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The Philippines: Opportunities for European trade and investment

On 17 June, the ECCT hosted a special lunch with guest speakers from The Philippines. Martial Beck, Vice-President & General Manager of the European Chamber of Commerce of The Philippines (ECCP) and Walter van Hattum, Counsellor & Head of Economic & Trade Section, EU Delegation to The Philippines gave an overview of the economic environment, trends and prospects for The Philippines.

Taking into account the multitude of islands that make up the archipelago, The Philippines is a relatively large country. It is eight times larger than Taiwan and three times larger than Korea. It has a large population of over 100 million (possibly more since it is estimated that 10 million of its citizens live and work abroad as migrant labourers). The country is an excellent location for agriculture and is also rich in mineral deposits including copper, nickel and gold.

In recent years, the economy has seen remarkable growth that has outpaced its neighbours. GDP growth hit 7.2% in 2013, second only to China's 7.7% in the region and ahead of Vietnam's 5.3%. GDP in the first quarter of 2014 was 5.7%. The lower figure was attributed to the lingering effects from Typhoon Yolanda (Haiyan) from the previous quarter, but analysts project the growth rate for the full year to be within the government's target of 6.5-7.5%. The Philippines has an annual GDP of €205 billion (or €2,100 per capita). Government expenditure is still a very small percentage of GDP at around €35 billion. The external debt is also relatively low by global standards at 21.5% of GDP.

Trade between the EU is fairly modest at less than €11 billion in 2013. EU exports to The Philippines have seen steady growth over the past three years but imports from The Philippines have declined in the same period.

The largest sectors of the economy are agriculture, Business Process Outsourcing (BPO, such as call centres), IT and logistics. The great success of its BPO industry can be mostly attributed to a large pool of well-educated English-speaking people (450,000 students graduate from university every year) and a relatively good telecommunications infrastructure.

In terms of EU investment in the country, the largest percentage (45%) is in the energy sector and the next three largest sectors are manufacturing (15%), financial services (12%) and electronics/semiconductors (8%).

On the downside, The Philippines has a large wealth gap. A few billionaires and family enterprises control large and important sectors of the economy while 24.9% of the population lives below poverty line. Official unemployment is 7% while 20% of people are underemployed. Moreover, remittances from abroad (from Philippine labourers living and working overseas) still account for 10% GDP.

The Philippines registered US$3.860 billion in foreign direct investments (FDI) in 2013, a rise of 20% from $3.215 billion in 2012 but, accumulated investments are still relatively low. The construction, manufacturing and business process outsourcing (BPO) industries continue to be the leaders of growth in the economy.

The Philippines has made great improvements in terms of development, fighting corruption and global competitiveness in recent years. It has risen in a number of global surveys over the past three years including 28 places in the World Bank's Doing Business Survey to 108th place and 26 places in the World Economic Forum's Global Competitiveness Index. It also rose 35 places in Transparency International's Corruption Practices Index over the same period.

According to Van Hattum, the EU has a strong commercial relationship with The Philippines but it is underutilized and he believes that trade and investments could easily be doubled from current levels. Van Hattum believes that now is a good time to invest in The Philippines but there is still some work to do to convince European and other foreign investors.

The Philippine authorities Board of Investments (BOI) believe the most promising sectors are logistics, mining, ship building and tourism. The Joint Foreign Chambers (JFC) in the Philippines share the same positive view of the country's promising growth but highlight a broader range of seven industries that the country should focus on namely: agribusiness, BPO, infrastructure, manufacturing and logistics, tourism, mining and creative industries.

35% of the Philippine labor force works in the agricultural sector but a lot of food is wasted owing to poor storage, processing and transportation of food. Better post-harvest storage facilities are required as well as irrigation, food terminals and cold storage, while food processing factories would allow for more local-value added. The IT and BPO sector is the fastest-growing in terms of employment and the highest revenue-generating sector in the country and is expected to remain important. The BPO sector is expected to increase employment to 1.3 million employees and register revenue of US$25 billion by 2016.

The EU Delegation to The EU has several trade policy mechanisms with The Philippines. It has in place a Generalised Scheme of Preferences (GSP), which provides preferential access to the EU market through reduced tariffs. It is now working on an enhanced GSP (named GSP +), which would reduce tariffs on a long list of items by between 9.5% and 28.5% and thereby boost exports. By some estimates, GSP + could create 400,000 jobs and , according to Van Hattum, if GSP+ is ratified, it would give The Philippines an advantage over its ASEAN neighbours.

