The Philippines

Investment Climate Statement – The Philippines

October 2018 Mizuho Bank, Ltd. Global Strategic Advisory Department

Presence of financial conglomerates Overseas Filipinx Workers (OFW)

 In the Philippines, the Spanish-based financial conglomerates had  The total amount remitted by OFWs in 2017 through banks to the great power, partially due to the history of Spanish rule. However, Philippines was USD28 billion (an increase of 4.3% from the previous year). now, except for the Ayala financial conglomerate, the Chinese The remittance amount including non-bank transfers was approximately financial conglomerates have greater presence. USD31.2 billion, which accounts for about 10% of the Philippines’ GDP. These remittances make a major contribution to Philippine economic growth  Financial conglomerates are said to actually control 70% to 80% of by supporting private consumption, together with making a major the Philippine economy. They have developed businesses in the fields contribution to the acquisition of foreign currencies in the Philippines. of finance, real estate, communications, retail, food, and so on. In  One-third of all OFWs are permanent residents in the United States, and a recent years, they are actively developing infrastructure. high percentage of them have high-paid occupations such as doctor, nurse, or  Many of the conglomerates exercise great influence in politics, for accountant. Meanwhile, looking at new destination countries where workers example by producing members of parliament and governors from are dispatched, demand is growing from Middle Eastern countries such as their families. Saudi Arabia and the United Arab Emirates, etc. Workers are often dispatched there as construction workers or domestic workers (housemaids). Main financial conglomerates in the Philippines Remittance amount from OFWs

Name Main Companies Ethnicity (USD million) Ayala Group Ayala Corp. (conglomerate), Bank of Phil. Islands (bank), Pure Spanish Foods (foods), Globe Telecom (telecommunications), etc. 30,000 Soriano Group A. Soriano Corp. (ANSCOR, conglomerate), Int’l Container Spanish Terminal Services (logistics), Phelps Dodge Phils., Inc. (copper 25,000 ore), etc.

SM Group BDO Unibank (bank), SM (retail), etc. Chinese 20,000 JG Summit JG Summit Holdings (holding company), Robinson’s Land (real Chinese estate), Universal Robina (foods), Digital Telecom Phil. (telecommunications), etc. 15,000

San Miguel Group San Miguel (beer), etc. Chinese 10,000 Yuchengco Group Rizal Commercial Banking Corp. (finance), etc. Chinese LT Group Share Holdings (holding company), Philippine Airlines (airlines), Chinese 5,000 Allied Banking Corp. (finance), etc.

Lopez Group Benpres Holdings (holding company), Manila Electric Com. Philippines 0 (MERALCO, electric power), Bayan Telecommunication (telecommunications), etc. 2011 2012 2013 2014 2015 2016 2017

Sources: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from the Central Bank of the Philippines (BSP), etc. 1 Trade Overview (1): Exports

 Electronics products account for the majority of exports from the Philippines (2000: approximately 70%; 2016: approximately 50%) due to the entry of Western semiconductor manufacturers in the 1970s and the expansion of Japanese electrical equipment manufacturers in the 1980s and 1990s.  Looking at export destinations, the US was the largest (about 30%) by the mid-2000s. However, as exports shifted to electronics-related items, exports increased to Asian countries, which are manufacturing bases. The dependence on the US decreased proportionally.

Export trends (by commodity) Export trends (by country)

(USD million) 70,000 Middle East Others 5% ASEAN (excl. 1% 60,000 Singapore) 8% 50,000 Taiwan Japan 4% 21% 40,000 South Korea 30,000 4%

20,000 Singapore 6% U.S. 10,000 15% Hong Kong 0 12% 2010 2011 2012 2013 2014 2015 2016 Other Petroleum products Europe Copper ingot Food and beverages China Fruits and vegetables Coconut products 13% Textiles and clothing Chemical products 11% Furniture and wood crafts Machinery and transportation equipment Electronics products

Source: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from the National Statistics Office of the Philippines 2 Trade Overview (2): Imports

 The development of the Philippines manufacturing industry has been delayed in the capital goods and intermediate goods sectors. Imports of capital goods and intermediate goods also increase as exports increase, and so the trade deficit has become permanent.  In the past, the US and Japan were central as import partners. However, the proportion of Asian countries has risen due to trade expansion within Asia. Currently, China is the largest import partner.

