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Successfully investing in the Philippines

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​​​​last updated on 7 June 2024 | reading time approx. 8 minutes

   

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How do you assess the current economic situation in the Philippines?

In summary, from our daily observation as well as various publications, and expert opinions, the current economic position of the Philippines may be portraited as bullish. The AHK Business Outlook for Fall 2023 and the recent release for Spring 2024, conducted amongst the members of the German Philippine Chamber of Commerce and Industry, reflect similar optimistic business sentiments. From the Fall to Spring Business Outlook, the economic situation has improved even further. Despite this, the Philippine Fall 2023 Business Outlook, when compared to its ASEAN neighbour countries and even globally, ranked the Philippines in many areas in the upper percentile compared to its peers.
   
Macro-economic indicators for the Philippines, such as a GDP growth of 5.6 percent in 2023, one of the highest in the Asian region, provide additional proof supporting the aforementioned business sentiments. The key industry propelling economic growth in 2023 was the (BPO) service industry. This is not a surprise, keeping in mind that the Philippines is one of the leading economies globally in terms of in-house and external Business Process Outsourcing. After the pandemic, the Philippines even strengthened its position in this business sector. It is important to mention that the BPO sector is not limited to call centres and basic outsourcing tasks (anymore). The services and interests are steadily growing in many other areas where highly qualified expertise and support are needed. Another area of growth is the renewable energy industry, which has emerged as a key investment area, particularly in terms of foreign investments, following the government's decision in 2023 to allow 100 percent foreign ownership in this sector. In terms of Bureau of Investment approved foreign direct investments, Germany is currently the largest investor in the Philippines, which is primarily related to the renewable energy sector. 
  
Over the last decade, the Philippines has persistently been among the countries with the highest GDP growth in the Asian region. The archipelago continues this path after the pandemic and the 2022 change of government. Compared to the previous government, the current President and government have shifted their attention from a rather China-focused macro-economic policy back to the US and particularly also to Europe and Germany. 
  
Continuous liberalisation over the last decade, streamlined business registration processes, massive infrastructure developments, and legislative reforms (such as the Tax Reform “CREATE” and the upcoming “CREATE More”, Public Service Act, Retail Trade and Liberalization Act) boost economic growth, productivity and competitiveness.

   

How would you describe the investment climate in the Philippines? Which sectors offer the largest potential?

While in 2021 the Philippines passed its largest tax reform in history, reducing the corporate income tax from one of the highest in ASEAN to 25 percent (20 percent for small entities) and introducing a new competitive investment incentives scheme, the House of Representatives aims to enact further amendments to the Tax Code with the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy Act (CREATE MORE Act). In March 2024, the House of Representatives approved the CREATE MORE Act on a third reading. Before the President can approve and sign the amendment, it still must pass through the Senate and the Bicameral Conference Committee. The CREATE MORE Act seeks to improve the policy and administration of tax incentives in the Philippines. The upcoming key legislative amendments, ushering a new dimension for strategic investments, demonstrate that the Philippines is a steadfast partner, offering support for both market expansion initiatives and operational requirements. 
  
The Philippines aims to make particularly renewable energy investments more attractive by implementing various energy transition policies, including investment incentives aimed at promoting energy efficiency. Additionally, the Philippines is in the process of creating programs to facilitate the decarbonization of the economy. Renewable energy investments, especially from Germany, contribute significantly to the shared commitment of sustainability and climate resilience. The Philippines holds significant potential for investments in the renewable energy sector, aiming to promote sustainability-driven strategic investments that will accelerate the energy transition. Other sectors such as sales and marketing, services, and research and development also rank high when it comes to current and potential investment areas in the Philippines. 42 percent of German businesses found the sector of sales and marketing as one of the top areas to make investments, while services reached 37 percent and research and development in total 25 percent. Companies’ investment decisions are highly influenced by market size and development, the local economic policy framework and diversification. In comparison with other regions worldwide, the Philippines ranks highest in services with 47 percent as a factor of investment with a similar trend in sales and marketing with 50 percent. In 2023, the Board of Investments approved German investments mostly in the industry of electricity, gas, steam, and air conditioning supply, agriculture, forestry, and fishing and administrative and support service activities. The Philippines has also established itself as a significant contributor to the global outsourcing sector, notably excelling in call centres and IT services. Benefiting from a sizable, well-educated workforce proficient in English and supported by government policies, this industry stands primed for ongoing expansion and investments.
  
Overall, while the Philippines faces challenges such as infrastructure gaps, policy uncertainties or inflation amounting to 3,2 percent in 2024 in the post-pandemic economic recovery, the country also offers a diverse range of investment opportunities across various sectors as demonstrated by the activities of the Philippines, especially in the EU. While attending the Philippine-German Business Forum in Berlin in March 2024, President Ferdinand R. Marcos Jr. highlighted the strong bilateral ties between Germany and the Philippines, emphasizing a shared dedication to democracy and a rule-based global order as the cornerstone of their trade and investment partnership. The President aims to make the Philippines the second most significant hub for foreign direct investments in Southeast Asia by 2028 and identifies renewable energy and technology sectors as particularly promising arenas for foreign investment, recognizing their potential to drive economic growth, foster innovation, and contribute to sustainable development. 
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What challenges do German companies face during their business venture into the Philippines?

