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Successfully investing in the Philippines

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last updated on 21 August 2020 | reading time approx. 5 minutes

 

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How do you assess the current economic situation in the Philippines?

2020 started for the Philippines' thriving economy with the eruption of the Taal volcano, which is located not far from the capital city center. However, the impact was limited both geographically and economically. The volcano's foreshock was followed almost seamlessly by the economic upheaval caused by the corona virus. On 15 May 2020, the capital of the Philippines and parts of the economically strong island of Luzon were placed under an “Enhanced Community Quarantine”. The closure of non-essential businesses (with home-based work being allowed), the suspension of local and long-distance public and private transport as far as possible, night-time and/or sometimes even full-day local curfews have brought not only public life but also the Philippine economy to a virtual standstill. Gradually, the restrictions on commercial operations and the free movement of persons were eased, especially as of 1 June. Depending on the number of cases in the respective region, certain quarantine levels apply, which in an international comparison potentially still remain among the strictest and most prolonged in the world. For example, the entry of many foreigners is still largely prohibited. Night-time curfews apply in many places. Selected businesses are allowed to operate their facilities in accordance with the hygiene rules imposed and with only limited capacity. As of 1 August, the Covid case numbers have again increased massively, which is why in the long term the restrictions for the larger conurbations will probably only be relaxed slowly. At present, it is not unlikely that stricter quarantine regulations will even be imposed again for individual areas.


In terms of economic growth, the Philippines was originally forecast to grow by 6.2 per cent in 2020. The Philippines would thus have remained one of the fastest growing economies in Asia and would have continued its stable trend of the past decade. Analysts and the government now expect negative growth of -0.3 to -3 per cent in 2020. This would still leave the Philippines in a relatively good position by international standards, especially considering its very strict quarantine measures.


A first significant economic recovery of at least 4 per cent is expected in 2021. However, there are still many unknown factors here. From 2022 at the latest, growth in the range of the originally targeted 6 to 7 per cent could be achieved again. The latter is not unlikely, since little has changed despite the Covid-19 challenges to the Philippines' sound economic fundamentals and the overall positive growth trend in the emerging markets of ASEAN. The Philippines might even become one of the long-term beneficiaries of the “New Normal”.

 

How would you describe the investment climate in the Philippines? Which sectors offer the largest potential?

Over the past decade, the Philippines has been able to continuously increase its foreign direct investment, which has been accompanied by a steady liberalization of the market and continuous improvement of the „Doing Business” framework.


With regard to the current situation, companies and investors are rather hesitant, as the outcome of the pandemic is not yet foreseeable. Nevertheless, new investments in the Philippines have not been completely frozen. Some companies that had already planned to enter or expand their markets before the pandemic are persistently pursuing their plans. Quite surprisingly at first sight, there have even been a few more companies in recent months. What all investors have in common is that they see long-term opportunities in the Philippines despite the currently rather gloomy global economic situation. This positive outlook is based on robust demand in the large and often yet untapped Philippine domestic market, or the promising prospects as a supplier, service center and in covering the shortage of skilled workers.


The Philippines continues to be an interesting destination, especially from the perspective of German companies. “Made in Germany” as a brand continues to be highly valued in the Philippines in terms of both, goods and services. The “Golden Age” of Philippine infrastructure projects, which already began before Covid-19, will probably receive a further substantial financial injection through the government support package. Even if the trade war between the United States and China is depressing investment sentiment somewhat, the Philippines may still benefit, as it not only attracts more Chinese companies to the Philippines, but moreover because, within the framework of the China+1 strategy, entrepreneurs increasingly see the Philippines as a competitive alternative to China and Asian competitors.

 

What challenges do German companies face during their business ventures into the Philippines?

There is no question that the Philippines have a great potential – which has often been underestimated in recent years – to become the next or renewed “Asian Tiger”. On the other hand, there are challenges to be face by many emerging Asian countries, which must not be ignored. These include the country's relatively weak infrastructure, especially in rural areas, and the associated lack of a stable energy supply and reliable means of communication at internationally competitive prices. The government is aware of this challenge and has set itself the goal of investing around 6 per cent of GDP annually in infrastructure improvements.

Another challenge is the bureaucracy associated with the investment law framework for “Doing Business” in the Philippines. In some areas, the authorities still work on a paper-based or contact-based basis with little digitalization. In addition, the authorities are increasingly but still too rarely coordinating their administrative procedures and implementation regulations. In connection with Covid-19, however, the authorities were or are forced to digitize. Despite some initial difficulties, greater progress has been made, which was hardly conceivable before Covid-19. The pandemic and the associated slogan “Heal as One” have led to the fact that it is currently easier to find practicable solutions to official red tape than was the case just a few months ago.
  

The Philippines is expected to become the fifth largest business location in Asia within the next decades. How realistic is the forecast?

This forecast seems entirely justified, as the Philippines is already an important business location in Asia, which in our opinion continues to be largely underestimated. By 2050, the population is expected to grow from 108 to about 150 million inhabitants. The Philippines would thus further expand its position as the second largest domestic market in ASEAN, second to Indonesia. In addition to one of the youngest and fastest-growing populations in the world, the Philippines' strengths include widespread English language skills and relatively high levels of education.


This population growth, coupled with steadily increasing investment in infrastructure over the past decade, creates the best possible conditions. The country is rich in a wide variety of raw materials, many of which have not yet or not sufficiently been developed.


Human capital and Business Process Outsourcing (BPO) are one of the country's strengths, and the Philippines is one of the world's leaders in this area. The Philippines is a leader in call center and business support services. More and more highly skilled jobs are also being outsourced to the Philippines. These include engineering, financial and IT programming services. The trend towards home office solutions brought about by the corona virus will certainly further catalyze the tendency towards outsourcing certain non-local business processes.
 

In your opinion, how will the Philippines develop?

Covid-19 has hit the Philippines hard, both in humanitarian and economic terms, which would have been unimaginable just a few months ago. With Covid-19 cases currently on the rise, an end to the exceptional situation is not foreseeable for the time being.

Nevertheless – if the Philippines has proven one exceptional quality throughout the past turbulent decades, it is certainly resilience. From the overcoming of the Marcos regime, countless political capers and international economic crises to several natural disasters, the Philippines has always been able to recover relatively quickly. This was particularly noticeable during the Asian and global financial crisis as well as during the SARS outbreak.

Based on the Philippines' renowned resilience, their past experience with other crisis situations, one of the most stable economic growth rates in the region (even in times of crisis), relatively low national debt and substantial natural resources, the Philippines remains competitive even in times of Covid-19 and beyond. Especially the continuous development towards home office solutions and thus consequently also the possibility to have certain activities carried out internally or externally across borders could even make the Philippines one of the beneficiaries in the long run.

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