By Melissa Luz T. Lopez, March 12 2019; Business World

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FOREIGN direct investment (FDI) net inflows fell short of expectation last year after five straight months of decline from 2017 amid rising prices and jitters due to planned changes to tax perks.

FDI net inflows ended last year at $9.802 billion last year, down 4.4% from the $10.256 billion received in 2017, the Bangko Sentral ng Pilipinas (BSP) reported on Monday.

It was the first drop of such inflows in three years.

The amount is also lower than the $10.4 billion net inflows which the central bank expected for the full year, which would have otherwise been a fresh record high.

In a statement, the BSP said net inflows settled at $677 million in December alone, 4.8% lower than the $712 million received in the same month in 2017. This marks a sustained year-on-year drop in FDIs since August.

The lower FDIs came as equity investments plunged by more than half that month, with net inflows at $132 million versus $312 million a year ago. December saw gross placements at $161 million, countered by $29 million in withdrawn capital. In contrast, investments amounted to $334 million the prior year, partly offset by $22 million in outbound capital.

Reinvested earnings fell to $61 million in December from $65 million the previous year.

Providing some respite were foreign parents’ lending to their Philippine units which rose by 44.7% to $484 million from $335 million.

For the entire 2018, equity capital inflows dropped by a third to $2.267 billion. On the other hand, reinvested earnings roughly steadied at $859 million from $863 million while debt placements grew 11.3% to $6.676 billion from $ 5.996 billion.

The central bank said bulk of the FDIs went to manufacturing; financial and insurance; real estate; electricity, gas, steam and air-conditioning supply; as well as arts, entertainment and recreation.

Nabil Francis, president of the European Chamber of Commerce of the Philippines, cited factors behind the seeming reluctance of foreign businesses to make long-term bets in the Philippines.

“The decline in FDIs may be attributed to the continuing uncertainty over TRABAHO bill and risks to peace and order in certain areas of the country, which may discourage investor confidence. On the other hand, manufacturing challenges and challenging Internet connectivity… persist,” Mr. Francis said in a mobile phone message.

“The Philippines is also one of the countries in ASEAN which has a relatively higher number of non-working holidays, which also has an impact on the operational costs of businesses.”

In September, the House of Representatives approved House Bill No. 8083, or the proposed Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Act, which gradually reduces the corporate income tax rate to 20% from the current 30% by two percentage points every other year starting 2021.

This will come alongside a uniform scheme for tax incentives that will replace various types granted by investment promotion agencies and likewise put a cap on the number of years in which a company can enjoy such perks. This reform has been flagged as a major risk by businesses.

Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, Inc., said investors likely retreated to “careful sidelines” last year, largely because of escalating trade tensions between the United States and China.

“Another factor is the level of prices last 2018. Inflation rose to unexpected levels that has temporarily hampered positive perception about the health of the Philippine economy,” Mr. Asuncion said when sought for comment.

Equity capital came mainly from Singapore at $935.62 million, followed by Hong Kong ($270.19 million), Japan ($218.91 million), China ($198.68 million) and the United States ($160.43 million), according to BSP data.

However, Mr. Asuncion painted a better picture for 2019.

“With expectations that inflation will continue to decline and that the trade issues between the world’s biggest two economies probably seeing a resolution soon, thus potentially resulting to a better trade environment and global growth perception, UnionBank’s Economic Research Unit expects that Philippine FDI will recover its momentum from 2017.”

The BSP sees FDI net inflows reaching $10.2 billion this year.

John D. Forbes, senior advisor at the American Chamber of Commerce of the Philippines, said reforms are key to jump-starting big FDI flows.“Probably, more reforms will be needed, such as the PSA amendments, reducing business costs for manufacturing and allowing new mining investments, before the amount goes up to $15-20 billion,” Mr. Forbes explained, referring to amendments to the 82-year-old Public Service Act. — with Reuters