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Philippines

Executive Summary

The Philippines is becoming a more attractive destination for foreign direct investment (FDI). The country’s middle class is growing, and Filipinos quickly spend disposable income in a fairly stable political environment, helping gross domestic product soar to an average growth of 6.1 percent over the last six years. According to central bank data, FDI inflows reached a record growth of U.S. $7.9 billion in 2016, a 40.7 percent increase from 2015. The majority of investments went into finance and insurance; arts, entertainment and recreation; manufacturing, real estate, and construction. The Business Process Outsourcing (BPO) and tourism sectors have experienced growth in recent years.

The Philippines has improved its overall investment climate. The Philippines’ sovereign credit ratings remain investment grade, due to the country’s robust economic performance, continued fiscal and debt consolidation, and improved governance. Still, improvement is needed. The Philippines lags behind most of the ten Association of Southeast Asian Nations (ASEAN) in attracting FDI (the Philippines was ranked 9 of 10 ASEAN countries on FDI as a percentage of GDP in 2015). Foreign ownership limitations in many sectors of the economy pose a significant constraint. Poor infrastructure, including high power costs and slow broadband connections, regulatory inconsistency, and corruption are major disincentives to investors. The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. Investors describe the business registration process as slow and burdensome, although there are signs of improvement. Traffic in major cities and port congestion remain a regular cost of business.

Investors report the Philippine bureaucracy can be difficult and opaque. However the business environment is notably better within the special economic zones, particularly those available for export businesses operated by the Philippine Economic Zone Authority (PEZA), known for its regulatory transparency, no red-tape policy, and “one-stop shop” services for investors. The Duterte Administration’s 10-Point Socioeconomic Agenda seeks to address these constraints by increasing the country’s competitiveness and ease of doing business. The administration also wants to relax constitutional restrictions on foreign ownership to attract foreign direct investment. Many investors are hopeful President Rodrigo Duterte’s relatively large political capital can help effect these changes.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2016 101 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2016 99 of 190 doingbusiness.org/rankings
Global Innovation Index 2016 74 of 128 globalinnovationindex.org/
content/page/data-analysis
U.S. FDI in Partner Country ($M USD, Stock Positions) 2015 USD 4.7 billion http://www.bea.gov/
international/factsheet/
World Bank GNI Per Capita 2015 USD 3,550 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The Philippines actively seeks foreign investment to generate employment and promote economic development. The Board of Investments (BOI) and PEZA are the lead agencies that provide incentives and special investment packages to investors. Noteworthy advantages of the Philippine investment landscape include free trade zones, including PEZA zones, and the large, educated, English-speaking, relatively low-cost Filipino workforce. Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and Foreign Investment Act (see details under Limits on Foreign Control section). Additional information regarding investment policies and incentives are available on the BOI website  and the PEZA website .

However, restrictions on foreign ownership, inadequate public investment in infrastructure, and lack of transparency hinder foreign investment. The Philippines’ regulatory regime remains ambiguous in many sectors of the economy, and corruption is a significant problem. Large conglomerates, including San Miguel, Ayala and SM, dominate the economic sphere.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares for 50 years, renewable one time for 25 additional years. The 2003 Dual-Citizenship Act allows dual citizens full rights to possess land.

The 1991 Philippine Foreign Investment Act (FIA) requires publishing the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted. An update to the FINL is due in 2017. The FINL bans foreign ownership in the following investment activities: mass media (except recording); small-scale mining; private security; marine resources, including the small-scale use of natural resources in rivers, lakes, and lagoons; and the manufacture of firecrackers and pyrotechnic devices. Only Philippine citizens can practice the following professions: law, pharmacy, radiology and x-ray technology, criminology, and forestry. In theory, foreigners may practice professions not prohibited under FINL provided their country allows the same reciprocal rights to Philippine citizens. In practice, however, language exams, onerous registration processes, and other barriers prevent this from taking place.

