[OPINION] Data residency proposals will dampen the Philippines’ digital economic ambitions

As one of the fastest growing digital economies in Southeast Asia, the Philippines is well-poised to benefit from the new ASEAN-wide Digital Economy Framework Agreement (DEFA) that is currently being negotiated, as well as the immense strength of ASEAN’s digital economy. According to the Boston Consulting Group, the economic bloc’s digital economy is projected to triple to $1 trillion by 2030. Progressive rules in DEFA, including those governing digital trade, cross-border e-commerce, cybersecurity, digital ID, and digital payments, could double this to $2 trillion by that same year.

However, a new proposal by the Philippine government to severely restrict the transfer of data overseas threatens to undermine the country’s digital economic potential. The draft Presidential Executive, if passed, would effectively force the localization of broad categories of public and private sector data in the Philippines. Data is fundamental to e-commerce and the free flow of data across borders is critical to the growth of the Philippine digital economy. For SMEs that do not have an international footprint, the free flow of data across borders enables them to use common infrastructure to serve their customers in multiple markets.

Given that the Philippines has always been a regional leader for cross-border data flows, the sudden reversal in policy direction will impact investor trust and confidence. It is also completely unclear what is motivating this paradigm shift in the country’s policy position. 

A data localization mandate will impact many sectors across the Philippines

A survey conducted by the OECD on the impact of data localization measures on sectors like aviation, cloud computing, and cross-border e-payments found that restrictions in the flow and storage of data led to a significant increase in data management costs, regulatory fragmentation, and cybersecurity risks resulting from the inability to share data on threats or system vulnerability.  For the Philippines specifically, a data localization mandate would have deleterious implications for the following sectors: 

• Tech start-up ecosystem: Education (edtech), health (healthtech), agriculture (agritech), and the environment (greentech) are at an inflection point for growth in the Philippines (Asian Development Bank). Data localization mandates would significantly increase the cost of IT and cloud infrastructure for startups and SMBs in the Philippines, as well as limit the ability of these companies to access innovative and best-in-class software services as these are often global services and not hosted out of local IT/Cloud infrastructure.

• Digital banking and digital inclusion. According to McKinsey, the Philippines’ banking penetration rate remains among the lowest in ASEAN. With recent changes to banking sector regulations, digital banking and financial services are enabling fintech innovation and financial inclusion for the underbanked. Data localization mandates will increase the cost for digital banks, reducing access to secure global IT infrastructure, and broadly, set back financial inclusion for large swathes of Filipinos. 

• The IT-BPM Industry in the Philippines: The IT-BPM industry is expected to generate $35.9 billion (P652.7 million) in revenues this year, up 10.5% YOY (Colliers Research). The inability to access global services will increase the cost of IT services and impact cybersecurity and disaster recovery and redundancy. The IT-BPM industry is heavily reliant on data, and it is critical for the data to flow freely across borders given that most of the industry’s clients are overseas. Data localization mandates will dampen the country’s appeal as an outsourcing destination for the IT-BPM industry. 

• Investments in data center infrastructure:  In the last couple of years, ASEAN countries (including Malaysia, Thailand, and Indonesia) have been able to attract hyperscale cloud service providers to invest in infrastructure locally. The Philippines is primed to be the next investment destination for these cloud service providers. However, this potential could be dampened by the restriction of free cross-border data flows, given that when a hyperscaler invests, it will likely be with expectations that the country can serve as a data hub for the region. Notably, Malaysia, Thailand, and Indonesia all have enabling frameworks for cross border data flows.

Data localization mandates run counter to Philippines’ international postures and commitments on cross-border data flows. For example, in the Regional Comprehensive Economic Partnership Agreement (RCEP), the Philippines committed to not mandate data localization. The Philippines had also applied to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) in 2021, which contains even stronger rules that prohibit data localization. 

Any data localization mandate would have significant unintended negative consequences to the Philippines’ digital economic ambitions and impact investor confidence. The Philippines has an opportunity to lead by example on the ASEAN DEFA negotiations, and demonstrate the success it has seen over the years in its digital economy, due in large part to supportive cross-border data flow policies. Backtracking on this success with data localization mandates will significantly stall the progress that the Philippines has made. We are hopeful that the government will work with industry to set the way forward for the Philippine digital economy. – Rappler.com

Jeff Paine is managing director of the Asia Internet Coalition.