Bernardo M. Villegas
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Rebalancing Strategy

 

          The Duterte Administration is adopting the right strategy in international economic relations when it speaks of “rebalancing.”  Without decoupling (or “separating”) from its traditional partners in the Western World, especially the United States and Europe, it makes sense that there is a greater effort to develop closer and deeper ties with the economies of Northeast Asia, especially China, Japan, South Korea and Taiwan.  These are the countries that have done wonders in upgrading their infrastructures over the last twenty or so years, building world class airports, bullet trains, bridges, tollways, power plants and seaports.  The Philippine Government is bent on increasing expenditures on infrastructures to 7 percent to GDP at the end of this present Administration.  There is also a more aggressive program to encourage unsolicited proposals from the private sector in infrastructure investment, subject of course to the Swiss challenge.  Our Northeast Asian neighbors have excess capacity in their construction sector, much investible capital, up-to-date technology and experienced managers that can be deployed in the massive infrastructure program that we will see in the Philippines in the coming five to six years.

         I have observed that Chinese infrastructure companies are literally all over the place trying to bag construction projects both at the national and local levels.  Among them are the Clark to Manila and Calamba to Batangas City railroads, airports in regions outside the National Capital region, bridges connecting islands to one another.  These are partly a result of the trip that President Duterte made to Beijing last October 2016.  Although the agreement still has to fleshed out, the two countries signed deals worth $24 billion during that visit.  This includes $15 billion in investment and $9 billion in credit facilities.   The first tranche was supposed to be $3.7 billion which could be more than half of total FDIs in the Philippines in 2016.  There is no doubt that China can do much to help finance the massive infrastructure development program of the Duterte Administration, especially since the Chinese Government established the Asian Infrastructure Development Bank precisely to help countries like the Philippines improve the quantity and quality of its infrastructures.

         The Philippine Government, however, is very much aware of not being overly dependent on one country in both financing and technology.  That is why President Duterte has done much to woo Japanese investors, starting with establishing a most cordial relationship with Prime Minister Abe.  It is a propitious time to attract more Japanese investors to the Philippines.  Last October to November 2016, the Japanese agency JETRO conducted a survey on the business conditions of Japanese companies in twenty countries and regions in Asia and Oceania.  In the Philippines, 103 Japanese companies responded to the survey.  The Philippines stood out as registering the highest increase of 77.5% in profits of the Japanese companies in the whole region.  As the report of JETRO indicated:  Domestic sales-oriented firms marked 79.5% which is much higher than the result of the 2015 survey.  Export-oriented firms also marked 76.7%.  These findings explain why Japanese firms like Mitsubishi have become very bullish in 2017, increasing their exposure to the Philippines.  In a road show in which I participated in Tokyo, together with officials of the First Metrobank Investment Corporation, I verified what former PEZA Director General Lilia de Lima used to say:  that there will be an avalanche of Japanese manufacturing firms transferring their operations from China to the Philippines.   Already, we are experiencing an above-average growth in our manufacturing sector.

         The JETRO survey also singled out the more hospitable environment in the Philippine labor sector as far as wages are concerned:  Despite the strong economic growth in the Philippines, the wage increase rate has been stable and is one of the distinguishing advantages of the Philippine economy.   The Report states:  “Year-on-year wage increase rate in peso is still 5.4% and this is only 0.1 point increase from the 2015 survey.  Although there was minimum wage rates increase in 2016, the average inflation rate in 2016 was as low as about 2%.  This is the factor of the country’s stable wage increasing rate.  Additionally, since the PH peso is seen to weaken vs US dollar, the wage increase rate is also steady when you compute in US dollar.”  Although inflation rate in 2017 is expected to increase to 3.5%, the compensating factor will be a higher rate of depreciation when the peso may reach P52 to $1 by the end of the year.  Add to these wage rate advantages the greater labor peace that is now being enjoyed in the Philippines as compared to the increased radicalization of labor in our competing countries like Vietnam and Indonesia.

         What we have written about China and Japan can also be applied to the other Northeast Asian countries that are suffering from severe labor shortages because of low fertility rates and rapid ageing of the population, i.e. South Korea and Taiwan.  Both these countries have much to contribute not only to infrastructure development in the Philippines but also to manufacturing and services.  Already, we are witnessing increased investments by South Korean and Taiwanese banks and insurance companies in the Philippines. In the case of Taiwan, the Philippines can benefit significantly from advanced technology in agribusiness, especially in the growing of high-value crops such as fruits and vegetables.  Already the largest seed company in Taiwan, Known You, is transferring technology in the growing of high-value fruits and vegetables through its Philippine partner, Harbest.  Filipino entrepreneurs should capitalize on the announcement of the President of Taiwan who has been encouraging Taiwanese investors to redirect their attention to Southeast Asia, especially the Philippines.  It would be advisable for more Filipino business men to join road shows to Taiwan and to the Northeast Asian countries that will be increasingly organized by Philippine banks, chambers of commerce and other organizations. For comments, my email address is bernardo.villegas@uap.asia.