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Assignment 1 MPM735

MPM735 – Draft Notes Assignment 1 IEPFLS Scenario / Country Profile

Segment– Foreign Direct Investment Group Members – Stephen Boicos Salina Choi Naomi Rule Grace Eunike Tika Dean Sibun Due Date – Monday 16th April (11.59pm) Word Count Section 5 – 525 (need to get this down)

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Assignment 1 MPM735 Introduction

Assessment 1 – Scenario / Country Profile: Philippines Section 1 - Economic

Country Indicators Indicator 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total population 88.706 90.457 92.227 94.013 95.834 97.691 99.645 101.638 103.67 105.744 (bn) Total GDP (USD 149.36 173.603 168.485 199.591 216.096 232.089 248.755 266.681 286.12 307.348 (bn) Real GDP Growth 6.6 4.2 1.1 7.6 3.7 3.4 4.9 5.4 5.5 5.6 (%) Inflation (%) 2.81 9.299 3.249 3.829 4.535 4.149 4 4 4 4 Unemployment 7.325 7.4 7.475 7.2 7.2 7.2 7 7 7 7 (%) Note – 2011 – 2016 are forecast figures Source: IMF and EIU Current (2012) Scenario The Philippine economy is based on services, with revenue and consumption supported by remittances. Although it was expected that lower remittances would affect the disposable income following the onset of the global economic crisis, inflows have proven that the economy is still growing, which increased by 7.4% annually in the first eight months of 2010 to USD 12.18 bn. With the domestic confidence and business investment rising from 2010, the government’s primary economic object remains the reduction of the budget deficit. The Aquino government, however, has diverged from its predecessor, Gloria Macapagal Arroyo,, in eschewing the objective of a balanced budget, 2

Assignment 1 MPM735 preferring instead to support social spending such as conditional cash transfers while aiming to reduce the deficit to 2% of GDP by 2013. Strong consistent economic growth will support this aim, the economy was expected to expand 3.7% in 2011 and by 3.4% in 2012. Another key area for the government is on raising revenue through the sale of state assets, evaluating the feasibility of privatizing state casinos in Q3 of 2010. Besides indentifying viable privatization opportunities, the president has pledged to improve the transparency of these sales and other commercial transactions. He has highlighted corruption as an obstacle to investment, and has prioritized improved accountability as a means to improve the country’s business environment. Inflation was expected to average 4.1% in 2012. The Central Bank of Philippines has cut the interest rates in mid January 2012, which is the first time since July 2009, in order to ease the monetary policy as a deteriorating global economy threatens growth. The outlook for 2012 are under pressures and the government is trying hard to protect growth after World Bank review its global economic forecast and commented a recession in euro region could lead to a slowdown in country’s development. Such move in reducing interest rates is expected to boost expansion by increasing spending and seek investments for public infrastructures. Future (2012 - 2016) Scenario As Benigno Aquino won the May 2010 presidential election, it is expected that the Philippines would be able to enjoy a period of relative political stability. Government revenue will remain low in relation to GDP, and it is expected that the budget to be remained in deficit, at around 2.3% of GDP on average. The real GDP was in a very good sign of 3.7% in 2011, yet it is expected to be a little bit in down trend of 3.4% in 2012 to in line with the slowdown in global expansion. Growth will then accelerate, reaching 5.6% in 2016, according to EIU’s forecast and which would be fueled by private consumption. The rate of consumer price inflation will slow from 4.8% in 2011 to 3.7% in 2012 according to the EIU forecast. Although global oil prices will remain relatively high, the price of food is set to fall in world markets. Inflation will average 4.7% a year in 2013-16. The remittances account will remain in surplus in the forecast period, at around 2.1% of GDP, as a result of the substantial inflows of remittances from all the overseas workers. In summary, Philippines’s demographic profile provide the possibility of an improved performance, but institutional obstacles to effective policy implementation (e.g. the interference from the former president in legislation) are likely to prevent a significant increase in the rate of gross fixed investment growth.

