In the pre-pandemic period, the Philippines was one of the most vibrant economies in Southeast Asia, but the adverse effects of the coronavirus is changing its economic outlook. The country has plunged into recession suffering from a deep contraction in the second quarter—and it has revised its forecast for the year on the back of imposing one of the strictest lockdowns in the region. According to data released by the national statistics agency, its gross domestic product contracted 16.5 percent from the previous year—pointing to the worst data series reading since 1981.
It is reported that the country’s economic managers predict it to shrink 5.5 percent this year from an earlier estimated decline of 2 percent to 3.4 percent before a strong rebound next year. It appears that the economic cost of trying to curb the infection spread through continued restrictions on movements has weighed heavily on its domestic demand and investment. Even Bloomberg economists said that the Philippines’ gross domestic product in the second quarter of the year marked an all-time low for the economy and more weakness is expected in the coming months.
Abhineet Kaul, who is the senior director of public sector and government, Frost & Sullivan Asia Pacific, told International Finance, “With the resurgence of coronavirus in the Philippines and continued lockdown, the economy will take a beating. We expect a U-shaped recovery with return to growth by Q1 2021. However, the domestic investment is expected to pick up by Q4 2020 and will drive the short-term demand. This is evident by the pledged DDI in H1 2020, which is 166 percent higher than the same period in 2019.” For now, the country is facing an economic downturn—and despite that many developments are simultaneously happening to secure the country’s investment environment and competitiveness in global markets.
Creation of new economic zones will protect investor interest
Last July, the President during the Station of the Nation Address highlighted the significance of Administrative Order (AO) No. 18 which aims to distribute the economic and business activities of the country by strengthening the development of special economic zones. What is interesting about the country’s efforts in building itself up as an attractive investment destination to foreign and local investors is the continued creation of economic zones in line with the Philippine Economic Zone Authority’s (PEZA) mandate according to the Special Economic Zone Act of 1996. It was in June that the Philippine government through the Office of the President’s presidential proclamations approved the 12 new economic zones to be managed by the authority.
The creation of the 12 new economic zones will promote rural development, encourage nationwide economic activity and boost investor interest. This is especially important with the contagion effects of the pandemic affecting the country on many levels. Among the 12 economic zones, the first five were proclaimed in January this year under Presidential Proclamation Nos. 885, 889, and 895-897. These zones are Abiathar Commercial Complex, TDG Innovation and Global Business Solutions Centre, Millennium Industrial Economic Zone, Ayala Bacolod Capitol Corporate Centre and Silver City.
That said, the remaining seven economic zones were proclaimed under Proclamation Nos 940, 946-950, and 953, which were signed by President Rodrigo Duterte. These economic zones include Davao del Sur Industrial Economic Zone, Batangas State University Knowledge, Innovation and Science Technology Park, GLAS Office Development, Bench City Centre, Ortigas Technopoint Tower 1 & 2, NEX Tower and Robinsons Luisita 2. It appears that 67 percent of the total approved investments will be located in Luzon while the remaining 33.33 percent will be in Visayas and Mindanao.
PEZA’s role in the development of economic zones
The fact of the matter is that the authority is pivotal to the current and future development of the country’s economic zones. This is because “it manages 408 operating economic zones which includes 284 in Luzon, 82 in Visayas and 42 in Mindanao with 4,584 of its locator companies directly employing about 1.6 million workers nationwide,” PEZA Director General Charito “Ching” Plaza told International Finance. However, the authority directly manages four of the total 408 economic zones which are privately developed. Despite the nature of development, “the economic zones are regulated under R.A. No. 7916 under which PEZA has the mandate to regulate and supervise the operation of PEZA-registered economic zones.” The authority contributes to 64 percent of the Philippines’ export of commodities and 16.8 percent of its GDP. Now it is actively taking initiatives to promote national development and industrialisation by coming up with a myriad of projects such as the new 10-point programme and the Development Outreach for Labour, Livelihood and Advancement of Resources (DOLLAR) programme.
The DOLLAR programme was launched to accelerate rural progress and encourage nationwide progress in the country. This is anticipated to result in the economic growth of local government units which will be hosting the viable and environment-friendly economic zones. The authority has launched an online job platform which aims to provide 69,081 jobs within its economic zones and an online skills training programme to help people to further develop their skills. Meanwhile, the 10-point programme seeks to assist existing investors and attract new ones to create a globally competitive, sustainable and environment-friendly business landscape for export-oriented companies in economic zones.