The EU and The Philippines have a Partnership and Cooperation Agreement which covers political, security, economic and social affairs as well as issues of specific interest such as human rights, counter-terrorism, energy and migration. In addition, the EU was invited to support peace building efforts in the restive Mindanao region. The EU is member of the International Monitoring Team, is supporting NGOs and engaged in activities such as eliminating landmines.

Although The Philippines offers compelling fundamental indicators, further domestic reforms would be needed to attract major new FDI and trade.

The rising economy and consequent rise of the middle class (estimated at 17-20m today and expected to double in the next 10 years), should be an enticing prospect for companies in consumer goods and services sectors.

In terms of future business opportunities, the most obvious area is in infrastructure, which needs to be upgraded to modern standards. 14 public private partnership projects have been approved and seven more are in the planning stages. Several improvements in the infrastructure sector are underway including 15 roadwork projects in the Manila metropolitan area from 2014-2016. The country is highly dependent on air and sea transport. For this reason, new terminals and modern equipment for more direct international flights to secondary cities are necessary. A new international airport has been proposed by San Miguel Corporation (SMC) to be built in reclaimed land in Manila Bay and there is still a need for investments in airport terminals, runways, and communication facilities for Central Luzon. The country only has one heavy rail line and only three light rail lines in operation. There is still a need to restore rail service north of Manila and build intercity and urban light rails especially in Luzon.

Manufactured products accounted for 82% or €4.2 billion of Philippine exports to the EU in 2013 (electronics products: 56% or €2.8 billion). Shipments in semiconductors and electric microcircuit account for a lion's share of merchandise export revenues.

Travel and tourism is currently the fourth largest source of foreign exchange revenue with international arrivals increasing by 9.6% to about 4.7 million in 2013. Of these, the number of EU tourists to the Philippines rose by 8% to over 376,000 visitors. The Department of Tourism (DOT) is projecting revenues from domestic tourism to hit PHP1.4 trillion in 2014. It estimates domestic tourist numbers will reach 47.7 million in 2014 up from 44.1 million in 2013. As part of the Investment Priorities Plan, the government is prioritizing the establishment and operation of accommodation establishments. There are also opportunities in the foreign national medical travel and retirement subsector. It is relatively easy for foreign retirees to get retirement visas in The Philippines and it is an attractive retirement destination for many western retirees.

There are a number of investment incentives offered for legal enterprises including income tax holidays ranging from 4-6 years, tax credits for taxes and duties on raw materials, deduction of labour expenses from taxable incomes, access to bonded manufacturing / trading warehouse schemes, exemption from taxes and duties on imported supplies and spare parts for consigned equipment, exemption from wharfage dues and export taxes. Foreign investors are legally protected from expropriation and are allowed to freely repatriate investments and earnings.

The Philippines is making efforts to increase its participation in international organisations and reform its regulatory environment. However, there is still some work to be done to address a number of market access issues. The Philippines has in place a Negative Investment List which restricts investment in sectors such as professional services and retail. There is a move to revise the investment act to relax specific foreign equity limits in sectors including telecommunications, electricity, water, media, and agriculture. In terms of government procurement, there is currently a 40% limit on foreign ownership of bidders. This could be addressed by joining the GPA. Changing the law is not so simple because many safeguards are actually written into the constitution. For example, public utilities are protected based on definitions that go back decades, before the days of modern communication and transport links. However, this could be addressed by changing the definition of public utilities to exclude areas that are not de facto public utilities such as express delivery, transport and telecom operators).

Progress has been made recently to address a number of regulatory areas. Philippine authorities have agreed to visit four member states for meat accreditation. Wine no longer requires separate registration. So-called "sin tax" laws no longer discriminate against foreign firms. The Foreign Banking Bill would allow foreign banks to buy local banks. Meanwhile, limitations on investment ownership and the retail sector have been eased while public procurement projects over PHP1 billion have been opened up to foreign bidders. A competition bill is being discussed, although prospects are uncertain because the discussion has been going on for 21 years and there are currently 12 versions of the bill being debated.

On the issue of IPR protection, The Philippines has IPR protection laws in place and dedicated IPR authorities are authorized to conduct raids and seize counterfeit products. However, like Taiwan, there is work to do to regarding enforcement and penalties are not severe enough.