed in Asia: Hong Kong, Singapore, China, Korea, Taiwan, Japan, Thailand, Indonesia, Sri Lanka, Vietnam and the Philippines.
“Even though poorer compared to the Philippines, Sri Lanka has indeed better infrastructure than the country,” Neumann said.
“It is very expensive to get into manufacturing in the Philippines because of our decrepit infrastructure. Yes, we have one of the worst infrastructure ratings in the region, bannered by the second worst airport in the world,” Mapa said.
The BPI economist also said that these downgrade records despite high economic numbers would be “a major impediment” in attracting investments in the country.
“Thus, it is no wonder why we attract a much smaller amount of FDI compared to the rest of our Asean neighbors,” Mapa said, citing brownouts, outdated and operating beyond capacity airports as well as the slow and expensive mass transportation.
For the country to catch up with its neighboring countries in infrastructure development, Neumann said that government infrastructure spending should be “doubled” and that the Aquino administration should not depend on public-private partnership infrastructure projects alone.
Neumann said the doubling of infrastructure spending may be a “five-year process” and the country should “ramp up as much as you can in the next two years.”