Economic Planning Secretary Arsenio Balisacan observed that the economy is growing too slow. He said that the Philippine economy must transition from its heavy reliance on consumption and services.
This means, Balisacan said, accelerating high-impact infrastructure spending, and boosting productivity through innovation and up-skilling. This means expanding growth into robust investments, high-value exports and the revitalization of agriculture and industry.
But foreign direct investment (FDI) net inflows (that’s necessary because local investments are not enough or too timid) have plummeted to an 11-year low. This severely strains Balisacan’s prescription for the economy.
Because Balisacan’s strategy heavily relies on shifting the country’s economic engine from local consumption to investment and exports, this capital drought threatens the country’s growth path.
Indeed, even reinvestment of foreign company earnings has declined recently. Data from the BSP showed that for the first five months of 2026, the reinvestment of earnings dropped by 9.7 percent. This means foreign-owned firms, the guys who know us best, retained less income locally for expansion.
There is another important hindrance. We have a cultural antipathy to foreign investments.
Historically, we call it economic nationalism. And it is embedded in constitutional and statutory restrictions. This is a primary reason why we have lagged behind neighbors like Vietnam, Indonesia and Malaysia in attracting FDI.
This attitude has been supported through the years by our rent-seeking oligarchy who have always been afraid of foreign competition but are risk averse themselves. They feed the narrative that Filipino First is the best policy for our economy.
The politicians who are supported by the oligarchy are happy to oblige them. Even the left seems to believe that the Philippines can survive on its own as an economic island detached from the rest of the world.
So, the Philippine economy has become an island of consumption driven by a service-and-remittance-backed domestic engine.
Filipino officials take pride that the Philippine economy is insulated from global economic dislocations because it is “domestically driven.” This is of course, highly misguided and economically flawed.
While local household consumption accounts for roughly 70 percent of GDP, this domestic engine is not self-sustaining. It is also fueled by and exposed to external global forces. For one thing, we are dependent on OFW remittances and BPO earnings that are very much linked to the global economy.
But there seems to be an attempt to pivot, born out of urgent reality rather than a sudden change of heart.
The “pivot” is starting to happen because our “self-sufficient island” model is hitting a hard ceiling. Politicians and the oligarchy are recognizing that consumption alone cannot generate the high-quality jobs required to eradicate deep-rooted poverty or match regional peers.
But dismantling our decades of protectionist barriers is a slow political process compared to the more agile, export-oriented investment models of our ASEAN neighbors.
The recent high inflation due to high oil prices caused consumer spending to drop sharply. Our economy slowed down significantly, with growth decelerating to 2.3 percent.
The consensus is clear: without heavy industrial capital, our economic engine powered mainly by consumption, will stall.
The local economic environment is also changing. Major conglomerates (such as Ayala, Aboitiz and SM) are hitting limits within the domestic market.
To expand, they require massive tech transfers, green energy grid scaling, and global logistics networks. Foreign multinationals are now seen more as joint-venture partners needed to finance expansion and infrastructure.
The political and economic elites now grudgingly recognize that the old island of consumption model cannot sustain the population or maintain competitive parity in ASEAN.
Belatedly, BBM is realizing that legal liberalization (CREATE, etc.) is only step one. To truly compete with Vietnam or Malaysia in manufacturing, the Philippines must do more than merely pass reform laws. It must aggressively build reliable infrastructure, lower utility costs and sanitize the regulatory environment from corruption.
Then there is finance.
Government borrowing is heavily local, with local commercial banks as the single largest institutional buyer.
The local banks like it this way because they can comfortably park their massive liquidity into risk-free government securities. They face very little pressure to take on the risk of lending to micro, small and medium enterprises or emerging entrepreneurs.
Our banks are not risk takers. They would even rather pay the massive fines than provide agricultural credit as required by law. This creates an insular, risk-averse financial ecosystem that directly suppresses manufacturing growth and economic diversification.
This arrangement makes the government highly dependent on local banking liquidity to fund its growing budget deficits. At the same time, local banks are equally dependent on the government to maintain risk-free, guaranteed corporate profits.
This symbiotic loop ensures the financial system remains incredibly secure, while structurally starving the productive, entrepreneurial economy of transformative capital.
This sovereign crowding-out effect is probably one of the most critical structural flaws in the Philippine financial system.
As the government absorbs the bulk of loanable funds, the remaining credit pool shrinks. Private businesses must compete for this limited cash, driving up interest rates and financially strangling expansion projects.
For the Philippines to cut its poverty rate, it needs an explosion of domestic entrepreneurial activity and manufacturing. But to fund that activity, banks must take risks. Even the government banks have all but abandoned their initial development mandates.
While the Philippine banking system is widely praised by international credit rating agencies for its safety, liquidity and low non-performing loan ratios, that structural “safety” is precisely what suffocates domestic industrialization.
As long as the national government runs large fiscal deficits and finances them primarily by selling debt to domestic banks, the financial system will continue to reward safety over innovation. This keeps the Philippines an island of consumer spending rather than a powerhouse of industrial investment.
To replicate its neighbors, the Philippines must transition its financial sector from a passive warehouse for government debt into an active, state-backed partner for industrial risk like Vietnam.
Boo Chanco’s email address is bchanco@gmail.com. Follow him on X @boochanco