Why is FDI rising?

PHILIPPINES - In Brief 16 Oct 2020 by Romeo Bernardo

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Early this week, the BSP released data showing net foreign direct investments (FDI) rising for the third straight month in July, by 35% yoy to $797 million. Following the IMF’s Balance of Payments and International Investment Position Manual, 6th Edition (BPM6), FDIs represent equity and debt flows of related parties having a 10% or more voting power in the resident enterprise.[1] In May and June, when government began easing quarantine measures, net inflows increased by 39% and 7%, respectively, the former likely reflecting some data distortion due to disrupted business activities during the most stringent mid-March to end-April lockdown[2]. Still, whereas FDIs in the first five months of the year fell 22% yoy, net flows increased by 23% yoy in the subsequent two months. What drove the increase in June and July? TABLE 1.Net FDI flowsSource: BSP The BSP traced the increase to “investors’ improving sentiment due in part to easing of containment measures, and some signs of gradual improvements in economic activity...” We find this unpersuasive considering that the Philippines has one of the worst covid-19 outbreaks in the region with the BSP’s own business expectations survey revealing weak business sentiments. Rather than improving sentiments, we surmise that much of recent inflows represent shareholders’ support for recipient firms whose operations are probably experiencing the same cashflow problems as other local businesses. Indeed, if we were to look for data to support our conjecture, we could interpret the components of FDI in the June-July period as follows: (a) retained earnings, which accounted for 12% of the flows, fell by 18% yoy, suggestive of decreased prof...