The sharp drop in foreign direct investments (FDIs) recorded by the Bangko Sentral ng Pilipinas (BSP) in February 2025 indicated caution among investors who opted to wait on the sidelines for the prevailing global and domestic uncertainty to pass, analysts said.
Analysts polled by the Malaya Business Insight cited trade tensions, especially from US President Donald Trump’s tariff policies, and geopolitical risks as factors behind the wait-and-see stance taken by investors.
“The sharp decline in FDI net inflows signals persistent investor caution,” John Paolo Rivera, senior research fellow at the Philippine Institute of Development Studies, said in a Viber message.
Caution, he said, stemmed from perceptions of geopolitical risks and trade tensions, especially from Trump’s new tariff policies, which are currently reshaping capital flows globally and making emerging markets, such as the Philippines, more vulnerable.
“Weaker-than-expected GDP growth and subdued corporate earnings may dampen investor sentiment,” he said, referring to the government report last week of 5.4 percent growth in gross domestic product for the first quarter.
That stood below the 5.7 percent median forecast by analysts polled by this paper for the January-March quarter.
Trump’s tariffs
“Trump’s policies encourage more investments and jobs in the US than outside the US. That could reduce foreign investments globally and locally,” Michael Ricafort, RCBC’s chief economist, said.
Ricafort warned that Trump’s reciprocal tariffs could weigh down exports and FDI in export-oriented industries.
Banker and economist Alex Escucha said investors have taken a “wait and see” stance given the high level of uncertainty surrounding the Trump 2.0 tariffs.
“Similar to the aftermath of a big earthquake, people are waiting for the aftershocks to settle down,” Escucha said.
“Unlike portfolio investments driven by relative prices or yields, foreign direct investments are long-term. Hence, not committing in the meantime is the prudent stance,” Escucha added.
Investment-friendly reforms
Rivera said uncertainty in regulatory and fiscal policies, including delays in implementing investment-friendly reforms, could be holding back foreign firms from making long-term bets.
“All of these could weigh on job creation and capital formation, especially in key sectors like manufacturing, infrastructure, and digital,” Rivera said.
He said the national government needs to signal consistency and clarity in investment policies, fast-track ease-of-doing-business measures, and leverage trade talks to anchor confidence.
“More aggressive promotion of sectors aligned with green growth, AI, and digitalization might help attract future-oriented FDIs,” Rivera said.
He cautioned that if the downtrend persists, “it might also impact the peso and external financing dynamics.”
Tax incentives
Ricafort said foreign investors also awaited the CREATE MORE IRR, released only on Feb 17, 2025.
Signed into law on Nov 11, 2024, the CREATE MORE Act offers tax incentives to foreign investors in a bid to make the country competitive, investment-friendly, predictable and accountable.
“Some foreign investors were on a wait-and-see mode prior (to the release of the IRR). But this would now make foreign investors more decisive on whether or not to locate in the country, going forward, Ricafort said.
He added that the slower FDI data is consistent with the latest slowdown in GDP growth data, which could justify further local rate cuts for the coming quarters, especially if inflation stays within the BSP’s target range of 2 percent to 4 percent.
‘Rate cuts could help’
“Rate cuts by the US Fed, which could be matched locally, would help lower borrowing costs, increase demand for loans, boost demand for investments and expansion projects, boost global trade in terms of exports and imports, create more jobs, increase business and other economic activities,” Ricafort said.
However, he stressed that rate cuts would have some lag effects as interest rates are still relatively high.
