The relentless appreciation of the Philippine Peso is hurting the local BPO industry. In a Business Processing Association of the Philippines (BPAP) survey conducted in late 2012, 47% of BPO respondents reported difficulty in hitting revenue targets, 40% reported losing business to other destinations, and another 40% reported cancelled expansion plans.
The BPO industry is looking to the Central Bank (BSP) for relief – largely in vain, I believe. As of November 2012, the BSP had already lost PHP 46.34 billion, up 21.09 percent from 2011, due to its US dollar purchases to arrest the peso’s rise. Under ordinary circumstances the BSP can use its interest rate tools to reduce the demand for pesos. However, Philippine interest rates have already sunk to historic lows, with 91-day Treasury bill rates in January 2013 down to only 0.05%.
For sure, local BPOs need to aggressively embark on cost management programs. Nonetheless, the Philippine government may have avenues to help BPOs cope by emulating a novel plan by French President François Hollande. Mr. Hollande is carrying out a plan for a business tax credit coupled with higher sales taxes as a way to revive the French economy. Since a currency devaluation is not possible within Euroland, France is attempting a “fiscal devaluation”, an idea espoused by Harvard University economist Gita Gopinath (Gopinath on Fiscal Devaluation, Women in Economics). As part of the fiscal devaluation, Hollande offered French companies a USD 27 billion tax cut on salaries but he also lifted the two highest VAT rates.
Assuming the numbers add up, adopting a similar fiscal devaluation plan in the Philippines is appealing at a couple of levels. Higher VAT will make imports more expensive just like in a currency devaluation. The higher cost to import is offset by lower corporate taxes and lower taxes on salaries thus allowing local companies (including BPOs) to remain competitive. Further, a number of companies and professionals have been very creative in reducing their tax payments to government. The reduction in both corporate and compensation taxes reduces the incentive for this harmful type of “creativity”. Finally, the shift in focus of the tax effort towards consumption should also improve the country’s savings (and hence, the investment) rate.