Strong peso cuts BPO competitiveness

We love to point out that we now beat India in the voice segment of the call center business. Well, we have a problem. India’s currency had been devalued in recent months while ours had been gaining strength.

Dr. Raul Fabella, a UP economics professor, told the ‘’Competitive Currency Forum’’ organized by the Philippine Exporters Confederation (PhilExport) last week that India’s BPO industry has become more competitive due to the significant depreciation of the rupee. Ronald Arambulo, executive director for finance of the Business Processing Outsourcing Association of the Philippines (BPAP) said they are now at a competitive disadvantage to India of about 30 percent.

The Indian rupee used to be roughly equivalent to the Philippine peso. But Fabella pointed out that the rupee has devalued by 25 percent from the January 2011 level of P44.67 to the current level of P55.62 against the US dollar.’’ Fabella also noted that the trajectory of the rupee has been downwards,’’ noting the rupee is geared for further weakening.

This possibly means the BPO industry’s projections on revenues and employment are off the mark. Much hope has been placed on our BPO sector gearing for a higher growth target because global economic conditions are favorable to subcontracting work in developed economies.

Last June, Rainerio Borja, president of Aegis-People Support, one of the largest BPO companies operating in the Philippines was quoted by news reports saying that “overall, we just increased our target to $26 billion in revenue for 2015. That is double the expected revenue of $13 billion for this year.” The BPO sector is already second only to remittances from migrant workers in forex earnings contribution to the economy.

Remittances from OFWs hit a record high of $20.1 billion in 2011, up 7.2 percent from the previous year. The remittances came from the 10 million Filipinos working abroad. BPO companies, on the other hand, recorded a total of $11 billion in revenues, up 24 percent year on year.

Raymond Lacdao, executive director for industry affairs of the BPAP had earlier expressed confidence that they can grow by 20 percent yearly over the next five years. We are currently the number one provider of voice services in the world. Lacdao added that the country’s non-voice services sector is also growing rapidly and is now number two worldwide.

Lacdao said the country’s BPO industry is “forecasted to produce 1.3 million direct jobs, 3.2 million indirect jobs and $25 billion in revenue.” That may not come as easily as people seem to think.

The appreciating peso has turned out to be a silent but very huge problem for the BPO industry. Contracts are denominated in dollars, but expenses are paid in pesos. A strong peso means they get less pesos when they convert their contract payments, but must pay more pesos to workers and to cover other local expenses.

Most of the current contracts are also based on the P43-P42 level to the dollar. DTI usec Tito Panlilio told me a few weeks ago that the P41 exchange rate level is at breakeven already and P39 will prove catastrophic to the BPOs.

The other pillar of the economy, the OFWs, will also start to feel the negative impact of the strong peso, if they have not started to feel it now. Figures are starting to show that the composition of our OFWs is shifting from skilled to unskilled and women workers. They would be more sensitive to a strong peso given their smaller pay than OFWs in higher skill levels.

The country’s other exports are expected to grow between eight to 10 percent in 2012 from last year. But with the stronger peso, exporters are recalculating their assumptions. An undervalued currency has positive effect on exports and GDP/capita growth.

Sergio Ortiz-Luis, president of the export group, said that it was revealed to them in a dialogue with BSP officials that had it not for the BSP intervention in the foreign exchange market the peso would have reached P38 to the dollar.

‘’The BSP has admitted it has been losing money buying and keeping excess dollars entering the country to stem the rapid appreciation of the peso. In the past couple of years alone, it has lost P107 billion,’’ Ortiz-Luis said.

The thing is, what should government do? In his presentation before the Foundation for Economic Freedom (FEF) last week, BSP Governor Say Tetangco was as usual, very circumspect in responding to suggestions on how to handle the exchange rate. Tetangco gave an extensive presentation that did acknowledge “capital flows to emerging market economies have risen appreciably in recent years.”

The BSP chief also pointed out that in the Philippines, strong forex inflows are driven by high current account receipts and portfolio investments. The challenge he said is in making monetary policy more effective.

In that regard, Gov. Tetangco feels the central bank has enough tools in its tool kit to handle the challenge and there are market-friendly options. In other words, he isn’t thinking of currency controls like what we had in the Marcos years or something ala Mahathir.

And the Governor thinks the solution is not solely lodged with the central bank. There is, for instance, a need for structural reforms in trade, investment and financial policies. Macroeconomic policies (monetary, exchange rate, fiscal) must guard against marcroeconomic risks associated with inflow changes. He also said macroprudential measures to strengthen the health of banking system are also important.

In sum, the BSP Governor feels that for now, the policy responses of the central bank had been sufficient. Inflation is well within target and expected to be at 3.2 percent this year. He doesn’t see asset bubbles forming in the equities and property markets. Liquidity and credit conditions are supportive of economic growth. And the banking system remains sound and stable.

As to the fear of the strong peso dragging down the economy’s competitiveness, the body language seems to indicate the BSP Governor shares the concern. But it doesn’t mean he intends to initiate anything drastic that could rattle the international financial community.

The local export sector through Ortiz-Luis is suggesting that the BSP and the Treasury continue to pay in advance the government’s billions of dollars in indebtedness as a means of arresting the peso’s strengthening. They also want the BSP to further relax the limits on the dollar purchases of private banks in the open market to ease the piling up of dollar remittances and export proceeds which is driving the peso even stronger.

The national authorities and not just the central bank will have to reckon with the competitive reality that every other country is doing something to keep their currency values down. A currency war may, in fact, be raging and we cannot stand still and watch.  

Outstanding Pinay

 Speaking of OFWs, I just got word that Vivian Zalvidea, a reporter I used to work with at ABS-CBN News many years ago was selected as one of 100 Most Influential Filipina American Women in the United States. Her award by the Filipina Women’s Network is in the Innovators & Thought Leaders award category for “breaking new ground in the US workplace through vibrant, energetic presentations of critical ideas, transforming the way people think.”

Vivian migrated to the Bay Area and is now TFC’s head of news production, as well as the executive producer of Balitang America. I am not surprised Vivian is doing well there. She was one of the more intelligent reporters in the broadcast industry during her time here. She was always one for breaking new ground.

Ging Reyes, who is now head of ABS-CBN’s news operations worldwide, was also a previous recipient of that award. Goes to show the world class qualities of the feisty women broadcast journalists of ABS-CBN. I am proud to have worked with both of them during my watch there.

Australia

 There was this line in last Monday’s column that bothered me and apparently a few readers because while Australia is an island, it has ample reserves of coal. I asked Dr. John Morris to clarify his statement and this is his response:

“I should have clarified that most of the top 10-12 most costly markets in the survey are islands – including Australia. Most (but not all) islands are generally fossil fuel-poor. This is not true of Australia; although it is an island, the main reason Australia sits near the top of the cost-curve is the recent appreciation of the A$ and not lack of cheap fossil fuels.”

100 percent commitment

An employee was reading his annual appraisal at work and was so pleased when he read his boss’s comment: “you give 100 percent commitment every week…”

Then he got to the part: “…15 percent Monday, 20 percent Tuesday, 35 percent Wednesday, 25 percent Thursday and five percent Friday.”

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco