As concrete proof of its commitment to actively assist US companies and individuals doing business or desiring to do business in the Philippines, AmCham opened the American Desk at the Board of Investments, Philippine Department of Trade & Industry. The American Desk started operation in 1992, initially funded by an assistance-grant from US-AID. Since 1996 it has been totally funded by AmCham's regular firm members.

The American Desk at the BOI is manned by Robert W. Blume, Investment Promotion Manager. It provides the following services to US companies and individuals:

• General Country Briefings
• Market Briefings
• Investment Briefings
• Investment Regulation Information
• Industrial park Information
• Special Economic Zone Information (Clark SEZ, Subic Bay SEZ)
• Philippine Economic Zone Information (PEZ)
• Joint Venture Partner Referrals
• Trade & Industry Association Referrals
• Referrals/Introductions to Philippine Government Departments and Agencies for Assistance
• Referrals/Introductions to US Government Departments for Assistance
• Referrals to Industry Authorities
• Visa Assistance
• Investor Problem Resolution
• Assistance in filing for BOI Incentives
• Assistance in Expediting Philippine Government decisions on investment applications

The American Desk is open Monday-Friday, 8:00 a.m. to 5:00 p.m. It is
located at the Ground Floor, #385 Sen. Gil Puyat Avenue, Makati City.
Telephones: 895-8851, 895-3918 Fax: 896-2315
E-mail: amdeskboi@vasia.com.

• Philippine Focus
• Current Conditions and Perceptions
  • Country Risk
  • Economic Fundamentals
  • Cost Factors
• Investment Incentives
• Sectoral Investment Opportunities
• Getting Started — Some Resources
• The Philippines vs. Asia and ASEAN — A Comparison

PHILIPPINE FOCUS

One year has passed since the peaceful transition to a new democratically elected government in the Philippines. The new administration, headed by President Joseph Estrada, a former popular film star and local government leader, is well underway on its policy initiatives.

The very setting of the Presidential inauguration at the historic Malolos Church, the birthplace of the formal declaration of Filipino independence in 1898, was symbolic. Symbolic in the sense that a major tone of the Estrada administration is to re-assert the rights and welfare of the common Filipino.

At the outset of the new administration the economy was stumbling in the turmoil of the surrounding Asia crisis. There were doubts about President Estrada's leadership abilities, whether he would turn away from trade commitments and continue the reform process carried out so forcefully by President Ramos. There was concern about whether an economic re-bound would start and when.

Now, as the country moves into the second half of 1999 it is becoming apparent that a Philippine recovery, and a recovery of Asia as a whole, is underway. There is a realization that basic structural issues still need to be dealt with, but the general quarters alarm has been turned off. A feeling of optimism, of a rebound is taking hold.

Importantly, the new administration has not wavered in staying on the road of keeping trade commitments to WTO and AFTA, opening more opportunities for foreign investment. The country's push toward global competitiveness remains key in the policy framework. This, despite calls from powerful local industrialists (e.g. glass, plastics, appliances mfg.) for protection.

As with former President Ramos, President Estrada's resolve will come under constant pressure and be relentlessly tested by vested interests throughout his presidency. Dealing with congress will present stiff challenges.

Below is an update on critical investment issues as we move into the second year of the Estrada presidency.

CURRENT CONDITIONS AND PERCEPTIONS

Country Risk

To get country risk right is basic to the investment equation. The Philippines paid a heavy price for severe shortcomings in the 1980's when peace and order fell apart under the Marcos dictatorship. Wounds from that time have yet to heal. Domestically, sensitivities still run high toward any moves by elected officials to overstay mandated term limits. For example, former President Cory Aquino's "No, No, - Never Again" public cry to efforts by President Ramos to extend his term of office by constitutional amendment. In the international investment arena memories of mistreatment under the Marcos government still lives on in home offices and corporate board rooms in New York, Detroit, Chicago, and Los Angeles.

• Democratic Government - Since restoration of democratically elected government in 1986, the country's democracy has continued on a sound path of stronger and more healthy institutions, more openness and transparency. Still, to an American point of view, the Philippines has a long distance to travel to match what Americans perceive to be a fully functioning democracy. Nevertheless, the Philippines is on the right track. There is no evidence of any meaningful attempts toward authoritarian rule. On the contrary, the Estrada administration is of a mind to strengthen the role of local government units and put more power (e.g. police, infrastructure development) in their hands. President Estrada, a strong advocate of democracy, has surrounded himself with a capable team. Strong points are trade and commerce, finance, economic planning, and foreign affairs.
• Peace and Order - President Estrada campaigned on making significant improvements in public safety. His efforts are succeeding. Conditions have improved. In particular are marked reductions in kidnapping for ransom and bank robberies. Still, a lot of work lies ahead to weed out corrupt elements in the armed forces and national police who moonlight in criminal activities.
• Freedom of Speech - The Philippine press remains the most free and open in Asia. In fact, reading any of the many newspapers one could readily conclude that Filipino press freedoms go beyond that of the U.S. The continuing openness of the press and other media readily exposes corruption and any attempts to backslide to authoritarian government.
• Corruption - certainly by American standards, corruption, dishonesty, making use of personal office for financial gain is a concern. The situation is nothing new nor does it seem to be getting materially worse. In dealing with government institutions the most problematic Departments are Customs, Immigration, Justice, Environment and Natural Resources, and Agrarian Reform. On the other hand, the most professional and even-handed are Finance, Trade and Industry, and Agriculture.
  
  
• The Bureaucracy
  Good advice in dealing with the national and local bureaucracy is Patience, Patience and Patience. By comparison to U.S. standards the bureaucracy is slow, laborious and inefficient. A fi-ustrating pace of approval is often the case. Fortunately for investors engaged in manufacturing for export (which comprises the bulk of new entrants) dealing with the Philippine Economic Zone Authority (PEZA) is one of the most user friendly. Government salaries are low, and as with previous administrations it is a challenge of top leadership to coax good people from the private sector to serve government.
  
  
• The Judicial System
  Concerns about the equity of court decisions and the lengthy judicial process loom large. Society tends to be litigious throwing matters to the courts and lawyers for decision, so as to avoid face to face direct confrontation by parties involved. To a large extent, a system of selective justice prevails favoring the politically powerful and business elite. Problems with the judicial system are well recognized, but overhauling the courts is a long-term affair. Investors are advised to hire top-notch local law firms at the outset to obtain all necessary government approvals.
  
  
• Labor
  Labor laws are heavily weighted in favor of employees. Union power and organized labor actions are on the wane but individual disputes are not. Investors must be on guard to comply with the letter and spirit of labor laws protecting tenure of workers. As a consequence, down-sizing, right-sizing, and re-engineering of work forces are to be undertaken with caution and with sound legal counsel.
  
  
• Continuity of Policy
  Cultural propensity for maintaining smooth interpersonal relationships and down playing conflict leads to the constant fine tuning of regulations, and even some flip-flops, to accommodate competing interests. Continued maintenance by vested interests is necessary to keep policy decisions in place. The process of on-going revisions is a source of frustration to investors (e.g. Auto Mfg., Pharmaceuticals, Banking, Energy/Oil).
  
  
• Market Openness - Significant opening of industries took place from 1992-96 under President Ramos. President Estrada's goal is to continue the process. Industries he hopes to open up to foreign investment are retail trade, industrial land ownership, electric power generation, and telecom (convergence legislation). Legislation is working its way through congress.
• Financial Markets - During the 97/98 regional crisis, the Philippines gave no serious consideration of reverting to exchange control. The Estrada camp is strongly in favor of open financial markets and a freely convertible peso.
  
  
• Intellectual Property Rights
  A new comprehensive IPR Code was enacted in 1997. The new code is generally sound. What is greatly lacking is enforcement plus other technical shortcomings (copyright protection, search and seizure features). The Philippines remains on the U.S. Trade Representatives "Watch List" along with 37 other countries.
  
