Thursday, April 23, 2015


Recent reports say direct foreign investment flows have been  negative. This could not mean anything else except the reality that the flows were smaller compared to  a similar period in the past. 

This sounds oxymoronic to me. Or the negative flows are clear suggestions that while the economy needs foreign capital it can survive on its own. Proofs are everywhere. Shares offered by big companies particularly those listed in the Philippine Stock Exchange are invariably oversubscribed. But it must be pointed out the right to acquire them belong exclusively to the present stockholders. In other words some of the capital offerings are rights of pre-emption. They are not options. 

Almost every day newspapers (Business Insight highlights them) report this and that company have set aside billions of pesos for capital expenditures. Even the Ayala Group, probably the most conservative but most successful among the conglomerates, is known to have decided to borrow not less than P15 billion this year for its capital expenditures. 

The economy does not seem to be hurt by persistent decline in the value and volume of merchandise exports. This could have hurt the economy severely if it relied almost solely on export receipts for foreign exchange.  

The country has around $80 billion of gross international  reserves remitted by around 10 million Filipinos working abroad. The economy does not rely on exports for dollars. Direct foreign investments help increase the reserves, nominally considering that the Philippines is not as yet the favorite host to foreign investors.

The benefits from direct foreign investments are  not in counting the money in dollars and cents.  It is the product foreign money produces, the number of people it hires and the taxes it pays.

Otherwise direct foreign investments do not help the economy if they come in the form of hot money invested mostly in listed shares of stock.  Hot money is transient money.  It takes advantage of the volatility of emerging markets.  

The simple fact is the economy is largely helped by foreign investments — direct or otherwise. The economy grows at a faster clip.  The  future looks rosy as seen by foreign rating agencies and multilateral institutions notably the International Monetary Fund (IMF), the World Bank and the Asian Development Bank among many. 

While the economy needs foreign investments, slow flow does not affect growth.  Which translates into realizing the long-awaited dream of attaining internal strength.

It is in this sense that while we need direct foreign investments to grow even faster the economy survives   even if the flows were smaller in recent periods. 

My   opinion of why these things happen is   that we have opened up the economy to just about anybody who wants to come in. The regime of strident nationalism is behind us. Otherwise, there will be loud, in fact nearly violent objections to the opening of the banking system to foreigners. 

Earlier, Supreme Court lifted restrictions on mining by allowing foreign investors to fully own a mining operation for as long as they enter into a technical and financial agreement with the government. The downside of the SC ruling is the stubbornness of the President.

He might have been brainwashed by self-proclaimed guardians of the environment such that in his watch he has not given a single permit to a new mining proposal. Most unfortunate is missing — so tar anyway —the $5.9 billion committed by foreign investors to develop the rich copper-gold deposits in Tampakan. South Cotabato 

The investors have not  exactly thrown in the towel. They simply slowed down on spending on community development. 

Setting aside the stubbornness of the President, he should be credited for leaving business alone. He seems to have full appreciation of the fact that the best government for business is less government.

Thus, he hardly talks or defines which path the economy should take. He leaves that decision to the businessmen, to the risk takers. They know best. What they believe to be good for them is better for the economy. 

Lifting restrictions imposed by the Constitution encourages direct foreign investments. Whether the President knows it or not, his government appears to have a full grasp of the market driven economic system although there are “quirks” like imposing price controls on consumer products although    no law can control the costs of producing goods and services. 

In a way price controls or suggested retail prices may have the effect of discouraging foreign investors who may want to take risks in producing   consumer products. It is in that sense that smaller inward flows of direct foreign investments have a serious impact on the economy.

Regulators do not seem to have learned any lesson from the reality that producers of goods and services will always “soak” the consumers with prices that leave them a profit which in turn is presumed to be used for expansion or new projects. 

The sense of it all is producers know the consumer is king. He rules the market. If prices of goods and services get to be beyond his capability to pay, he will stop buying or reduce purchases. That will force the producers to accept the reality of making smaller profits. The other option is to pack up and go home. 

Theoretically, a shortage immediately ensues. Practically, prices will go up even higher. The regulators do not have the means, not the political power, to dictate to the producers for what they claim is for the benefit of the consumers. ‘The truth is politics mercilessly punishes instead of helping them. 

It is not exactly correct to say that producers soak the consumers with higher prices because they are possessed with greed for more money. Little is known about the fact that it is legitimate greed that keeps the economy going. 

How much money can the Ayalas spend in their lifetime? They have enough to last ten or more lifetimes. But they long for more. For their personal benefit? Far from it! It is the consumers and the government that benefit from morally defensible greed.

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