Persistent withdrawals of foreign investments are a risk to the Philippine growth outlook as investors focus more on the negative news coming out of the country, Australia’s ANZ Bank warned.
“For the time being, foreign investors have been reacting more to the negative media headlines,” the bank said, noting that Philippine asset prices have been under pressure and weighed down by outflows in portfolio investment.
Bangko Sentral ng Pilipinas (BSP) data showed there yave been five consecutive weeks of outflows totaling $800 million since late August.
“While the Philippines’ low reliance on foreign capital means the recent sell-off will not have much material impact on economic prospects, the risk is that negative investor sentiment could persist for longer, putting further pressure on asset prices,” ANZ said.
It noted the contribution of foreign capital to the Philippines is low, with net foreign portfolio flows posting a monthly average of $96 million in the last three years.
“The Philippines has one of the lowest minimum public float in the region at 10 percent, leading to low rates of foreign ownership,” the bank said.
Foreign direct investments reached only $5.8 billion in 2015, equivalent to 2 percent of gross domestic product (GDP), it said. This pales in comparison to remittances that account for for 8.8 percent of GDP in 2015.
In the last 10 years, direct investments from the US accounted for 27.8 percent of total intake, marginally higher than those from Japan, ANZ added.
An additional risk is the environmental audit of the mining industry.
The Department of Environment and Natural Resources has so far suspended 10 mining operations with 20 more companies having been recommenderd for suspension.
“Exports of mineral products account for 4.4 percent of total exports, so the risk is that more suspensions in mining production could lead to a further deterioration in the trade deficit, resulting in a much narrower current account surplus next year,” the bank said.
In terms of impact on gross domestic product (GDP), ANZ said it does not see a significant effect on growth as the mining industry accounts for only 1 percent of GDP. Excise revenue from mining, at P2.1 billion in 2015, was only 0.1 percent of government collections.
The bank believes remittances and the business process outsourcing sector will help offset the risks. “At some point, the foreign investor sell-off will subside, leading to a rebound in domestic asset prices, especially the PHP [Philippine peso] which reached its weakest level since 2009 at one stage,” the bank pointed out.
The seasonal rise in remittances toward the end of the year should also help the peso recover some lost ground.
“We called the Philippines economy ‘the strong man of Asia’ a few years back in light of its strong growth performance and rise in potential growth. We see no reason to change our assessment,” ANZ said.
Foreign investor sentiment can be fickle, but sound economic fundamentals stay the course, especially when policies designed to unlock a country’s potential continue to be implemented.
In this regard, the bank said public investment will likely continue to rise with no indications that projects are being put on hold and that existing contracts are being reviewed which could lead to delays.
“Instead, there are preparations to implement a program of 24/7 construction work by 2017. The bidding for new projects are expected in the fourth quarter, completing the requirements for construction to break ground by January 2017,” it said.