Export trends (by commodity) Import trends (by country)

(USD million) 90,000 Middle East 4% Other Japan 80,000 6% 12% 70,000 60,000 U.S. 9% 50,000 ASEAN (excl. Singapore) 40,000 20% Europe 30,000 9% 20,000 Taiwan 10,000 6% South 0 Korea China 2010 2011 2012 2013 2014 2015 2016 18% Other Feed 6% Communications and electrical equipment Iron ore and steel Chemical products Plastics Singapore Hong Kong Cereals Industrial equipment Transport equipment Fuel 7% 3% Electronics parts

Source: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from the National Statistics Office of the Philippines 3 Industrial Structure

 Industrialization advanced faster in the Philippines than in surrounding Asian countries after World War II. However, subsequently the shift to export-oriented industries was delayed in the Philippines. So, the country’s manufacturing industry has been sluggish since then.  Meanwhile, the service industry has become the industry where people seek employment, and as a result, the unemployment rate is relatively high (⇒ wage increase rate is low).  In recent years, BPO business (included in “other services”) has grown into a major industry that accounts for about 10% of GDP. Sales in recent years have expanded by about 10% every year.

The Philippines GDP by economic sector (YOY) 2005 2016

Other services Mining 4.7% Public service 1.0% Mining Other Agriculture, Agriculture, 3.9% 1.0% services forestry, and Public service forestry, and 10.4% fishing 9.6% fishing 8.8% 13.3% Real estate and Real estate and leasing Manufacturin leasing 9.4% g 11.6% Finance Manufacturing 23.2% 5.7% 23.7% Finance 7.3% Transportation and telecommunications Construction 8.1% Wholesale and Electricity and Electricity and Transportation and Wholesale and 6.2% gas retail gas telecommunications 7.6% retail 3.3% 16.5% Construction 3.6% 16.8% 4.4%

Tertiary industry: Secondary industry Primary industry: Tertiary industry: Secondary industry: Primary industry: Approx. 54% Approx. 32% Approx. 14% Approx. 58% Approx. 27% Approx. 10%

Sources: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from the National Statistics Office of the Philippines, JETRO materials, NNA news, etc. 4 Industry Characteristics

 Manufacturing: Development is delayed and the percentage of the working population is low. Reduction of the manufacturing cost through infrastructure improvement is expected.  BPO industry: This industry has grown into a major industry that accounts for about 10% of GDP. In the future, boosting of the value added will be an issue.  Retail: This industry is supported by robust domestic demand, and growth is expected in the future.

Features and trends of major industries Manufacturing BPO industry Retail  Development of manufacturing is delayed; the percentage of the  Because there are many English  Retail will experience strong working population in speakers and labor is cheap, the growth due to the continuing manufacturing dropped from 9.3% BPO (Business Process population bonus and the increase in 2005 to 8.2% in 2016 Outsourcing) industry has in middle-income earners Features  The types of businesses include developed  Due to high hurdles that restrict food processing, electronics-  It has grown into a major industry foreign investment, major related businesses that now accounts for about 10% financial conglomerates have a (semiconductors, etc.), and petro- of GDP strong presence chemical products

 While labor cost is cheap in the  BPO in the Philippines focuses on  The Philippines is a country made Philippines, the infrastructure is labor-intensive operations (call up of many islands, and so weak. As a result, the high centers are common) development of modern retail Recent manufacturing cost is a problem  In the future, it will be a challenge markets is delayed outside urban trends  Under the current administration, to add value to the BPO industry, areas infrastructure development is an such as by strengthening non-  In the future, modern retail important policy, and reduction of voice fields (accounting, law, markets utilizing cold chains, etc., manufacturing cost is anticipated healthcare, etc.) and EC are expected to expand

Sources: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from the National Statistics Office of the Philippines, NNA news, etc. 5 Direct Investment Trends : Inward Investment

 Direct investment decreased due to the 2008 financial crisis, but it gradually recovered thereafter and hit a record high in 2012.  In 2014, direct investment decreased due to concern about electric power shortages and the turmoil in logistics due to regulation of heavy truck driving in Manila City that began in February of that year. (The truck regulation was lifted in September 2014.)  In 2017, the amount of approved FDI dropped by half because many companies decided to take a wait-and-see approach due to the impact of the regime change in the previous year and social unrest, including armed conflict with Muslim extremists. By industry, the manufacturing industry, which accounts for 52% of the total, decreased by 43%.  Meanwhile, domestic investment was steady. The total amount approved both domestically and overseas was PHP911.3 billion, an increase of more than 30% YOY. Trends in foreign direct investment (approved) New FDI approved by business type (2017) (Peso million) 350,000

300,000 289,118 Energy-related Other 274,014 9% 258,231 5% 250,000 245,216 219,039 196,069 200,000 186,943 Management operations, etc. (including BPO) 13% 150,000 Manufacturing 121,816 105,639 52% 100,000 Real Estate-related 21% 50,000

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Japan The Netherlands Australia U.S. Singapore South Korea China Other

Source: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from the National Statistics Office of the Philippines 6 The Attractions and Pointers (Issues) for Investors

 The Philippines has abundant human resources with high English ability and low wages. It has the potential to be an attractive consumer market.  Meanwhile, the Philippines is in the developmental stage. It is necessary to pay attention to the lack of infrastructure and non-transparent policy management, etc.  Under the sponsorship of the president, security measures and anti-poverty measures are being implemented, and the number of crimes has decreased greatly. However, there are security problems such as armed conflict with Islamic extremists in some areas.