  
• Cultural / Religious Orientation
  A real plus and key benefit in selecting the Philippines as a place to invest is its close affinity with America. Approximately 2 million Americans are of Filipino descent. There is a constant flow of people and ideas back and forth across the Pacific, continually reinforcing the basis for strong bilateral ties. Filipino Americans remit about US $ 6 billion to relatives in the Philippines each year. The English language is widely in use, and 98 % of the population are of the Catholic faith putting the U.S.. and the Philippines much more on the same mental wavelength than other Asian countries.
  
  
• Socio-Economic Balance
  A middle class income group is growing, but the largest portion of the 75 million population is poor. Per capita GDP (purchasing power parity) is US $ 3,520 per annum and US $ 1,203 per annum in real terms. The country has one of the highest poverty indices in Asia (27 % of population) in 1997. This group lives on less than US $ 1.00 / per day (PPP). At the top of the socio-economic ladder is a small group of Filipinos, Filipino-Chinese and Filipino-Spanish who control trade, industry and banking. Many families are intertwined by marriage. A large group of poor live as "squatters", occupying idle government and private lands. They are often the cause of blocked infrastructure development. Continued population growth of over 2 % per annum puts special pressure on addressing poverty issues.
  
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Economic Fundamentals

The Philippines weathered the 97/98 Asia Economic downturn better than neighboring countries. Whether this was due to better economic management or the fact that the Philippines was a late starter in the Asian Tiger boom is debatable.

Expected economic results for 1999 and 2000 as follows:

	1999	2000
	% Increase
GDP	3.0	4.8
GNP	3.5	5.3
Inflation	6.8	5.7
Exports	12.0	18.0
Imports	9.0	11.4

(Source: (Banco Sentral / Univ. Asia & Pacific)

• Quantity and Quality of Labor
  The plentiful supply of quality, productive labor at reasonable levels of compensation is the Philippines primary competitive advantage. It is why many firms in the field of electronic devices, auto electronics and garment assembly have set up sizable operations. Only about 500,000 workers out of a total work force of 28 million are covered by collective bargaining agreements. Excellent workers are readily available to fill managerial and factory worker positions. A majority of workers have good English language ability, are well educated, easily trainable, and not prone to turnover.
  
  
• Local Capital Resources
  The pool of available capital is relatively small. The entire commercial banking system, some 50 banks, has total assets of $ 65 Billion. Market capitalization of the stock exchange is $ 45 Billion. Investors normally source most of their financing from offshore markets. There are, however, no restrictions on borrowing locally.
  
  
• Factory and Office Space
  The Philippines has a plentiful supply of reasonably priced, high quality, modem industrial parks and office locations. Most popular factory sites are in the Calabarzon Region (immediately to the south of Manila), Cebu (Central Philippines), the Special Economic Zones at Clark and Subic Bay (the area north of Manila). As for office space, many newly completed, first class office buildings are readily available in the greater Manila area and Cebu.
  
  
• Domestic Market
  With a growing middle income group, investors are increasingly taking into consideration ways to better capitalize on the local market. A major example is Ford Motor Co., which will open a new car and light truck manufacturing plant in late 1999. There are many American companies that trace their origins back to the early 1900's (e.g. Citibank, Mobil Oil, Procter & Gamble, Sea Land, AT&T) The Philippines geographic location also makes it ideal to serve surrounding Southeast Asia markets.
  
  
• Infrastructure in General
  Inadequate infrastructure is the major source of concern and frustration to investors. This applies to roads, railroads, airports, seaports and utilities. Most infrastructure dates back to the Marcos era when the country went on an international borrowing binge. Money was poorly used. The Philippines has paid a heavy price of not being able to borrow the large amounts needed for infrastructure from external capital markets to keep pace with needs. During the Ramos presidency (92-98) an ambitious build-operate-transfer program was launched to attract private developmental capital. The program was successful in the area of electric power generation but much less so in other fields. With somewhat of an impasse at hand it is becoming evident that national government must play a financing role in addressing infrastructure inadequacies.

Roads and Bridges : Work on the major toll road (South Express Way) to the fast developing Calabarzon industrial zone is nearly complete. However, a vitally needed connecting road to the new Batangas container port is stalled. Likewise, a connecting road south to the regional center of Lucena has not moved past the planning stage. Rehabilitation of the North Expressway to the Clark Special Economic Zone was completed in 1998. In Cebu, the badly needed second bridge to the Mactan Export Zone is likely to be completed in 1999. Other new road projects are in jeopardy due to funding constraints and the government’s extremely limited power in obtaining right of ways.

Railroads: A second light rail transit project (LRT-3) to ease traffic congestion in Metro Manila is nearing completion. Additional projects to decongest the city are in various stages of planning. The country's only rail line going south to the Bicol region is dilapidated and in dangerous condition. A northbound rail project has failed to get off the ground after a couple of false starts.

Airports: The Metro Manila International and Domestic Air Terminals continue to be a major concern to investors. Access is chaotic and terminals are severely congested. A second terminal will be functional in 1999 taking some pressure off an overburdened system. Outside of Manila, regional airports are generally in need of up-keep and modernization.

Sea Ports: Phase one if a four-phase new container port in Batangas City is complete (financed by Japan Aid). Unfortunately, phase two, the setting up of a container yard, is stalled due to land acquisition problems. Also, government has failed to deliver on the road linkage to the South Expressway. The main Manila Port, dating back to pre-World War II days, is congested and outmoded. Regional ports are likewise in need of repair and modernization. The "National Port Plan" contains some 80 projects for future funding.

Telecom: The range and quality of telecom service continue to improve since break up of the PLDT monopoly in the early 1990's. Ten telecom companies are actively competing to serve the market. The 1998 take over of PLDT by new investors seems to be moving the issue of interconnectivity forward in a positive way.

Electric Power: The major success of the Build Operate Transfer (BOT) program. Now with power abundant the issue has turned to cost. Based on current demand/supply studies, adequate power will be available until 2004. Government has, in fact, requested a delay in moving forward with some large projects. Comprehensive legislation aimed at privatizing power generation (the Omnibus Energy Bill) is thought to be the solution to lower power costs.

Water: The Metro Manila Water utility, privatized in 1997, is moving along nicely toward greater efficiency and expanded coverage. The country has sufficient ground water resources for industrial development.

Ease of Exit and Entry (Visas): The American Chamber and other foreign Chambers are constantly lobbying and applying pressure to make entry and exit procedures easier. As a result some improvements have been made, such as the new Department of Immigration Center in Makati, and longer term visas for BOI Registered firms. In general, the whole process of one year visa renewals along with intensive bureaucratic requirements is high on the list of investor frustrations.

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Cost Factors

In many respects the Philippines presents an attractive cost scenario relative to ASEAN neighbors. Some indicative costs are as follows:

Taxes: Corporate Rate 32%
Corporate Rate (Industrial Exports Zones) 5 % on adjusted gross income
Individual 35 % (on income in excess of $ 12,500)

Office Space (Metro Manila) - US $ 19 - $ 31 / Sq. m /Mo. Rent

Industrial Land (Calabarzon Region) -
US $ 3 - 4.5 / Sq. m/Mo. (Rent)
US $ 65 - $ 90 / Sq. m (Purchase)

Utilities:
Power - $0.11 - 0.28 Kwh
Water - $0.26 - 0.27 Cu. M

Communication:
Telephone - $ 14 / Mo. ( Res.)
Telephone - $ 28 / Mo. (Bus.)

Transportation - inter-island sea shipping and air shipping costs are relatively high due to the presence of oligopolies. In the case of highway shipping there are hidden costs in the form of delays caused by traffic congestion.

Tariffs - Average tariff rates continue to come down as the country approaches its 2004 goal of a uniform tariff rate of 0-5%.

Investment Incentives
Major investment incentives consist of a combination of tax breaks and customs duty exemptions depending on what government entity one applies with. Most investors apply with the Board of Investments (BOI), Philippine Economic Zone Authority (PEZA), or the Clark and Subic Bay Special Economic Zones (CSEZ/SBSEZ). BOI is empowered to grant an income tax holiday of up to 8 years. PEZA , CSEZ and SBSEZ's grant a special tax rate of 5 % on adjusted gross income, plus all capital equipment and raw materials enter duty free. Most U.S. companies entering the Philippines since 1990 have chosen to take advantage of the PEZA incentive package. Government is planning to unify investment incentives in the future.

