23 Oct 2014
Philippines: Business Opportunities in Asia’s Rising Star
Its improving economic environment makes this the ideal time to reassess the commercial potential of the Philippines
Over the past few years, Asia has undoubtedly proved the global centre of growth, with Europe and the US still contending with the aftermath of the financial crisis. Asia, though, is not a unified market, but consists of a wide range of economies, with many of them in different stages of development. Among the emerging economies in Asia, the Philippines – once dubbed the “sick man of Asia” – has fared notably well, with growth outpacing most of its Asian peers, making it “Asia’s rising star” (more about the Philippine economy: country profile & Selling to the Philippines: Syncing with the New Retail Reality).
Substantial economic growth, along with a stronger government inclination to tackle many of the country’s structural problems, has seen the Philippines regarded as an emerging market with considerable business potential for Hong Kong companies.
Improving international rankings fosters enhanced investor confidence
With its strong growth momentum, improving government finance and governance, the Philippines has gained investment-grade ratings on its sovereign debt from Fitch, Moody’s and S&P – the world’s three most well-regarded credit rating agencies. A string of credit upgrades have confirmed the stability of the Philippine economy and government finances, which had been suffering due to a number of political upheaval of the past few decades, and have bolstered international investors’ confidence in the country.
The Philippines has leapfrogged up the rankings of several international indexes since 2010, demonstrating an increasing international recognition of the country’s ongoing structural reforms and significant improvements in its socio-economic development. For example, it jumped up 40 places in the 2013 Transparency International Corruption Perception Index, a recognition of the government’s efforts in tackling graft. In addition, rankings by the World Economic Forum and the World Bank in the table below point to the apparent improvement in areas such as government efficiency, property rights protection and ICT affordability, revealing a more conducive business environment in the Philippines.
Backed by the robust economic performance and improving socio-economic conditions, foreign companies and international investors are beginning to seek business opportunities in the Philippines. According to the Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), net foreign direct investment (FDI) inflow to the Philippines almost doubled from US$2 billion in 2011 to US$3.7 billion in 2013. Despite the rapid FDI growth, the Philippines still has the lowest FDI intensity level in the 10-member ASEAN, standing at only 1.4% of total GDP in 2013. This positive economic outlook is raising the prospect of sustained FDI increases, which will in turn help raise the country’s FDI intensity to catch up to the ASEAN average of 5.2%.
In the first six months of 2014, the net FDI inflow amounted to US$3.6 billion, growing significantly by 77% year-on-year (YOY) and almost matching the 2013 total, demonstrating the increasing attractiveness of “Asia’s rising star” to international investors. Foreign investments went mainly to five sectors, namely financial and insurance, real estate, manufacturing, wholesale and retail trade, and mining and quarrying. Notably, Hong Kong was the second largest source of FDI inflow to the Philippines during this period, trailing only the US.
Economic ties between Hong Kong and the Philippines are expected to further strengthen after the Manila Hostage Incident was resolved in April 2014. First Pacific Group is one of the initial Hong Kong-based companies to have committed significant investment to the Philippines, with its interests now spanning telecom services, energy, infrastructure and mining.
Liberalising FDI rules point to a more efficient economy
In recognition of the importance of FDI in driving economic growth, the Philippine government has implemented a raft of measures designed to further open up the economy. One of the more remarkable moves includes a proposed amendment to an article in the Philippines Constitution that supports restrictions on foreign participation in certain economic activities. In view of government efforts to liberalise the economy, the investment environment in the Philippines is expected to become more open in the coming years with a commensurate increase in foreign participation.
One of the ground-breaking measures regarding FDI regulations is the opening up of the banking sector. In July 2014, the Philippine government announced it was fully removing restrictions on foreign participation in the banking sector, removing the 60% cap on foreign ownership of Philippine banks and abolishing a quota on the number of wholly-owned foreign banks operating in the country. These moves are expected to bolster the Philippines’ banking system by improving efficiency through introducing competition and industry consolidation, as well as attracting more foreign capital and resources. Meanwhile, both local and foreign businesses will benefit from the liberalised banking sector through more efficient financing and other banking services.
A number of banks that are active in Hong Kong, such as HSBC and Standard Chartered Bank, have already established a strong presence in the Philippines. In light of the liberalisation measures, the Philippines’ banking sector is set to attract more players including Chinese mainland banks, thus creating an environment more conducive for Hong Kong businesses to access the Philippine market.
Upgrading inadequate infrastructure helps the economy and business
Despite the rosy economic prospects, foreign businesses continue to lament with regard to the country’s poor infrastructure. Traffic congestion in Manila, due largely to the inadequacy of roads and inefficient road networks planning, for example, is one of the major problems facing both local and foreign businesses. Manila’s poor traffic often leaves business people with little choice but to factor in extra time for travelling to work and to business meetings. Similar situations also apply to roads and ports for cargo transportation, a situation typical of many emerging ASEAN economies.
Undoubtedly, improving the infrastructure is a significant task for the Philippine government. Since winning the presidential election in 2010, Benigno Aquino III has been keen to upgrade the country’s infrastructure. The Department of Budget and Management has pledged to bolster government spending on public infrastructure to 5% of GDP by the time President Benigno Aquino III leaves office in 2016, up considerably from the 1.8% committed in 2010.