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Assignment 1 MPM735

Assessment 1 – Scenario / Country Profile: Philippines Section 2 - Political

Phillipines political situation: Philipines is one of the oldest democratic countries in Asia and is a key member of the Asociation of Southest Asian Nations (ASEAN) (Datamonitor 2011). The current constitution as framed in 1987, Republic of the Phillipines political system is charaterized by a separation between the executive presidency, bicameral legislature and independent judiciary. Each elected president is limited to serve in a 6 years term. President of Phillipines is also chief executive, head of state and commander-in-chief who has the authority to approve bills passed by Congress or choose to exercise a veto which can only be abrogated by a two third majority of Congress (The Economist Intelligence Unit 2009). The current president, Begino Aquino was elected in May 2010 and the next election is due in May 2016 (Datamonitor 2011). The legislature consists of two components with 24 members Phillipine Senate and 285 member of House of Representatives. All senators serve a 6 years terms and representatives are elected every 3 years (Bureau of East Asian and Pacific Affairs 2012) Filipino political parties are characterized majorly by personalities and lack of ideologies. In other words, political aprties are mostly based on the loyalty of key players and vast network of patronage spreading from national to local level. Consequently, corruption has become widespread issue in Fillipino political scene (Datamonitor 2011). There are opportunities and threats posed by Phillipines political condition for Jardin Vertical Garden to consider in establishing its business in the country. In terms of opportunities, Phillipines is a major non-NATO of the US which ensures the country's security. Besides, the current president is committed to fight against corruption and remove excesses of the preceding administration in order to recover losses from previous corruptions. Furthermore, the country is moving toward decentralization of political power and improvement of regional governance. Peace agreements with Moro Islamic Liberation Front and Communist New People's Army are also a priority of the government to reduce violence and terrorism in the country .Nevertheless, the country also faces several security issues such as terrorist threats from local insurgent groups ,warlords and external war risk posed by China in regard of the South China Sea claims (Business Monitor International Ltd 2012). In the next few years, there are potentially instability in Filipino political scene. Firstly, the performance evaluation of president Benigno Aquino III is not entirely positive. Supportive recognition of his progress in decreasing proverty 4

Assignment 1 MPM735 and corruption was made however he was also criticized heavily for delays of rolling out infrastructure projects and more importantly parts of the millitary are unspporitve of his way to handle guerrilla violence in Basilan. Nonetheless, there is still time for the president to regain his popularity before his term ends (The PRS Group 2011).

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Assignment 1 MPM735

Assessment 1 – Scenario / Country Profile: Philippines Section 3 - Financial

Current (2012) Scenario During the Asian crisis of the 1900s, banks were forced to improve their balance sheet performance by restructuring, consolidating and shedding non-performing assets. Success of rationalising the banking sector was assisted by the strengthening of the Philippine regulatory framework and improvements to the Bangko Sentral Ng Philipinas (BSP), Philippine central bank supervisory capabilities (IMF 2010). Since the Asian crisis, growth in the Philippines has been averaging 5% and grew by 7.6% in 2010. Resilience to recent external shocks, particularly the global financial crisis with learning’s from the Asian crisis, has seen the Philippines build international reserves, increase savings whilst maintaining currency stability (Appendix 1, World Bank 2012). Despite the upward trends, poverty has remained largely the same level with a quarter of the population below the poverty line and 40% earning less than $2 a day. The unchanged social trends indicate that the benefits of increases in growth and investment in the Philippines are not reaching the poor (Appendix 1, World Bank 2012). Good governance is a priority for the current administration, with a focus on anti-corruption intended to enhance the appetite of foreign and domestic investors with the drive to create jobs, improve social service delivery and reduce poverty (National Economic and Development Authority 2011). To answer these challenges and achieve inclusive growth, the Philippines Development plan 2011-2016 has three main strategies; attaining high and sustained economic growth that provide employment opportunities, promoting equal access to development opportunities, establishing effective and responsive social protection to protect and enable those who do not have the capability to participate in the economic growth process (World Bank 2012). A key initiative of the Philippines Development Plan is the Investment Priorities Plan (IPP) which seeks to generate investments thereby creating jobs by offering tax incentives to new and expanding industries (Board of Investments 2011).

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Assignment 1 MPM735 Tax incentives are available to enterprises registered with the Board of Investments (BOI) or the Philippine Economic Zone Authority (PEZA) which grant, six for pioneer, four for non-pioneer and three years for expanding firms, income tax holidays with the option to receive tax incentives or reduced tax rates beyond the initial term(s) (Taxrates.cc 2010). The IMF reviewed the taxation framework and recommended changes to tax incentives, corporate taxes, excises, VAT, personal income tax, and mining taxes by increasing taxes, rationalising taxing agencies and decreasing tax incentives to increase taxation revenue over the 2012-2016 period (IMF 2012). If the IMF recommendations are enacted the increase taxation compliance will create jobs, and increase in taxation revenue will assist the poor through wealth redistribution. Future (2012 - 2016) Scenario The Philippine Development Plan sets the growth targets over 2011-2016 of 78% growth (minimum 5%) annually, increase per capita income to US$3,000 and reduction in the instance of poverty by 10% per year (National Economic and Development Authority 2011). The favourable growth profile along with the increase in investor participation in capital markets, strengthening of the governance and legal frameworks and redistribution of wealth to the poorer regions indicates a positive future in the Philippines. However, the Philippines have experienced such growth over the past decade, execution of the governance and wealth re-distribution will ultimately determine the plan’s success.