SECTORAL OPPORTUNITIES

Telecom / IT
The U. S. Government and the American Chamber are actively assisting the Philippines in efforts to come to grips with new legislation needed to set the stage for media convergence and E-commerce. Once legislation is enacted, look for accelerated investment and trade opportunities in an already fast growing and exciting investment area.

GETTING STARTED - SOME RESOURCES

The Philippines hosts a wide array of American companies in many fields - banking, electronic device manufacturing., insurance, shipping, airlines, air cargo, consumer products, telecom, power generation, construction, engineering, software engineering, agriculture, food and beverages manufacturing., pharmaceuticals, healthcare, energy products, auto/truck mfg., and auto parts mfg. Many US firms have been in the country since the early 1900's. American companies have prospered over the long term and view the Philippines as a country where they can do business profitably and comfortably. The western orientation, the English language, the heritage, democratic government and inter-linked history going back to 1898, all play a role. The special ties form the basis for the US being the country's largest direct equity investor on a cumulative basis. Likewise the US is the Philippines largest trading partner.

American firms, along with European, Japanese, Korean and other nationalities have found the Philippines a smart choice as a place to invest. With patience and strong, clear focus the Philippines can be rewarding. In addition the Philippines can be a fun place to live, being voted as having the best conditions overall for expatriate living by the Political and Economic Risk Consultancy.

Sources of useful information for investors and traders are:

The American Chamber of Commerce of the Phils. Inc. (AmCham)

The American Desk at the Board of Investments (AmDesk)

Robert W. Blume - Investment Promotion Manager
Board of Investments Bldg.
385 Sen. Gil J. Puyat Ave. Makati City
Tel: 895-8851 / 895-3918
Fax: 896-2315
E-Mail: Amdeskboi@vasia.com

Services: country briefings / market briefings / referrals to industry, legal, accounting, real estate, recruitment, movers, trade & investment experts/ resource library and publications, arrange meetings with government and private sector officials.

US-Asean Business Council

Philip J. Gielczyk - Regional Director 4/F
Thomas Jefferson Bldg.
395 Sen. Gil Puyat Ave., Makati City
Tel: 895-3008
Fax: 895-3007
E-Mail: usbc@mozcom.com

Services. Asean Region trade and investment briefings, government and trade / buyer introductions

US-Commercial Service / U.S. Embassy - (FCS)

Carmine D'Aloisio, Commercial Counselor
Robert D. Bannerman, Commercial Attache
U.S. Embassy Manila
Seafront Compound
Roxas Blvd. Pasay City
Tel: 804-0301 / 804 - 0305
Fax: 804-0339
E-Mail: Rbannerman@cs.doc.gov

Services: Promotion of U.S. Exports and Services, market information, contacts, partnerships, and project advocacy. FCS links traders and investors to the U.S. Commercial Liaison to the Asian Development Bank, U.S. Trade and Development Agency, U.S. Agency for Int'l. Development, and US-Asia Environmental Partnership.

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The Philippines Compared to Eleven other Asian Countries

(1=Best Conditions / 12=Worst Conditions)

PHILIPPINES AND ASEAN

	GDP Total (PPP)	GDP/ Cap (PPP)	GDP 98 Growth	Exports	Current A/C Bal.	Reserves	Population	Literacy
Philippines	$258 Bil	$3,520	-1.90%	$30 Bil	$1.3 Bil	$10 Bil	74 Bil	94%
Singapore	88	28,235	1.2	110	14.6	72	3	92
Thailand	412	6,795	-8	52	14.3	28	62	94
Malaysia	250	11,520	-8.1	72	9.2	28	22	89
Indonesia	755	3,750	-10.3	52	3	25	205	84
Vietnam	131	1,705	4	9	-1.8