Economic Update

The Philippines business processing outsourcing (BPO) sector is fast developing into one of the pillars of the nation’s economy, with both earnings and employment levels soaring in recent years, though there are concerns that international competition, rising costs and staff shortages could undermine future growth.

Last year, the Philippines BPO sector posted growth of 26% and generated export earnings of about $9bn, according to the Business Processing Association of the Philippines (BPAP), giving the industry a 5% share of GDP.

Estimates by the World Bank suggest that the BPO and associated IT sector have the potential to generate export earnings of up to $55bn by 2020, representing some 11% of GDP and directly providing employment for more than 1.8m Filipinos.

While BPAP’s own projections are not quite so optimistic, the association has said that over the coming five years the industry will continue to expand at an average rate of 15% per annum, with the sector expected to earn some $20bn and generate roughly 1.5m new positions by 2016.

The strength of the BPO industry was one of the reasons cited by ratings agency Standard & Poor’s (S&P) for maintaining the Philippines’ stable outlook forecast and its BB foreign currency long-term bond rating. In its latest appraisal of the Philippines’ credit ratings, issued on July 29, S&P said that BPO revenue, along with earnings from remittances, was offsetting the country’s weak fiscal profile and high public debt.

“The stable outlook encapsulates our expectation that remittances and BPO receipts will continue to drive current account surpluses, while prevailing government debt and interest burdens and the weak fiscal profile will take time to resolve,” explained S&P credit analyst Agost Benard.

Successive Philippine governments have seen BPO as having the potential to become a major revenue earner and source of employment. To help achieve this, the government has implemented a series of measures to assist the sector’s further development, most recently with President Benigno Aquino III’s announcement in mid-July that his administration would strengthen the industry’s favourable environment with extended tax holidays on BPO-related investments of up to eight years and a reduction in bureaucratic procedures.

However, there has been criticism that the government’s enthusiastic support for the BPO sector is coming at a cost, with claims that not enough emphasis is being placed on the development of local industries and that much funding intended for the science and technology sector is instead being directed to strengthening the ICT backbone of the BPO industry.

In late July, the UN Conference on Trade and Development (UNCTAD) warned that there was a danger of countries such as the Philippines becoming too dependent on non-equity modes (NEMs) of foreign direct investment like BPO. While there are distinct advantages to NEMs, such as high income and low investment requirements, by their nature they are easy to establish but also easy to lose, the UNCTAD said.

Though BPO and IT-related activities accounted for a growing slice of GDP last year and provided employment for 525,000 people in the Philippines, the UNCTAD report noted that more needed to be done to maximise developmental benefits from NEMs so as to protect against what it called their “footloose” nature.

Diwa Guinigundo, the deputy governor of the Bangko Sentral ng Pilipinas (BSP), agrees, saying in late July that while increased BPO investments have been advantageous for the economy by creating new revenue streams and boosting employment, there is also an increasing need to pursue investments in manufacturing and other industries.

“Let’s get more NEM investments, but let us create an environment where we can rely less on them and more on industries,” Guinigundo said.

The Philippines also faces increasing competition in the global BPO industry, with Asian powerhouses India, China and Malaysia increasingly taking on more BPO business. Other regional rivals such as Vietnam, Indonesia and Thailand are also gaining momentum, thanks in part to their lower labour costs.

Another issue that the Philippines must address is the need to deepen the pool of trained staff working in the sector. The industry has a high turnover of employees, with some estimates putting the rate at close to 50% per year. Even considering BPAP’s low-end projected annual growth rate of 15% for the sector, this translates into hundreds of thousands of new personnel required each year.

The government has made clear its commitment to grow the BPO industry, but without working with the private sector to create better tailor-made training programmes that meet the needs of industry, the sector may not achieve the ambitious goals set for it. Still, should all the pieces come together, the sector has the potential to generate significant levels of revenue that can then be ploughed back into other areas of the economy.