• The country needs a clear, unembellished picture of the economy

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    ON Tuesday, the Bangko Sentral ng Pilipinas (BSP) released data on foreign direct investments (FDI) as of June this year, with a statement carrying the rather triumphant headline, “FDI net inflows increase by 94.9 percent for the first semester of 2016.”

    That is true. And the net amount of foreign investment coming into the country nearly doubling is truly impressive. The central bank, led by Governor Amando Tetangco Jr., who has for several years in a row been judged by his global peers as one of the best central bankers on the planet, always presents complete and unfailingly accurate data.

    But a keen reader will notice that the presentation of the data does not necessarily show a clear picture of the overall situation unless one looks closely into the figures.

    Almost lost in the discussion of the FDI report was the alarming data for the month of June itself, though again, to be fair to the BSP, was not omitted from its report on Tuesday, just placed near the end of it.

    FDI inflows during the month dropped 40.9 percent from the corresponding month a year earlier, registering just $238 million, compared with the $404 million recorded in June 2015. In one FDI component, equity placements, the inflow actually reversed, with investors withdrawing $5 million more in equity than they placed in Philippine-based companies.

    FDI statistics are important because they are a key indicator of sustained economic activity, reflecting the sentiment of investors toward the local economy. Unlike foreign equity or other financial market investments and so-called “hot money,” direct investment is made in companies to fund their ongoing operations and capital expenditure, and higher FDI can be viewed as an endorsement of the economic environment, an expectation on the part of investors – who are sometimes the parent companies of Philippine affiliates – of longer-term returns. The June FDI data is particularly important because that was the month marking the end of the Aquino government and then the beginning of President Rodrigo Duterte’s administration.

    For weeks, we have been hearing anxious comments from various business groups and analysts both here and abroad about growing investor uncertainty about the direction of the economy under President Duterte and his unfamiliar leadership style.

    Last week, echoing a similar sentiment expressed by Fitch-owned BMI Research and Dutch banking giant ING, economist Gareth Leather of London-based Capital Economics observed that, “With Duterte in charge, it is hard to rule out a sudden shift in policy or a disruption of the political stability that has characterized the last six years. Either would cause sentiment to sour and growth to weaken.”

    As we have pointed out before, reassuring investors is important, because investor sentiment, whether justified or not, has a significant effect on the economy, at least in the short term. It seems that the BSP was attempting to do just that with the positive spin to its statement on the half-year FDI data, but for all the BSP’s skill in managing monetary policy, it should probably refrain from attempting to over-manage information. An unembellished presentation would serve the purpose better, because it would accurately indicate the degree and scope of the effect of investor sentiment, and permit policymakers to effectively respond to it.

    As Ayala Corp. Managing Director Paolo Borromeo noted on Wednesday, foreign investors are concerned about potential political risks, but “what’s important is to ensure or to understand that the Philippine economy is stable.”

    And it is fundamentally stable, as other analysts noted after the release of the latest FDI data, despite the June downturn. But statements that sound misleading unnecessarily encourage skepticism.

    The sound fundamentals of the Philippine economy are a credit to the equally sound management of the BSP, and the government and investors alike rely on the guidance of its statements. Letting the data speak for itself helps guide policymakers and investors in accurate and effective decision-making, and reflects positively on the BSP’s good performance of its mandate.

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    1 Comment

    1. TAX HOLIDAYS…give them Foreign Investors more ot Tax Holidays. From the standpoint of a sound economy it is better to create more jobs (arising from the job creation schemes of the business entities the FI will create) rather than collect more taxes from the earnings of the FI businesses. The churning of economic opportuinities brought by more jobs is more than 100 fold better than the amount of tax holidays. Remember that the supposed Tax from FI is not assured of bringing turn-around benefit to the citizenry as government might use the money as part of the SCAMAtic in any form. Economists can show diagnostics in graphic presentation format what job creation can bring to a stable country vis-a-vis tax holidays….Invite FI with 0% tax as other Central Asian countries do.