The Philippines limits foreign ownership to 40 percent in the following industries: manufacturing of explosives, firearms, military hardware, and massage clinics. Other areas that carry varying foreign ownership ceilings include: private radio communications networks (20 percent); private employee recruitment firms (25 percent); contracts for the construction and repair of locally funded public works (25 percent); advertising agencies (30 percent); natural resource exploration, development, and utilization (40 percent, with exceptions); educational institutions (40 percent); operation and management of public utilities (40 percent); operation of commercial deep sea fishing vessels (40 percent); Philippine government procurement contracts (40 percent for supply of goods and commodities); construction of locally funded public works (25 percent with some exceptions); operations of Build-Operate-Transfer (BOT) projects in public utilities (40 percent); ownership of private lands (40 percent); and rice and corn processing (40 percent, with some exceptions).

A law signed in July 2016 liberalized foreign ownership restrictions that used to apply to financing companies, investment houses, insurance adjustment firms, and enterprises covered under the 2007 Lending Company Regulation Act (i.e., credit granting entities that do not clearly fall under the scope of existing laws).

Retail trade enterprises with capital of less than USD $2.5 million, or less than USD $250,000 for retailers of luxury goods, are reserved for Filipinos. Foreign investors are prohibited from owning stock in lending, financing, or investment companies unless the investor’s home country affords the same reciprocal rights to Filipino investors.

Foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries if they can meet certain requirements. However, a foreign bank that seeks to establish branches in the Philippines cannot open more than six branch offices. The law also stipulates that a minimum 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks. Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank.

Other Investment Policy Reviews

The Organisation for Economic Co-operation and Development (OECD) conducted an Investment Policy Review of the Philippines in 2016. The review is available online at the OECD website .

Business Facilitation

Stakeholders describe business registration in the Philippines as cumbersome due to multiple agencies involved in the business registration process. It takes an average of 28 days to start a business in Quezon City, Metro Manila, according to 2017 World Bank’s Ease of Doing Business report.

Sole proprietorships must register with the Bureau of Trade Regulation and Consumer Protection (BTRCP) in the Department of Trade and Industry (DTI ), while corporations or partnerships must register with the Securities and Exchange Commission (SEC ). In addition, city and municipal governments require businesses located within its jurisdiction to have its “business/mayor permits” renewed every year. Meanwhile, foreign investors must register with Bankgo Sentral Philippines (BSP ), the central bank, if the foreign exchange for repatriation of capital and remittance of earnings will be sourced from authorized agent banks or their affiliate foreign exchange corporations.

The Philippine Business Registry (PBR) website  facilitates integrated online business registrations involving various business permit-issuing agencies. However, stakeholders report the website is oftentimes unreliable and applicants are still compelled to go in person to government offices to register their businesses.

Outward Investment

There are generally no restrictions on outward investments by Philippine residents, although, foreign exchange purchases from banks and foreign exchange subsidiaries or affiliates above USD $60 million per investor, or per fund per year, require prior approval from the central bank.

6. Financial Sector

Capital Markets and Portfolio Investment

The Philippines supports the entry of foreign portfolio investments, including into local and foreign-issued equities listed on the Philippine Stock Exchange (PSE ). Investments in publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws. Non-residents are allowed to issue bonds/notes on similar instruments in the domestic market with prior approval from the central bank.

There are generally no restrictions on outward portfolio investments by Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year, foreign-controlled entities organized under Philippine laws, and branches, subsidiaries, or affiliates of foreign enterprises organized under foreign laws operating in the country. However, foreign exchange purchases from banks and their foreign exchange corporation subsidiaries or affiliates above USD $60 million or its equivalent in the other foreign currencies per investor per year, or per fund per year for qualified investors, require prior central bank approval.

The central bank does not restrict payments and transfers for current transactions, subject to the submission of a duly accomplished foreign exchange purchase application form if the foreign exchange to be purchased does not exceed central bank-specified thresholds. Purchases above the thresholds are subject to the submission of minimum documentary requirements but do not require prior central bank approval.

Although growing, the Philippine stock market (with only about 265 listed firms) lags behind many of its neighbors in size, product offerings, and trading activity. The securities market is growing but remains dominated by government bills and bonds. Hostile takeovers are uncommon because most companies’ shares are not publicly listed and controlling interest tends to remain with a small group of parties. Cross-ownership and interlocking directorates among listed companies also decrease the likelihood of hostile takeovers.

