Last week, I had the opportunity to sit through an exclusive economic briefing for Spanish businessmen given by Señor Enrique Feás, the economic and commercial counselor of the Spanish Embassy in Manila. Señor Feás is a highly respected economist in both the diplomatic and business circles. His briefing sought to enlighten Spanish businessmen on the opportunities and challenges in doing business in the Philippines. It was the most frank assessment I had heard in years, one I also found most accurate.

[caption id="attachment_146033" align="alignleft" width="240"] Spanish Embassy’s Charge de Affaires, Señor Ignacio Perez-Cambra (left) and Señor Enrique Feás, economic and commercial counselor of the Spanish Embassy in Manila.[/caption]

Señor Feás began by saying that the risks of doing business in the country this year is significantly less than the last two years. The threats that loomed in 2012 and 2013, such as our unprecedented property and stock market boom, have since abated. Records show that since the end of 2012, the aggressive expansion of luxury residential projects have softened significantly, easing the risk of a property glut in the high-end segment. As for the stock market, the price correction in the Q4 of 2013 and Q1 of 2014 also relieved the unrealistic price valuations of some listed companies.

For the most part, Señor Feás declares the Philippines a success story as growth and fiscal conditions are concerned. At a time when the rest of the world was smarting over the recession that followed the global financial crisis of 2009, the Philippines registered successive years of high growth. Our fiscal condition is also in the pink of health with inflation at less than four percent; external debt significantly reduced from 70 percent of GDP in the late ’90s to just 20 percent today; gross international reserves at comfortable levels, at $79 billion; current account balances at two percent of GDP; and capital formation (construction, durable equipment and inventories) on a steady ascent. All these make for a favorable environment to do business, says Señor Feás.

It’s why we’ve seen a significant increase of Spanish investors in recent years. Last March, Spanish Minister for Foreign Affairs and Cooperation Señor Jose Manuel Garcia-Margallo was in the Philippines with a delegation of 25 conglomerates seeking business opportunities. The intent is to make the Philippines Spain’s jump-off point for Spanish companies seeking to take advantage of the ASEAN Common Market. Spanish conglomerates such as Globalvia, OHL, Sener and Abengoa were represented.

Many of these conglomerates are involved in infrastructure development. Unknown to many, 37 percent of the world’s transport infrastructure are managed by Spanish companies. So competitive are the Spaniards in this realm that they are widely recognized for their ability to build large-scale infrastructure projects cheaper, faster, and better than the Japanese or Koreans. They are keen on participating in government’s Public Private Partnership (PPP) projects. As I write this, several alliances have already been formed with our counterpart conglomerates.

THE CHALLENGES

Having said that, Señor Feás also points out the challenges in the Philippines’ story. One of his concerns is that the share of low cost services (e.g., call centers, tourism-related services, etc.) is growing much faster than manufacturing and exports. As we are all too aware, a lower middle income economy such as ours can never leapfrog from one based on agriculture to one based on high-value services without first having a fully developed manufacturing sector to serve as its technological foundation. Hence, it puts to question whether the country will have the wherewithal to become a sophisticated economy in the next 20 years.

A second concern is the government’s relatively low spending on infrastructure. In today’s logistics-driven economy, nations that aspire to rise in competitiveness must have world-class infrastructure to enable businesses to flourish. Fact is, not all these infrastructure projects can be profitable—thus, not all can be subject to the PPP scheme. Government must still fork out a substantial chunk of the national budget for infrastructure development, especially for those “missionary” in nature. An acceptable infrastructure spend ratio is five percent of GDP—this is how much Thailand, Singapore and Hong Kong spend theirs. The Philippines ratio is less than three percent due to our low tax-generated income, which today only stands at 15 percent of GDP. In contrast, our neighbors collect taxes north of 20 percent of GDP. The large disparity is due to tax evasion, which gives tax evaders no right to complain about traffic, our decrepit airports, and public facilities.

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