Attractions for foreign investors Pointers (issues) for foreign investors

Abundant labor force Weak infrastructure environment

Low wage levels for workers Support industries still emerging

High corporate tax rates compared High number of English speakers to other ASEAN members

Pro-Japanese sentiment Security/safety problems

Non-transparent policy Market with latent potential management

Geographical proximity to Japan Relatively expensive electricity

Sources: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on data from various public sources 7 About the Mizuho Bank Manila Branch

25th Floor, Zuellig Building, Makati Avenue corner Address Paseo de Roxas, Makati City 1225, Metro Manila, Philippines

Tel. 63-2-860-3500

Open Monday - Friday

 Deposits  Lending  L/C issuance, acceptance, and confirmation Activities  Acceptance and negotiation of import/export bills  Remittances, foreign exchange contracts  Guarantees Access from the airport approximately 45 minutes by taxi

Source: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd. 8 Business Cooperation (1): Bank of the Philippine Islands (BPI)

BPI outline

 Established in 1851, BPI is the oldest bank in the Philippines.  BPI is part of the Ayala Group, a Spanish financial conglomerate with the longest history of any financial conglomerate in the Philippines.  Branches: 820 domestic branches and 5 foreign branches  ATMs: 2,575 ATMs  Shareholder structure: Ayala and affiliates, 48.3%; Roman Catholic Archbishop Content of MOU of Manila, 8.3%; GIC Private Limited (formerly known as Government of Singapore Investment Corporation), 5.6%, Other, 37.8% 1. Local currency services  Ratings: Moody’s Baa2; Fitch BBB- 2. Introduction of local partners and  Financial information: Total assets: PHP1,450,197 million; loan balance: PHP800,170 million; current net income: PHP18,039 million local sales outlets, etc. 3. Mutual cooperation on developing the local debt market Purpose of signing MOU 4. Exchange of information on local financial markets and regulations  To promote cooperation in various fields such as local settlement business, business matching, foreign exchange-related guarantee transactions, etc., through a partnership with a major local bank that possess advantages financially and in its domestic network  To establish a system that can support domestic settlement transactions (salary transfers, etc.) that has been flowing to local banks (including study of an efficient payment scheme from Mizuho Bank’s accounts to affiliated employees’ accounts, etc.)

Sources: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on the bank’s website, etc. 9 Business Cooperation (2): The Department of Trade and Industry (DTI)

DTI (Department of Trade and Industry)  The DTI is a government body responsible for industrial development and the promotion of trade and inward direct investment.

 The Philippine Economic Zone Authority (PEZA) and the Board of Investment (BOI) are both DTI affiliates which encourage Contents of the MOU inward foreign direct investment. 1. Mutual cooperation on attraction of Japanese companies and their expansion into the Philippines Purpose of the signing of a Memorandum of Understanding (MOU) 2. Collaboration on the introduction of companies for investment, arrangement  Through the MOU, smoother support will be offered for Japanese of interviews in the Philippines, and companies to expand their investment in the Philippines to investment promotion activities domestic demand-oriented industries. This will be achieved through collection of information from the DTI and visits to individual companies together with the DTI. (Mizuho Bank is the first Japanese bank to sign an MOU with the DTI.)

Sources: Compiled by the Global Strategic Advisory Department of Mizuho Bank, Ltd., based on the bank’s website, etc. 10 Disclaimer

These materials have been prepared solely for the purpose of providing information relating to financial solutions, and are not intended to induce or introduce readers to engage in any particular financial transaction. Nor do they assume any transaction with any Mizuho Financial Group company. These materials have been prepared based on information adjudged to be reliable and accurate, but Mizuho Bank, Ltd., does not guarantee its reliability or accuracy. Readers are requested to exercise their own judgment when using these materials and, if necessary, to consult with lawyers, certified public accountants, tax accountants, and other experts in this regard. The entire content of these materials is subject to the copyright of Mizuho Bank, Ltd., with all rights reserved. Accordingly, these materials, in whole or in part, may not be (i) copied, photo copied, or reproduced in any other means, or (ii) redistributed without written consent of Mizuho Bank, Ltd.