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Assignment 1 MPM735

Assessment 1 – Scenario / Country Profile: Philippines Section 4 - Legal

DS NOTE – the number under each Par is the word count excluding references. The Philippines legal framework is a combination of continental civil law and the Anglo-American common law and Spanish law system, with many laws based on American and Spanish statutes (Isla Lipana & Co., 2010, p. 4). In the south there is also the influence of Islamic law in regard to a Code of Muslim Personal Laws (Business Monitor International Country Reports, 2012). 49 As a result of US colonisation until 1948, English is the language of Government; statutes are also written in English (Isla Lipana & Co., 2010, p. 3). Decisions in the US courts still have an influence on those in the Philippines (Isla Lipana & Co., 2010, p. 4). 34 Courts are not under the control of the executive branch and so are constitutionally independent, but can be manipulated by domestic elites, intimidation of Judges and lawyers is not uncommon with some Judges accept bribes (Economic Intelligence Unit, 2012). The speed and quality of decisions has been a cause of concern (Isla Lipana & Co., 2010, p. 22), with the Philippines ranking 122 out of 139 countries for the efficiency of the legal framework in settling disputes (Manilla Bulletin, 2011), further, concerns remain over decisions extending into policy making rather than legal interpretation (Business Monitor International Country Reports, 2012) as well as the capability of judges settling commercial disputes in business related cases (Business Monitor International Country Reports, 2012). However continued support by the American Bar Association Rule of Law Initiative has at least seen a reduction in the time to process minor money claims, reducing from 3 to 5 years to 4 to 6 months.(American Bar Association, 2011). 130 Organisations with vested interests, eg: the Roman Catholic Church, environmental groups and local government, etc., do have an influence on the legal system, though in general policy debate is open and the legal system is transparent (Economic Intelligence Unit, 2012). The Aquino administration on taking office introduced a legal reform agenda in an attempt to stamp out, or at least reduce, corruption within local government and the judiciary which has culminated with the impeachment trial of Chief Justice Rene Corona (Manila Bulletin, 2012). 77 Of continued concern is the issue of intellectual property rights. The Office of the US Trade Representative has placed the Philippines on a watchlist of countries identified of violating intellectual property laws (Economic Intelligence Unit, 2012). This will be of concern to any business that wishes to outsource any part

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Assignment 1 MPM735 of its operations which contain proprietary information such as trademarks, designs, trade secrets, etc. 60 Land can only be owned by Filipinos or where Filipino ownership of a corporation is at least 60%. Foreigners may lease land for certain industrial projects for 50 years with a further 25 year renewal, and may also own buildings on private leased land (Investors’ Lease Act of 1993). 44 Foreign investment is governed by the Foreign Investments Act of 1991 and the Omnibus Investments Code of 1987. Foreign investment up to 100% ownership is available subject to limitations contained in the Eighth Regular Foreign Investment Negative List. Foreign equity participation for industries in List A is set at 0%, 20%, 25% and 40%, and up to 40% for those industries in List B. Foreign investment is encouraged by the Foreign Investments Act of 1991 where there is a significant contribution to national industrialisation and socioeconomic development. Incentives for particular economic zones are governed by the Special Economic Zone Act of 1995. The minimum paid in equity required is $US200,000 (Republic Act No. 7042, as amended by Republic Act No. 8179). 121 The Corporations Code governs domestic corporations and grants foreign corporations license to operate in the Philippines. 16 Facilitation of profits from the Philippines is eased when the entity has registered with the Central Bank of the Philippines (Bangko Sentral ng Pilipinas). 24 Total Word Count excluding references: 555 --==--==--==--==-THINGS I HAVE NOT INCLUDED BECAUSE OF WORD LIMIT Types of operations:  Joint venture (mainly for construction)  Branch  Corporation o Limits on foreigners to obtain share of stock (5 – 15 individuals) o Directors – ratio of foreigners to Filipino’s o License required form the SEC (Securities and Exchange Commission)  Private corporation  Sole proprietorship  Partnership Employment law’s --==--==--==--==--

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Assignment 1 MPM735

Assessment 1 – Scenario / Country Profile: Philippines Section 5 – Socio-cultural

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Assignment 1 MPM735

Assessment 1 – Scenario / Country Profile: Philippines Section 6 – Foreign direct investment