One of the main challenges in the Philippines for German companies, based on the most recent AHK study among its member companies in the Philippines, is the “Economic Policy Conditions”. Certain laws and regulations in need of review under current market conditions, bureaucracy and red tape are the factors that companies need to address either internally or with the support of experienced advisors and partners. Another challenge that the study frequently addresses is the difficulty in finding adequately trained and qualified personnel. This is a surprise taking into account that the Philippines has one of the youngest, well-educated and English-speaking workforces in the world. Nonetheless, the employment market is competitive, and companies need to invest not only in finding the right people but also in training and familiarizing them with their specific standards and requirements. Furthermore, energy prices tend to be an obstacle for German companies, impacting production expenses and competitiveness in the market. 38 percent of German businesses found the energy prizes to be a challenge for their business ventures into the Philippines. When compared to other nations within the ASEAN region, the Philippines stands out with the highest ranking in terms of risks associated with energy prices. On the other hand, as mentioned above and particularly because of the challenges the energy market faces, investments and expertise in these sectors certainly belong to the future markets in the Philippines. 
 

​​What is the current standing of the Philippines’ free trade agreements, including ongoing negotiations with the EU?​

Currently, the Philippines is a party of several free trade agreements. In 2016, the Philippines and the EFTA members Iceland, Liechtenstein, Norway, and Switzerland signed a free trade agreement. The Regional Comprehensive Economic Partnership which entered into force in 2022, was signed between the Philippines and fourteen Asia Pacific Countries. The Philippines-Japan Economic Partnership Agreement is one of the few of Philippine's bilateral free trade agreements, while the Philippines also has preferential trade agreements with China, Hong Kong, India, Japan, South Korea, Australia and New Zealand. In 2023, the country welcomed another bilateral free trade agreement with South Korea. Moreover, the Department of Trade and Industry aims to establish free trade agreements with selected African nations including South Afia, Nigeria and Kenya to broaden bilateral trade beyond Asia and Europe.
  
On a European level, the EU has already signed free trade agreements with Singapore and Vietnam, while Malaysia, Thailand, Indonesia and the Philippines are still in discussion about bilateral free trade agreements with the EU. At present, the discussions with Malaysia are on hold, but there are movements regarding the relationship between the EU and the Philippines. Negotiations for a trade and investment agreement between the EU and the Philippines commenced in December 2015 but were subsequently paused. Nevertheless, in March 2024, both parties announced the recommencement of discussions, following the first-ever visit of a President of the EU-Commission (Ms. Ursula von der Leyen) in July 2023. 
  
The EU strives for a free trade agreement with the Philippines aiming to achieve ambitious market access for goods, services, investment, and government procurement. Additionally, the agreement seeks, among other things, to eliminate barriers to digital trade and trade in energy and raw materials, while facilitating the digital and green transitions. The EU is the Philippines’ fourth-largest trade partner and the Philippines, as the fifth-largest economy in the ASEAN region, is the EU's seventh most important trading partner in the region.

Moreover, the EU stands out as one of the Philippines' major investors, with its foreign direct investment stock in the country amounting to 13.7 billion euros in 2021. But what impact will the free trade agreement have on business activities in the Philippines? The free trade agreement is expected to have a positive impact on business activities in the Philippines, such as expanding and sustaining existing investments, achieving a market advantage, and seeking new investment prospects. The free trade agreement is anticipated to be utilized mostly when it comes to trading in goods and services and supply chain optimization. The majority of businesses within the framework of German-Philippine economic relations perceive the potential free trade agreement as an important factor of their company's operational success. 
  
The free trade agreement has the potential to create a more favourable business environment for EU companies seeking to venture into the Philippine market, stimulating trade, investment, and economic cooperation between the two regions. It may also encourage greater foreign direct investment flows between the EU and the Philippines by providing a more predictable and transparent business environment, fostering collaboration and joint ventures between EU and Philippine companies. In particular the sectors of trade in goods, services and supply chain optimization have the opportunity to become areas with great potential as a result of the agreement.

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In your opinion, how will the Philippines develop?

When compared to other countries within the ASEAN region, the Philippines stands out positively in terms of the overall business situation, business expectations and employment intentions despite the challenges posed by the coronavirus pandemic in the past. The Philippine government is confident that strong economic growth will persist and will remain vigilant in pursuing its objectives, actively anticipating challenges, and advocating for strategies aimed at achieving economic growth. The Philippines is expected to continue its economic growth in the future. With its status as the second-largest domestic market in ASEAN, the Philippines sets its sights on emerging as one of the top five economic giants in Asia by 2050.

   

Taking a glimpse into the past of the Philippines, the country has been characterized by aspects such as corruption, the coronavirus pandemic, and other political challenges. Once labelled the “Sick Man of Asia”, the Philippines has since embarked on a path of economic revitalization. Through structural reforms and efforts to attract foreign investment, the country has achieved steady growth marked by a continuously rising GDP and the attraction of foreign investors. Challenges like corruption and political instability remain, but initiatives focusing on infrastructure and innovation offer promise for continued economic progress. To summarize in the words of President Ferdinand R. Marcos Jr.: “keep in mind the Philippines as a reliable partner that can support your market expansion and operations”.

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