In order to accelerate the infrastructure development progress, the Philippine government introduced the Public-Private Partnership (PPP) programme in 2010. As of July 2014, seven PPP projects totalling US$1.4 billion have been awarded, while more than 45 projects are now underway at a value of about US$20 billion, including road, water, airport and ICT projects. The Philippines is considered by the Asian Development Bank (ADB) to be the most PPP-ready ASEAN member, revealing its huge potential in infrastructure development for private construction and engineering companies. The trend of improving infrastructure not only constitutes a better operating environment, but also offers many business opportunities for qualified Hong Kong services suppliers (HKSS), notably those in the surveying, engineering services and environmental enhancement services sectors.
Currently, the major PPP participants in the Philippines are the large local conglomerates, such as San Miguel, Ayala and Megaworld. The Philippines’ Board of Investments (BOI) encourages small- to medium-sized enterprises (SMEs) to participate in the programme by forming consortia with local or foreign investors. Apart from capital investment, these Philippine SMEs may also need input from overseas technological know-how and expertise in order to handle some of the larger infrastructure projects, thus creating business and partnership opportunities for HKSS. This may result in opportunities to supply the construction materials and engineering equipment needed for such projects.
Practical issues and challenges for Hong Kong businesses
The Philippines has demonstrated considerable improvement in terms of ease of doing business in the country. The World Bank noted that areas such as obtaining credit, trading across borders and resolving insolvency have improved considerably, although problems remain in areas such as starting a business, registering property and paying taxes.
Based on meetings with businesses in the Philippines, other common challenges for Hong Kong companies attempting to break into this emerging market include transaction payments, and problems in recruiting the right technical and managerial staff.
Payment risk is one of the major challenges to which Hong Kong businesses should pay attention. Owing to the high cost and prevailing business practices in the Philippines, many importers are reluctant to employ certain banking facilities, such as a letter of credit (L/C), a document against acceptance (D/A) and a document against payment (D/P) for trading transactions. Instead, they prefer open account payments, something that may generate payment default risks for Hong Kong suppliers. One Hong Kong company interviewed, which had more than 30 years of dealing with the Philippines, said that it usually set aside a provision of 1% 2% against uncollected account receivables. To protect open account deals, Hong Kong companies are advised to secure sufficient upfront deposits prior to delivery and ensure the final tranche of goods is only shipped upon payment.
To further mitigate payment risks, vigilance should be exercised and a selective approach taken when identifying new buyers, as emerging market buyers may not all have good credit backgrounds. When assessing the creditworthiness of Philippine importers, Hong Kong companies can seek assistance and gather useful information from bodies such as the Federation of Filipino-Chinese Chambers of Commerce and Industry (FFCCCII).
Apart from cross-border trade, Hong Kong companies intending to establish a commercial presence, whether as manufacturing companies or service suppliers, may face challenges due to a lack of skilled workers. Despite the Philippines having a young and competitive workforce generally literate in English, many businesses still face a severe shortage in skilled labour across many sectors ranging from information and communications technology (ICT) to engineering and surveying. This is largely because a substantial number of well-educated Filipino workers have chosen to go overseas in search of better paying jobs.
In a meeting with the senior management of the Philippine branch office of a Hong Kong based LED production and solutions firm, it was pointed out that recruiting suitable engineering and managerial staff was no easy task in the Philippines, with the company still largely relying on technical support from the Hong Kong office. Even so, the company noted that it was important to have a physical presence in the country so that local customers would have greater confidence in the business.
While market access conditions for different sectors vary, Hong Kong businesses may choose a number of different routes when entering the Philippine market. For merchandise trading companies, a safe and effective way is to appoint a reliable local agent, one who can help them handle customs procedures and distribute goods through various local channels. In the case of services suppliers, setting up a representative office, though unable to conclude any contracts with local entities on behalf of the parent company, would be a less costly way to test the waters, as it can help gather local information, promote the company’s services and products, and provide direct points of access for clients.
|Department of Trade & Industry (DTI)||Tel: (+632) 751 0384|
Fax: (+632) 895 6487
|Board of Investment (BOI)||Tel: (+632) 897 6682|
|Department of Public Works and Highways (DPWH)||Tel: (+632) 304 3000|
|Philippine Chamber of Commerce and Industry||Tel: (+632) 846 8196|
Fax: (+632) 846 8619
Federation of Filipino-Chinese Chambers of Commerce and Industry (FFCCCII)
|Tel: (+632) 241 9201|
Fax: (+632) 242 2361
|Philippine Exporters Confederation (PhilExport)||Tel: (+632) 230 5555|
Fax: (+632) 831 3707
|The Philippine Retailers Association (PRA)||Tel: (+632) 687 4985|
Fax: (+632) 636 0825
|Philippine Franchise Association (PFA)||Tel: (+632) 687 0365|
Fax: (+632) 687 0635
|Franchise Manila||Email: email@example.com|
Related information: Philippines infographics