Foreign direct investment (FDI) flows rose substantially in the latter half of the 20th century, as developing nations, notably ASEAN members introduced measures to attract FDI inflows, investment and trade via the removal of restrictive self protection polices (Austrade 2012). Historic Inflows of FDI (Philippines) The inflow and outflow of FDI in the Philippines has largely been influenced by government policy in recent decades. Economic liberalisation and sector wise reforms in the financial and transportation sectors of the economy have been critical in attracting large inflows of foreign direct investment during the 1980s and 1990s (Economic Society of Australia 2010). Table 1 below outlines FDI inflows into the Philippines over the past two decades. Table 1: FDI Inflows: Philippines

Post Global Financial Crisis (GFC) domestic investment in ASEAN and in particular the Philippines has been lethargic, as the percentage of national GDP to FDI flows has reduced (ASEAN AIR 2011). 12

Assignment 1 MPM735 Current (2012) Scenario In 2009 to restore capital flows following the GFC, ASEAN nations signed the ASEAN Comprehensive Investment Agreement (ACIA) to promote the liberalisation and facilitation of FDI in the region. Measures such as multiple private – public partnerships in 2011 were undertaken to relax entry conditions for particular export processing zones like aviation. However existing investment laws are still heavily weighted to promote and favour domestic Filipino businesses (Gerardo Scat 2012). The Philippines continues to conduct protectionist policies ensuring key sectors like the services industry, agriculture and fisheries are restricted to foreign investors (Philippines World Trade Review 2012). Restrictive constitutional provisions on foreign capital, in particular rules restricting ownership of joint ventures, with foreign capital (ownership) remaining in the minority under the 60/40 equity ratio, highlight the limitations foreign organisation face with horizontal direct investment in the Philippines (Gerardo Scat 2012). FDI inflows of 256.1 billion Php in 2011 were the highest experienced since 1996 (NSCB 2012), however the result was relatively weak when compared to neighbouring ASEAN nations like Thailand, Malaysia and Indonesia, which do not restrict foreign capital by allowing foreign equity investments to obtain incentives.

Future (2012 - 2016) Scenario Competiveness reporting undertaken by the Asian Development Bank in 2011 indicated less than favourable investment conditions for foreign enterprises investing within the Philippines (ADB 2011). The key drivers identified were:        Inadequate infrastructure Corruption Poor tax and customs administration Barriers to market competition and entry Potential skills gaps Insufficient access to finance for small to medium enterprises Ineffective regulation

The World Trading Organisation in its 2012 country report published the view that the Philippines economy is underperforming, and encouraged the government to instigate additional reforms to advance economic performance and further liberalise its FDI regime to attract investment currently being allocated to its ASEAN neighbours (Philippines World Trade Review 2012).

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Assignment 1 MPM735 While the Philippine government has acknowledged its concerns regarding FDIs, there are no immediate plans to initiate any form of change or reform to existing foreign investment policy. As a result of the current circumstances, any organisation looking to invest directly into the Philippines market, particularly in the non -export processing zones, will do so with a higher degree of business and operational risk when compared to investing within alternate markets across the ASEAN region.

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Assignment 1 MPM735

FDI - In its World Investment Prospects Survey 2010 to 2012 by United Nations, the Philippines was not listed in the top 20 priority host economies for FDIs. - BMI also says that Philippines' foreign direct investment (FDI) inflows could increase following the launch of multiple private-public partnership (PPSs) in 2011. - April 13--FOREIGN direct investments (FDI) to the Philippines surged in January this year on the back of improved risk appetite for emerging Asian assets. - "FDI flows are expected to remain positive in 2011 with the continued global economic recovery and the national government's thrust for public-private partnerships," - Apr. 15--CONCERN over the outcome of the Philippines' national elections pulled down foreign investments in the first month of this year. In a statement, the Bangko Sentral ng Pilipinas (BSP) said foreign direct investment (FDI) inflows fell 74.3 percent to $101 million in January from $393 million in the same month last year.

Conclusions and Recommendations

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Assignment 1 MPM735 References American Bar Association, 2011. Judicial Reform Leads to Better Access to Justice in the Philippines. Washington DC(Washington): The American Bar Association. Asian Development Bank 2011, “Country Partnership Strategy – Philippines 2011 – 2016”, October, retrieved 3 April 2012. Australian Trade Commission 2012, “Philippines Profile” Austrade, 24 January, retrieved 3 April 2012. ASEAN Investment Report 2011, “Sustaining FDI Flows in a Post-Crisis World”, retrieved 3 April 2012. Blomberg, ‘Philippines Cuts Key Rate for First Time Since 2009 as Growth Outlook Dims’, retrieved on 07 April 2012, <http://www.bloomberg.com/news/2012-01-19/philippine-central-bankcuts-benchmark-interest-rate-to-4-25-from-4-5-.html> Board of Investments - Philippines, n.d. Primer on Doing Business in the Philippines. [Online] Available at: http://www.boi.gov.ph/pdf/primer.pdf [Accessed 4 April 2012]. Business Monitor International Country Reports, 2012. Industry Business Environment Overview - Philippines - Q2 2012. [Online] Available at: http://global.factiva.com/aa/?ref=BMICOR0020120222e82l00014&pp=1& fcpil=en&napc=p&sa_from= [Accessed 4 April 2012]. Bureau of East Asian and Pacific Affairs 2012, ‘Background note: Philippines’, retrieved 2 April 2012, <http://www.state.gov/r/pa/ei/bgn/2794.htm#gov>. Business Monitor International Ltd 2012,’Philippines security SWOT’, Philippines Defence and Security Report Q1, no. 1, pp. 65-72, retrieved 2 April 2012, Business Source Complete database. Board of Investments 2011, ‘A New Day for Investments: Coherent, Consistent & Creative’, Retrieved 06 April 2012, < http://www.boi.gov.ph/pdf/IPP2011.pdf>. Central Inteligence Agency - United States of America, 2012. The World Factbook East & Southeast Asia :: Philippines, retrieved 4 April 2012, <https://www.cia.gov/library/publications/the-worldfactbook/geos/rp.html>.

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Assignment 1 MPM735 Datamonitor 2011, ‘Country analysis report Philippines’, pp. 1-78, retrieved 2 April 2012, Business Source Complete database. Economist Intelligence Unit, The Economist, ‘Country Report – Philippines’, retrieved 7 April 2012, < http://country.eiu.com/Philippines> Economic Intelligence Unit, 2012. Philippines risk: Legal & regulatory risk, s.l.: The Economist Intelligence Unit Ltd. Gerardo P. Sicat, “Philippine economy – (part III) – A historical peep into foreign direct investments policy and economic reality”, The Philippine Star, March 2012, retrieved 5 April 2012. Gerardo P. Sicat, “Philippine economy – (part IV) – Lessons from manufacturing promotion and foreign direct investments (FDIs)”, The Philippine Star, April 2012 retrieved 5 April 2012. International Monetary Fund, ‘Philippines and the IMF’, retrieved on 7 April 2012, < http://www.imf.org/external/country/PHL/index.htm>. International Monetary Fund 2010, ‘Philippines: Financial System Stability Assessment Update’, retrieved 07 April 2012, <http://www.imf.org/external/pubs/ft/scr/2010/cr1090.pdf>. International Monetary Fund 2011 , ‘Road map for a pro-growth and equitable tax system’, Retrieved 07 April 2012, <http://www.imf.org/external/pubs/ft/scr/2012/cr1260.pdf>. Isla Lipana & Co. 2010. Doing Business and Investing in the Philippines, Metro Manilla: PricewaterhouseCoopers. Manila Bulletin 2012. Business Benefits, s.l.: Manila Bulletin Publishing Corp. Manilla Bulletin 2011. Philippines must develop stronger institutions, Manila: Manila Bulletin Publishing Corp. National Economic and Development Authority 2011, ‘Philippine Development Plan 2011-2016’, retreived 7 April 2012, < http://www.neda.gov.ph/PDP/2011-2016/default.asp>. National Statistical Coordination Board 2012, Sexy Statistics – Investing. More fin in the Philippines, March, retrieved 6 April 2012. Taxrates.cc 2010, ‘Philipplines Tax Rates’, retrieved 5 April 2012, <http://www.taxrates.cc/html/philippines-tax-rates.html>. The PRS Group 2011,’Philippines country forecast highlights’, Philippines Country Report, pp. 2-45, retrieved 2 April 2012, Business Source Complete database. 17

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The Economist Intelligence Unit 2009, ‘Philippines: political structure’, The Economist, 4 August, retrieved 2 April 2012, <http://www.economist.com/node/14160967>. The World Bank 2012, ‘Data Catalogue’, retrieved 3 April 2012, <http://data.worldbank.org/country/philippines 03/04/2012>. The World Bank 2012, ‘Philippines Overview, retrieved 5 April 2012, < http://www.worldbank.org/en/country/philippines/overview>. World Trade Organisation 2012, Trade Policy Review: Philippines, March, retrieved 3 April 2012.

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