The Philippine economy has become more investment-led. As % of GDP, capital formation which is the most comprehensive measure of investment, rose from 24.4% in 2016 to 27.4% in the first half of 2018. (Table 1) Capital formation is one of the foremost determinants of future growth, in addition to employment and factor productivity.
Capital formation, which is tracked by the National Income Accounts issued by the Philippine Statistics Authority, shows a real growth of 9.4% in 2017 and 16.4% during the first half of 2018. These growth rates are higher than real GDP growth of 6.7% and 6.3%, respectively. Of the major components of investments, fixed capital which consists of construction and durable equipment grew by 9.5% in 2017 and 14.8% in 2018.
Another measure of investment is foreign direct investment (FDI) and portfolio investments tracked by the balance of payments account which is released periodically by the Bangko Sentral ng Pilipinas. (Table 2) These measure the amount of investment coming from foreign investors. FDI is the more important indicator because it measures the amount of investment through controlling ownership in a business by foreign investors which implies more active participation and more commitment by the investor in business policies and management. It is distinguished from foreign portfolio investment in that the investor in FDI exercises some degree of control. A portfolio investor may buy and sell stocks daily and shifts from one bond or stock to another and generates profits on price differences.
FDI increased by 21.4% to US$10.05 billion in 2017 and further by 48.9% in the first five months of 2018. As % of GDP, this shows a rise from 2.7% in 2016 to 3.7% in 2018.
Portfolio investments which are minority holdings in local company stocks and bonds by foreign investors show significant variability, declining to a negative level in 2016 due to uncertainties fanned by the rise in US interest rates and then rising to US$559.7B during the first 7 months of 2018. As % of GDP, the ratio rose from 0.1% in 2016 to 0.4% in 2018.
The third measure of GDP is the approved investments issued by the Department of Trade and Industry (DTI). (Table 3) These are approved investors` applications for fiscal incentives with incentive-providing agencies, primarily BOI and PEZA. Approved investments rose by 29.4% in 2017 and declined by 5.3% in the first half of 2018. Note that this is only 21.5% of capital formation in 2017 and 13.0% in 2018. The lower ratio implies that investors are applying less for fiscal incentives and are attracted more by the country’s improving macroeconomic fundamentals.