In short, PEZA is imperative to the development of all types of economic zones including manufacturing, assembling, processing, IT services, agro-industrial, medical tourism, knowledge and technology. The authority explained that the new economic zones will be in addition to the existing 408 economic zones, each providing their own fiscal and non-fiscal incentives to foreign investors. Kaul explained that “10 of the 12 new economic zones are in high value-adding digital sectors which will help to catalyse investment and job opportunities in the Philippines. They are expected to generate an additional Ph6.4 billion in this fiscal year. While the long-term outlook looks good, the short-term investment will be impacted due to the coronavirus.”
Foreign investment portfolio—by numbers
For the country, a cause for truly legitimate concern is its foreign direct investment. “The investment outlook is not very good. In 2019, the foreign direct investment of $5 billion was below the government’s target of $8 billion and also below the 2018 record of 6.6 billion. Even the latest numbers in April 2020 were down 68 percent compared to April 2019,” Kaul said.
The central bank of the Philippines said in a statement that the “registered foreign portfolio investments for June yielded net outflows of $235 million resulting from the $1.3 billion gross outflows and $1 billion gross inflows for the month.” This record is smaller than the net outflows of $1 billion in May. “The $1 billion registered foreign investments for the month was more than twice the investment record of $486 million for May 2020.” It is reported that 92.3 percent of investments registered were in PSE-listed securities, while the remaining 7.7 percent investment was directed into Peso government securities. It seems that the foreign investment outflows for June was lower compared to the recorded outflows for May. The US had received 61.4 percent of the total outflows.
The foreign investment commitment in the first quarter was propelled by investments from the UK, the US and China. The UK, Singapore, the US, Norway and the Bahamas were identified as the top five investor countries for June, with a combined share totalling to 71.7 percent. “The Philippines registered foreign portfolio investment transactions from January 1 to June 30 this year yielded net outflows of $3.3 billion resulting from $9 billion gross outflows and $5.7 billion gross inflows for that period,” the central bank said in a statement. “This is larger compared to $721 million net outflows noted for the same period last year, brought by uncertainties such as the impact of the coronavirus pandemic on the global economy and financial system, and other key events earlier this year like the continuing geopolitical tensions between the US and Iran; ongoing trade negotiations between the US and China; and renegotiation of the contracts of the country’s water concessionaires. Meanwhile, year-to-date transactions for all investments including PSE-listed securities, Peso GS and other investments have resulted in net outflows.”
Ecozones incentives to attract foreign and local investors
The authority administers incentives to investors and companies registered in the economic zones. The incentives include income tax holiday, tax and duty free importation of capital equipment or supplies, exemption from payment of local government taxes, employment of foreign nationals and special visa for foreigner investors and long-term lease up to 75 years among other aspects. “Our incentives have already been tried, tested and proven over the years to attract investors and compete globally as attested to by industry associations and international institutions,” PEZA Director General Charito “Ching” Plaza said. “From the ecozone investors’ perspective, any reduction in the existing incentives will erode the country’s competitiveness in attracting new foreign direct investment and might even trigger an exodus of existing ecozone locators or reallocation of their production quotas to other countries where they can be more viable with their export operations.”
According to the Philippines Chamber of Commerce and Industry, providing additional flexibility in fiscal and non-fiscal incentive grants is important as the country competes internationally for high-value investments. For that reason, the authority supports the grant of longer ITH and 5 percent gross income earned incentives including the retention of tax and duty-free importation and zero VAT rating for local purchases of production-related materials for strategic and large scale projects. “This in turn will encourage the existing locators to expand their operations and to re-invest in new projects in the country to be eligible for transition to the new incentives’ regime.”
Economic zones will lead to socio-economic progress
The purpose of further developing economic zones is quite clear. The new and existing economic zones will “help to create job opportunities for locals and build forward and backward linkages,” PEZA Director General Charito “Ching” Plaza explained. “This will in turn boost socio-economic progress and reduce crime and poverty incidences in regions as experienced by local government units hosting the economic zones.”
