June 19,2011 , The EconoMonitor

The Aquino administration is seeking to expand the country’s trade links with emerging markets and developed economies to enhance export performance, encourage FDI, and sustain growth. In 2011, RGE is forecasting GDP to expand 5.2% in our outlook as President Aquino’s Public Private Partnership program, aimed at improving the country’s infrastructure, galvanizes capex in Q4 2011.

Trade officials are engaging in furthering trade discussions with the EU, Russia, China, and emerging markets to open new markets for investments, trade, and tourism. Weak demand in developed economies (US, EU, Japan) has forced the Philippines to look to emerging markets, particularly ASEAN and East Asia to broaden its economic base. In 2011, 10 of the 25 projects under the country’s PPP program will be offered to foreign investors. Expanding the network of trade links will help support the economy in the face of external shocks.

Figure 1: Export Destination by Economic Bloc, March 2011

Source: National Statistics Office, Republic of the Philippines (NSO)

Indonesia

With the largest economy in Southeast Asia and a prominent member of the G-20, Indonesia is an emerging market focal point for Philippine trade, tourism, and investment. From January to November 2010, the balance of trade between the Republic of Indonesia and the Republic of the Philippines reached US$2.3 billion, in favor of Indonesia. Krisiarto S. Legowo, Indonesia’s Ambassador to the Philippines, singled out Cebu’s real estate sector as one of Indonesia’s key focuses for investment. However, both nations’ comparable regulations on property ownership stress the need to adopt a joint venture concept to get the ball rolling. Opportunities for Filipino investment in Indonesia lie in the food processing, tourism, and semiconductors industries.

European Union (EU)

In 2011, the Philippines government will consult numerous stakeholders and perform impact assessments on different sectors in groundwork talks with the EU on a promising free-trade agreement (FTA). Trade Undersecretary Adrian Cristobal Jr. said the government would utilize a November 2009 report prepared by the Universal Access to Competitiveness and Trade (U-Act), a Philippine Chamber of Commerce and Industry-affiliated think tank, as a launching pad.

The EU comprised 17% of world trade in goods, 25% of services, and 50% of foreign direct investments (FDI) worldwide, the U-Act study showed. In 2010, the Philippines approved US$4.5 billion in foreign investments, with US$1.2 billion (27%) coming from Japan. The Japanese share of FDI is set to drop as rebuilding efforts in Japan causes would be investments to be rechanneled back to Japan for reconstruction following the devastating March earthquake and tsunami. A FTA with the EU will provide the Philippines with a network of sources for FDI in the face of external shocks. The U.K. has expressed interest in participating in the Philippines’ PPP program, with British companies particularly keen on projects relating to transportation, oil and other infrastructure projects.

Figure 2: Growing Importance of East Asia to Philippine FDI Inflow

Source: Bangko Sentral ng Pilipinas (BSP)

According to the U-Act study, sectors that will immediately benefit from a PH-EU FTA include: vegetables, oils and fats, textiles and apparels, and motor vehicle parts. The potential agreement would generate substantial gains for Philippine exports in the EU market, particularly, seafood and agricultural products, natural rubber, biofuels, mining products, health and tourism, information and communications technology services. The Philippines would also benefit from providing skilled labor for services, which would boost the inflow of remittances. However, strict EU food and safety standards provide challenging hurdles for Philippine exporters to overcome. As such, Philexport President Sergio R. Ortiz-Luis Jr. noted that “there are also alternate markets such as China that are not only nearer but have also fewer export requirements in place.”

China

In April 2011, a high-level Philippine economic delegation visited China to encourage the flow of direct Chinese investments into the Philippines. The Chinese government and business leaders have signaled strong interest in the Aquino administration’s PPP infrastructure projects in the Philippines worth US$12 billion. In 2010, China invested roughly US$100 million in the Philippines, a small fraction of China’s US$59 billion in overseas direct investment. The Philippines is also a potential source of highly skilled English-speaking business process outsourcing (BPO) personnel that Chinese companies can employ.

China is one of the Philippines’ top export destinations, reaching US$51.39 billion (33.69% y/y) in 2010, with top exports comprising electrical machinery and equipment, mechanical appliances, ores, copper, minerals, plastics, and electronic goods. The China-ASEAN Free Trade Agreement launched on January 1, 2010 is the world’s largest free trade zone, covering 1.9 billion people with a production value of US$ 6 trillion and a trade volume of US$4.5 trillion. As tariff and non-tariff barriers between China and ASEAN countries are slowly removed, the Philippines and China will experience an increase in mutual trade and direct investment. Strengthening ties with ASEAN countries may also help ease tensions concerning territorial disputes in the South China Sea, known in the Philippines as the West Philippine Sea.

Russia

In spite of growth in Philippine exports to Russia by 15.21% or US$39.086 million in 2009, the balance of trade is leaning favorably to Russia as the Philippines imports petroleum-based products. To address this imbalance, Trade Undersecretary Adrian Cristobal is encouraging “Filipino exporters to explore the largely untapped Russian market.” Meanwhile, Russian Ambassador to the Philippines Nikolay Kudashev said he is looking forward to more engagements between Russia and the Philippines in the areas of energy, transportation, communications, infrastructure, military exchanges and technical cooperation.

Tourism is another area where the Philippines can gain from strengthening ties with Russia. In 2010 over 600,000 tourists visited Thailand while roughly 14,000 visited the Philippines. Insufficient infrastructure and accommodation capacity need to be addressed to attract Russian tourists. The Philippines is a preferred destination during the latter part of the year as Russians flee the sub-zero temperatures of their homeland; travel time from Vladivostok to Cebu is the shortest among Southeast Asian destinations at around five hours.

Figure 3: The Philippines Needs to Improve Image as a Tourist Destination

Source: Cambodia Ministry of Tourism, Tourism Malaysia, Philippines Department of Tourism, Tourism Authority of Thailand, U.S. Department of Commerce, Vietnam National Administration of Tourism

Outlook

As weak demand, debt issues and stagnation overtake developed economies (US, EU, Japan), the Philippines is expanding its trade links with partners in East Asia and emerging markets while continuing to strengthen ties with developed economies to alleviate external shocks to the economy, improve infrastructure through FDI, develop the tourist sector, and maintain strong growth for years to come. Impediments to trade agreements to note are EU regulations, the Philippine business climate, insufficient infrastructure, the high cost of electricity and laws prohibiting foreign ownership of land.

Expanding trading links is ever more important in an environment in which government spending has slumped as a result of fiscal conservatism and worldwide concerns over sovereign debt. On June 15, 2011, the Government of the Philippines’ foreign and local currency long-term bond rating was upgraded to Ba2, a notch closer to investment grade rating and vital in fu