Since it was last reviewed in 2005, the Philippines has taken measures to make the business environment more attractive to foreign investments. But the areas for improvement remain considerable, the World Trade Organization (WTO) said in its latest trade policy review of the country released March 2012.
For instance, the Philippines continues to encourage foreign investment in some sectors, particularly manufacturing, which mainly takes place within export processing zones (EPZs), where substantial fiscal incentives are offered.
But the slow pace of reform and the continued existence of key constraints to overall growth, such as inadequate infrastructure, low investment, and governance issues, keep the Philippine economy operating below potential, the WTO said.
Moreover, the Philippines’ overall policy of investing Filipino control over key sectors, notably agriculture, fisheries, and a large number of services, keeps foreign direct investment (FDI) inflows low compared with other countries in the region.
Broad-based growth
During 2005-2011, the Philippines had an annual real GDP growth rate of 5 percent, moderate inflation of about 5 percent, and a surplus in its external account in part due to high remittances inflows, which account for about 10 percent of GDP.
Growth has been broad-based across private consumption, investment, and exports, and was helped by fiscal stimulus implemented in 2008 and 2011 in response to the global economic crisis.
Persistent fiscal deficits and the resulting large public debt continue to pose the greatest risk to macro-stability.
The Philippines was the world’s 37th largest exporter and the 29th biggest importer of goods in 2010. In services trade, it ranked 27th among exporters and 36th among importers. The Philippines’ outward-orientation makes it vulnerable to external shocks, but it has also made the economy more resilient and adaptive to challenges.
Greater trade diversification would help the Philippines, since it relies heavily on manufactured products (85 percent of exports and 67 percent of imports), the WTO said.
ASEAN integration
As a member of the Association of Southeast Asian Nations (ASEAN), the Philippines is committed to deepening economic integration among members, including removing obstacles to trade and improving trade facilitation.
The Philippines, both unilaterally and through ASEAN, has continued to pursue a policy of negotiating regional trade agreements (RTAs) of varying scope with the focus on Asia-Pacific.
The Philippine government’s trade policy has not undergone major changes since 2005; the tariff remains the main policy instrument.
With the adoption of the 2007 ASEAN Harmonized Tariff Nomenclature, the Philippines’ tariff was simplified and now comprises 8,299 lines at the HS eight-digit level (compared with 10,688 in 2004). The simple average MFN applied tariff (6.4 percent) is 19.3 percentage points lower than the simple average bound rate (25.7 percent), giving the authorities ample scope to raise applied tariffs. Tariffs average 10.2 percent (10.3 percent in 2004) on agriculture, and 5.8 percent on non-agricultural products (7 percent in 2004). All tariff lines, applied and bound, are ad valorem.
About 40 percent of tariff lines are unbound.
Customs procedures have been automated through the Electronic-to-Mobile (E2M) system to streamline the payment and clearance processes at the Bureau of Customs.
Under ASEAN, the Philippines is finalizing a “national single window” in order to expedite intra and extra-ASEAN trade.
Restrictions in the transport sector
Meanwhile, the main change to the Philippines’ maritime transport sector over the review period was the completion of a nautical highway roll-on-roll-off transport system, which allows for the continuous movement of cargo using land and water transport. According to the authorities, this has reduced freight costs, which were reported as high in the previous TPR.
Ownership restrictions on maritime transport remain in place. Nationally registered ships must be at least 60 percent Filipino-owned with 100 percent Filipino crew.
The Philippines allows private ownership and operation of ports, although foreign equity in port ownership is limited to 40 percent. Some state-owned ports, including the Philippines’ principal port in Manila, are operated by private companies under concession agreements: these companies must be at least 60 percent Filipino-owned. Customs brokers must also be Filipinos.
In air transport, there has been a steady increase in passenger movements over the review period. Fourteen new air services agreements have entered into force since 2005, most of which have mainly restrictive features.
However, in 2011, flexibility was given to negotiating entities to pursue a more liberal approach. Cargo and passenger transport is also being liberalized within ASEAN.
Foreign equity in domestically licensed airlines is still capped at 40 percent, and cabotage is restricted to domestic airlines. Philippine Airlines (PAL) remains the dominant Filipino carrier for international passenger transport, while the market share for domestic services is more evenly distributed.
Improving productivity, competitiveness
The trade group stressed that while the Philippine economy has “performed well” since the WTO’s third trade policy review in 2005, the Southeast Asian nation still needs to improve productivity to compete with its low-cost neighboring economies.
At the same time, “additional steps are needed to promote more competition, improve human capital, eliminate limitations on foreign investment, reduce incentives, and reform state-owned institutions,” it said, adding that it hopes that the Philippine government’s recently launched public-private partnerships “will encourage investment in major infrastructure projects.”
Photo: Jun Acullador
