AS 2007 draws to a close, recent developments augur well for the Philippine economy, suggesting that the pace of economic growth will be sustained and the volume of foreign investments rise. However, while the overall outlook for the year appears positive, there are risks of possible downsides. A strong peso, accompanied by softening external demand, will impact on Philippine export growth and foreign investment appeal, while domestic politics pose a threat to greater fiscal consolidation and the progress of key economic reforms. Despite these risks, the annual economic outlook, with only a month left, is stable and the country is expected to achieve average annual growth of 4.7 percent through to 2011. One barometer of the Philippine positive outlook is the sudden flow of foreign direct investments into the country. This year’s foreign investors brought to light prominent names in the business world — both individual and institutional investors — from the Gulf countries, noticeably from Saudi Arabia.
In the absence of available official statistics on the volume and value of Saudi investments in the Philippines, data nonetheless showed a marked improvement in the size of Saudi business stakes in the Philippines — particularly in tourism, agriculture, export and import trading sectors — and all within a short period. A healthy foreign direct investment will maintain the economic growth affected by diminishing exports because of the rise in the peso.
The flow in investment is attributed by observers to a number of factors such as the quality of manpower resources, a strategic business location, a liberalized and business-friendly economy, a hospitable lifestyle, unlimited business opportunities and the government’s drive to win greater foreign investment — with 100-percent foreign equity ownership permitted in most economic sectors and foreign businesses granted tax privileges in 45 special economic zones.
In 2006, the country’s total foreign direct investment reached $2 billion in January-November, up 54 percent from the previous year, although the country continues to lag behind other countries in the region. In line with that, the volume of Saudi investments in the Philippines is comparatively low compared to the Kingdom’s presence in other developing Asian countries — especially those in the subcontinent — despite the Philippines being firmly located on Saudi radar thanks to the presence of over a million Filipinos working in the Kingdom. They constitute the third largest foreign workforce in the country after Indians and Pakistanis and the largest pool of skilled foreign labor.
It is 30 years since the Philippines opened its first embassy in Saudi Arabia - in Jeddah, transferring it to the Diplomatic Quarter in Riyadh in 1986. Since then, commercial links have grown steadily, but largely on the trade side rather than in terms of investment. Saudi investments in the Philippines came much later, not until the passage of the Philippine Foreign Investments Act in 1991, considered as landmark legislation because it liberalized the entry of foreign investors into the country.
As a result, in March 1994, the first major Saudi investment of Saudi Arabia in the Philippines occurred. Saudi Aramco paid $532 million for a 40-percent stake in Petron, the downstream unit of the Philippine National Oil Co. (PNOC). There was a rationale to this. More than half — 56.3 percent — of the Philippines’ crude supply is sourced from Saudi Arabia through Petron, which has a refining capacity of 180,000 barrels per day. The Philippines imports more than 39 percent of its oil needs from the Kingdom, out of its more than 92.8 percent crude requirements that come from the Middle East. Oil constitutes more than 90 percent of the Philippines’ imports from the Kingdom.
The Petron agreement acted as an impetus for other Saudi investors to move into the Philippines. Saudis were even more encouraged to do so after President Gloria Macapagal Arroyo’s visit to the Kingdom in January 2001. At the time, the president drove home her message on the attraction and the incentives for Saudi investors in fast-growing tourism and ICT sectors in the Philippines where “high-value jobs are plentiful and ... can use our most competitive resource — the great Filipino workers.” Arroyo told Saudi businessmen that investments in the mining industry offered ample opportunities given the $1 trillion-tag put on the country’s estimated mineral reserves. They are the fifth largest mineral deposits in the world: Fifth largest in gold, ninth largest in copper, and 20 percent of the world’s nickel.
She said Mindanao offered vast opportunities for Saudi investors in the energy sector, particularly in establishing oil refineries. The president also said that Saudi investments in agriculture would help transform Mindanao into the “food basket of the Philippines.” She also said, “We want to raise its production, processing and logistical capacities, including the Halal food industry.”
Most recently, in April 2007, Prince Alwaleed Bin Talal entered into a joint venture with Ayala Land Inc. (ALI), investing $151 million in luxury hotels in the Makati business district. The project, 80-percent owned by Kingdom Hotel Investments (KHI) and 20-percent by ALI, will be the most expensive hotel project in the Philippines. Arroyo praised the prince’s decision at the time, saying, “Prince Alwaleed’s group investment in the Philippines is a clear vote of confidence from the Middle East, which is a bastion of our national interest because of the presence of more than a million Filipino workers in that part of the world.” She hoped that more Arab investors would follow suit. She awarded the prince the country’s Order of the Golden Heart during his visit.
The KHI-ALI planned complex, comprising a 300-room Fairmont Hotel, a 30-suite Raffles Hotel and 189 Raffles-branded residences, will be built on a 7,377-square-meter lot on Makati Avenue and Pasay Road. The site is currently being used by Anson’s department store, Park Square 2, and a public transport terminal. The new hotel complex will be placed under KHI-ALI Manila Inc. (the joint venture firm that will own the property on which the hotels will stand) and KHI-Manila Properties will be the operating company. ALI donated the land, while KHI will shoulder the hotel’s development and operations.
Another group of Saudi investors led by Abdul Rahman Al-Jeraisy, chairman of the Riyadh Chamber of Commerce & Industry and at the time also chairman of the Council of Saudi Chambers of Commerce & Industry, visited Manila prior to Prince Alwaleed’s initiative, to look into possible investment partnerships with Filipino businessmen.
Both the Philippine and Saudi governments look to further strengthen the bilateral relationship, as seen in their successful 2nd Joint Commission Meeting in October 2005 in Riyadh. It resulted in the signing of four important agreements. These included the Agreement on the Encouragement and Protection of Investments.
This establishes nondiscriminatory measures in the management, maintenance, use, enjoyment or disposal of investments. Encouraged by the competence of skilled Filipino labor in the Kingdom, a memorandum of understanding on technical education and vocational training was also signed, making provision for 16,000 instructors from the Philippines to train Saudi women to become more productive in the work force.
Under a separate MOU, the Saudi government and private sector were encouraged to invest in the Philippine domestic shipping modernization program, the maritime industrial park and help develop the Cotabato Port Project. In the transportation sector, the Philippines has sought Saudi financing to help facilitate infrastructure and socio-economic development in Mindanao, in particular the Mindanao Railway System, Socialized Microcredit Program and Socialized Housing. In the food sector, the Kingdom remains an attractive market for Philippine food and other food exports because of the large number of overseas Filipino workers (OFWs) and other Asian expatriates in the Kingdom, as well as a growing acceptance of tropical and exotic foods by Saudis.
The Philippines is hopeful that the surge in oil prices will spur Gulf Arab businessmen to invest in diversified portfolios in Asian markets, including their own country where the incentives are attractive. In the past five years, trade volumes between the Gulf Cooperation Council and Asia have tripled and, without question, much of the incremental demand for Gulf exports — not just oil and gas but also petrochemicals, base metals and services like finance and tourism — will come from Asia. The GCC has seen large inflows of migrant labor from Asia, creating both a growing source of private capital flows between the regions as well as an increased cultural overlap.
In addition, geopolitical trends are favoring strategic diversification. There is a recognition that should current economic and consumption trends continue, Saudi Arabia’s relations with the Philippines will take on even greater strategic importance.