The rising number of economic zones are seen as drivers for growth especially to less developed urban areas in the country. The development of economic zones will transform idle lands for better use and address unemployment to a great extent. In fact, new economic zones are yet to be developed in different regions with thousands of hectares of idle lands present. According to PEZA’s data, regions such as NCR and Region IV have the highest number of economic zones with contributing capacity to the country’s gross domestic product as they have a multiplier effect in the local business landscape. For example, Cavite, a province located in the Calabarzon region in Luzon only had two municipalities prior to the creation of PEZA’s public economic zones in General Trias. Now, it has developed three cities within the province and seven municipalities. “Flourishing economic activities and better livelihood is what we want to create across the country,” PEZA Director General Charito “Ching” Plaza said.
Similarly, private and public economic zones are located in Pampanga and Mactan among other areas. “Even with the difficulties caused by the coronavirus pandemic, PEZA will continue to attract investors in the country and promote creation of special economic zones especially in the countryside that will become economic drivers in every region,” PEZA Director General Charito “Ching” Plaza said. The development of numerous infrastructure projects by the national government under its ‘Build, Build, Build’ programme will complement the creation of more economic zones across the country because infrastructure, logistics and digital connectivity are imperative to enhance the ease of doing business.
Ease of doing business will be more pronounced
Certainly, a high employment rate and ease of doing business will contribute to sustainable economic development. “The new economic zones will also provide employment opportunities to our repatriated OFWs and those who have lost their jobs due to the unfortunate effects of the coronavirus pandemic,” PEZA Director General Charito “Ching” Plaza explained. Last year, the country’s unemployment rate decreased to 5.1 percent and it is expected to further decline in the coming years. Even its Labour Force Participation Rate increased to 61.5 percent last October compared to the previous year. But the International Monetary Fund expects the country’s unemployment trend to be largely affected by the pandemic, with an estimated increase of 6.2 percent in 2020 and decrease of 5.3 percent in 2021.
For that reason, the existing and new economic zones will stabilise the economy and ensure uninterrupted services to locator companies operating in the country despite global challenges. “The IT-BPO sectors under PEZA remain strong amid the negative impacts of the pandemic. Many BPO companies were quick to facilitate a work from home arrangement for their staff or were able to provide living quarters for them to ensure business continuity and still be able to provide support to their clients abroad,” PEZA Director General Charito “Ching” Plaza said.
It is positive that statistics show 77 percent of the IT sector and 92 percent of the manufacturing sector were operational for the period July 27-30, 2020. A total of 2606 companies were operating nationwide during that period, while 700 of them remained non-operational. The status of operations also point to an estimated total of 69,081 job openings recorded during that month. The authority has invested a lot of effort in implementing effective strategies to protect the welfare of workers and ensure continuous business operations during the pandemic. For example, stringent procedures were implemented in compliance with the guidelines set by the Inter-Agency Task Force for the Management of Emerging Infectious Diseases to curb the spread of the coronavirus infection. These procedures include social distancing measures, use of thermal scanning equipment, sanitisers and face masks and regular disinfection of the workplace.
Implications of CREATE Act for investors and businesses
According to Kaul, more than the new economic zones—the CREATE Act—if passed has a potential to attract investment by providing standardisation and clarity to investors about the incentives. The country is preparing to issue the CREATE Act through which the government will reduce the corporate income tax rate from 30 percent to 25 percent until 2022. After that, one percent annual reduction will be made until 2027 to lower the rate to 20 percent. The government has assured that the CREATE Act will lead to a fair and accountable tax incentive system in the country.
In this context, the authority explained that “PEZA supports the objectives of the CREATE bill, mainly the goal to rationalise the fiscal incentives to make them performance-based, targeted, time bound and transparent. However, its position is that the proposed rationalisation of incentives as espoused in the said bill need not result in the reduction of tax perks currently being offered by PEZA.”
The Fiscal Incentives Review Board, an agency which is responsible for managing the country’s investment promotion agencies will be given the authority to recommend appropriate fiscal and non-fiscal support incentives, under the CREATE Act. The fiscal and non-fiscal support incentives will include tax incentives, logistics support, training, facilitation of obtaining certification from government agencies and customs facilitation for investors. It is estimated that businesses in the country can save $842 million in tax savings and more than $12.5 billion over the next five years. Then these savings will be reinvested by businesses to empower themselves and increase cost competitiveness. This move is especially important to the Philippines at a time when it is exploring new ways to hit quick recovery and secure economic activities despite the protracted pandemic.