Credit is generally granted on market terms and foreign firms are able to obtain credit from the domestic market. However, some laws require financial institutions to set aside loans for preferred sectors (e.g. agriculture, agrarian reform, and MSMEs). To help promote lending at competitive rates to MSMEs, a government-controlled corporation manages a centralized credit information system that collects and disseminates information about the track record of borrowers and the credit activities of entities in the financial system.

Money and Banking System

The banking system is stable. The central bank has pursued regulatory reforms promoting good governance and aligning/adapting risk management regulations and the risk-based capital framework with international standards. Capital adequacy ratios are well above the 8 percent international standard and the central bank’s 10 percent regulatory requirement. The non-performing loan ratio was at 1.9 percent as of end-2016. There is ample liquidity, with the liquid assets-to-deposits ratio estimated at 50.7 percent. Commercial banks constitute more than 90 percent of the total assets of the Philippine banking industry. The five largest commercial banks represented about 59.4 percent of the total resources of the commercial banking sector as of 2016. Twenty of the more than 40 commercial banks operating in the country are foreign branches, including three U.S. banks (Citibank, Bank of America, and JP Morgan Chase). Citibank has the largest presence among the foreign bank branches and currently ranks 11th overall in terms of assets.

Foreign residents and non-residents may open foreign and local currency bank accounts. Although non-residents may open local currency deposit accounts, they are limited to the funding sources specified under central bank regulations. Non-residents’ foreign currency accounts cannot be funded from foreign exchange purchases from banks and banks’ subsidiary/affiliate foreign exchange corporations.

Foreign Exchange and Remittances

Foreign Exchange

Bangko Sentral Pilipinas (BSP), the central bank has actively pursued reforms since the 1990s to liberalize and simplify foreign exchange regulations. As a general rule, the central bank allows residents and non-residents to purchase foreign exchange from banks, banks’ subsidiary/affiliate foreign exchange corporations, and other non-bank entities operating as foreign exchange dealers and/or money changers and remittance agents to fund legitimate foreign exchange obligations, subject to provision of information and/or documents on the underlying obligations. No mandatory foreign exchange surrender requirement is imposed on exporters, overseas workers’ incomes, or other foreign currency earners; these foreign exchange receipts may be sold for pesos or retained in local and/or offshore foreign currency accounts. The central bank follows a market-determined exchange rate policy, with scope for intervention to smooth excessive foreign exchange volatility.

Remittance Policies

Overseas remittances, which officially totaled USD $26.9 billion in 2016, remain a vital part of the Philippine economy, with levels consistently equivalent to between eight and ten percent of the country’s Gross Domestic Product (GDP). Registration of foreign direct and portfolio investments with the central bank or custodian banks is optional unless the foreign exchange to repatriate capital and remit associated earnings from an investment will be sourced from banks and/or banks’ subsidiary/affiliate foreign exchange corporations. The central bank requires proof of inward remittance of foreign exchange and evidence that the funds/assets have been received by the local investee/beneficiary or seller/issuer of the investment instruments. Duly registered investments are entitled to full and immediate repatriation of capital and remittance of dividends, profits, and earnings.

The Financial Action Task Force (FATF) removed the Philippines from its “gray list” of countries with strategic deficiencies in countering money laundering and the financing of terrorism in 2013, but continues to urge regulation of the country’s growing casino industry for anti-money laundering/terrorism financing purposes. FATF is closely monitoring progress of pending legislation seeking to include casinos as covered institutions; a high profile international money laundering case in February 2016 heightened the urgency of amending the laws. Government officials expressed confidence that legislation will pass on or before July 2017; otherwise, the Philippines risks reverting to the FATF “gray list” by the October 2017 FATF plenary. Although not a systemic issue, some local banks and money service businesses were affected by the “de-risking” phenomenon reported by various jurisdictions in recent years, driven in part by risk aversion of foreign banks due to anti-money laundering/terrorism financing compliance costs.

Sovereign Wealth Funds

The Philippines does not have sovereign wealth funds.

Investment Climate Statements
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