Painted with the Same Brush

When the emerging financial markets rapidly tumbled after the Federal Reserve Chairman announced a pullback of Quantitative Easing, I could scarcely believe how the Peso-US Dollar exchange rate could depreciate by 7% and the stock market crash into bear territory almost overnight. A colleague from the offshoring industry was quick to point out that the country’s BPOs and captive service centers (GICs) were expressing collective relief from the recent regime of a strong peso. I smiled enigmatically at her, paused, and then shared my fearless forecast: By year-end, the peso would have recovered most if not all the value it had lost from the time of Bernanke’s announcement.

Indeed, if the US economy was firmly on the path of steady recovery, the relative appeal of a great part of the emerging markets would begin to pale. Nonetheless in the haste to scale back emerging market investments, the Philippines was painted with the same brush as the greater majority.

But the Philippines is not suffering from intense political turmoil like Egypt.

Turkey was widely acclaimed as a reform-minded member of the “Next Eleven” – a second-wave, rapid-growth BRIC country. However, the double whammy of the massive street protests and the global emerging economies sell-off has sent Turkey economy into a tailspin and has exposed the country’s dangerous dependency on external debt. In contrast, the Philippines debt-to-GDP ratio is down from a high of 78% during the Asian financial crisis of 1997-1998 to 48% in 2014. How healthy is 48%? The Euro convergence criteria prescribes a debt-to-GDP ratio of 60%. In 2011, the US had a ratio of 100%; Japan, 204%; and even Germany 85%!

Brazil, too, has seen massive protests over high prices, corruption, and poor government service after the economic growth has dwindled to less than 3%. Brazil had enjoyed an economic windfall in the last 10 years as commodity prices rose to stratospheric heights. But as China’s economy inevitably slows, the common belief is that the extraordinary commodity super-cycle is over – possibly compounding Brazil’s problems. The UNCTAD reports that Brazil’s commodity exports as a percentage of GDP is 6%.The Philippines’ is a modest 4%. Brazil’s commodity exports as a percentage of total merchandise exports is a whopping 63% while the Philippines’ is a modest 15%,

Indonesia’s dependence on commodity exports is even more disturbing: as a percentage of total merchandise exports, 62%; as a percentage of GDP,14%! The economy is softening with growth expected to taper down to 5.9% in 2013 as fiscal problems compound the weakening of exports. The Philippines tax effort continues to improve at 11.9% of GDP, thanks to an almost belligerent and headstrong tax commissioner. As a result, the government has been able to confidently propose a record PHP 2.3 trillion budget for 2014 that will allow the country to significantly improve its infrastructure.

China has seen a slowdown in its manufacturing sector and there is widespread belief that inflated asset prices are about to burst, possibly hurting the country’s banking sector in its wake. The Philippines has seen its manufacturing sector grow by 20% to date in 2013. As South Korea moves up the manufacturing value chain, it is also increasingly moving into the competitive space that used to belong to Japan. In response, Japan has been looking at rebalancing its manufacturing out of Japan into a cheaper location. For various reasons, that location is increasingly becoming the Philippines rather than China. This is expected to provide growth momentum to the manufacturing sector in the short to medium-term. Office occupancy rates have reached a record 97%. Property companies have not been able to build new offices fast enough to meet the needs of the burgeoning BPO industry. The chances of an property bubble in the country is unlikely in the short to medium term. The lessons of the Asian financial crisis are still fresh in the minds of the property developers. As such, most of the new development in Manila is initiated only after firm contracts with anchor tenants have been secured.

I can go on and on with the comparisons. But the bottomline is that it is not only fun in the Philippines, it is also quite profitable if you happen to be an investor. The IMF recently raised the GDP growth estimate for 2013 up to 7%. In the wake of credit upgrades by Fitch and Standard & Poor’s to investment grade, Moody’s has recently hinted of its own upgrade very soon. The World Economic Forum has moved the Philippines to the top half of its global competitiveness ranking for the first time in the latter’s history. All these conditions put the country in a much better position to exploit the demographic sweet spot that it will find itself in in the next few years.

This week, Bernanke clarified his earlier remarks about the pace at which QE will be scaled back. As the global markets are soothed and the dust settles, the country’s strengths will be more apparent relative to the other emerging economies.

At the height of the global emerging market sell-off, the ICTO’s tireless Trish Abejo asked me if the findings and recommendations in our report “Preliminary Study for the Corporate Services Segment of the IT-BPO Industry” was about to become obsolete. In that report, we had said that the exchange rate appreciation

was going to be one of the most challenging conditions that the BPO industry will have to hurdle. I have bad news, Trish. The updated The Economist’s Big Mac Index just came out (The Big Mac Index is the only reasonable way for amateur economists like myself to understand Purchasing Power Parity). It appears that the Philippine Peso is 42% undervalued and that the implied exchange rate is PHP 25.28 (from its current PHP 43.44).

The need for a country offshoring strategy is more compelling now than it ever was before.

p.s. Congratulations to my collaborator, George Francisco! I heard that George has recently been appointed President of LBP Insurance Brokerage, Inc. If there are any broken processes in that company, George will be sure to fix them sooner rather than later.

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