Is Philippines missing new wave of Japanese capital flows?

Posted at 03/24/14 11:16 AM

A man walks past an electronic board displaying Japan's Nikkei average outside a brokerage in Tokyo March 14, 2014. Photo by Toru Hanai, Reuters

MANILA, Philippines - It looks like the Aquino administration will have to do more — a lot more — to be able to attract a substantial share of the next wave of Japanese investments seen to hit Southeast Asia in the coming months.

Japanese firms are planning more capital investment in production facilities overseas in the fiscal year April 2014-March 2015, with locations in Southeast Asia expected to attract more than a third of these, according to a recent survey by the business daily Nikkei.

The planned investments in the region represent an increase over the amount for the current fiscal year about to end — but the Philippines will not be among the top recipients, the survey results reported during the weekend by Nikkei indicated.

Nevertheless, the Philippines was pointed out by more respondents as “an appealing option” for production, the Nikkei report said without citing numbers behind that sentiment.

The Nikkei quarterly survey, conducted over March 5-20 among top executives of 148 companies in Japan, showed 48 percent planning to expand production overseas.

Of these firms planning investments abroad, 36.4 percent will bring their capital to Southeast Asia, with Thailand, Indonesia and Vietnam getting the top three shares, the Nikkei survey showed.

Southeast Asia’s share, which is the biggest among the global regions, marks an increase from the 32.6 percent posted in the previous survey last December. Nikkei said this reflected the respondents’ “high expectations for regional growth.”

This optimism seems to ignore warnings in a separate Nikkei report early this month which said that the business investment environment in Southeast Asia has gotten “riskier” owing to rising costs — soaring prices of assets from real estate to stocks, declining sales of Japanese firms in the region, and increases in wages that threaten local advantages as a manufacturing center.

The Nikkei report on March 10 said “many of the factors that once made the region a highly attractive place for investors — rising resource prices and policies to stimulate consumption — are gone.”

Japanese companies, that report said, “may need to be a little more cautious” about investing in Southeast Asia.

Indeed, in the latest Nikkei survey reported last weekend, signs that the political and economic turbulence in Thailand and Indonesia are affecting Japanese investment sentiments show. The shares of both countries in the planned capital flows in the coming fiscal year are markedly lower compared to the previous year’s levels.

These trends are bound to impact on the Philippines’ bid to attract more foreign investments as a way of sustaining the strong economic growth of recent years. Japan has been one of Philippines’ top sources of capital investments, as well as a market for exports.

In 2013, according to data from the Bangko Sentral ng Pilipinas, total foreign placements of equity capital in Philippine industries reached $2.46 billion while capital withdrawals amounted to nearly $1.8 billion, resulting in a net inflow of $664 million.

The bulk of the year’s gross equity capital placements came primarily from Mexico, Japan, the United States, British Virgin Islands and Singapore. Bangko Sentral said the investments went to manufacturing; water supply, sewerage, waste management and remediation; financial and insurance; real estate; and mining and quarrying industries.

Owing to the significantly larger amount of withdrawals, net equity capital inflows in 2013 of $664 million, according to the Bangko Sentral data, were down by 67 percent from the 2012 amount.

However, overall foreign direct investment inflows still ended 2013 with a 20 percent growth on the strength of non-residents’ net placements in corporate debt instruments, as well as reinvestment of earnings of foreign companies already operating in the country.

The Philippines’ seven investment promotion agencies, meanwhile, recorded a total of P274 billion worth of approved foreign investment plans in 2013, a drop of 5.4 percent from the year-before total of P289.5 billion, according to a National Statistical Coordination Board report early this month.

By country of origin, the biggest amounts of approved investments came from the British Virgin Islands (P46.1 billion), Japan (P29.4 billion), and the Netherlands (P14.4 billion), the statistics agency said.

These numbers do not seem to indicate the amount of Japanese investments that top officials of the Aquino government have been expecting. And yet there is reason to believe more Japanese industries will invest substantially bigger amounts of their capital overseas as their exports continue to stagger.

Last week, Japan’s trade deficit for February was reported at its largest negative level for that month since 1979. A struggling manufacturing sector has been cited as a factor behind the large trade deficit.

Japan’s decision to freeze all of its commercial nuclear plants, following the impact of the 2011 earthquake on the Fukushima plant’s meltdown, now forces the nation to import costlier fossil fuels.

As such, despite the recent depreciation in the Japanese yen, an expected rise in exports has not materialized as manufacturing output has also been hamstrung by these recent factors.

More Japanese manufacturing industries are said to be looking for new locations, and Southeast Asia will most likely benefit from that movement. However, the trend does not seem to favor the Philippines in a big way.

An interesting characteristic of Japanese investment flows is that when a big manufacturing industry moves in, groups of small enterprises tag along to produce the materials and parts that the big firm will need for its operations.

If the Philippines works hard enough to attract more of these types of manufacturing investments, there will better chances of creating more jobs and increasing export revenues — which ultimately might help make a dent on the widespread poverty across the archipelago.

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