Sluggish investment hampers Philippines growth

MANILA, Philippines — The Philippines continues to lag behind other economies in Asia in terms of investments, which have yet to return to pre-COVID levels, according to ANZ Research.

In a report, ANZ economist Dabalika Sarkar said the Philippines and Malaysia are lagging other Asian economies in terms of investment recovery.

“Asia ex-China’s investment is still recovering from the pandemic-led slowdown. The investment rate is yet to rise up to the 2019 levels in most economies,” Sarkar said.

Sarkar said the weakness in investment is largely attributed to the private sector, while public capital spending continues to remain stronger.

“Weak corporate profitability and demand outlook, including that for housing, indicates low likelihood of material improvement in 2024,” Sarkar said.

While improved fixed investments growth in the Philippines in the third quarter supported gross domestic product growth in the third quarter, the economist said investment rates have not recovered to the 2019 levels, contracting by more than five percent of GDP based on the latest four-quarter moving average.

“This deterioration is very stark for the Philippines and Malaysia. The investment-to-GDP ratios for the Philippines and Malaysia are now 5.2 ppt (percentage points) and 3.2 ppt, respectively, lower than those in 2019,” Sarkar said.

ANZ pointed out that it is unlikely for investment growth in Asia, excluding China, to strengthen. Private investments are expected to slow down, while public capital expenditure (capex) spending is anticipated to remain supportive, as outlined in the 2024 budgets.

“There are specific factors that could shape the investment landscape for individual economies,” she said.

Sarkar said the region’s corporate sector is cautious about capacity expansion plans.

“This sentiment echoed in the corporate survey data for South Korea, India and the Philippines. The only exception is Thailand, where the investment outlook has improved,” she said.

ANZ noted that capacity utilization rates in the Philippines, South Korea and India have scaled back to pre-pandemic levels but failed to uplift investment sentiment.

“In the case of the Philippines, the number of businesses that perceive low demand as a business constraint has come down but is still quite high compared to the pre-pandemic era. Capacity investment is procyclical as the need for fresh investment depends on the outlook for business activity or demand,” Sarkar said.

She added that declining corporate profit margins could be another reason for a lower investment appetite.

“It is unsurprising that firms will shy away from capex allocation if balance sheets deteriorate,” she said.

ANZ said investment growth would remain subdued in 2024 as corporate profitability and weak demand outlook suggest private investments are unlikely to improve.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that the inflow of foreign direct investments (FDIs) declined by 12.9 percent to $5.45 billion from January to August  versus last year’s $6.26 billion on concerns over slowing global growth.

According to the central bank, the recorded slowdown in net FDI inflow during the eight-month period “may be due largely to investor concerns following the sustained uncertainty surrounding the global economy.”

The BSP earlier revised down its projections for the net inflow of FDIs to $8 billion from $9 billion for this year and to $10.5 billion from $11 billion for next year.