Servicing the world

While the services sector has become one of the pillars of the Philippines’ economy, shortcomings need to be addressed if the country wants to sustain its rapid growth

Christian Vits
July 18, 2014

While the services sector has become one of the pillars of the Philippines’ economy, shortcomings need to be addressed if the country wants to sustain its rapid growth

By Christian Vits
There have been many glowing descriptions attributed to the Philippine economy recently, from the “diamond of the region” to the “comeback economy”. The country has seen impressive growth rates in recent years, outpacing many of its Southeast Asian peers and making it one of the fastest growing economies in the Asia-Pacific region.
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“The Philippines economy has undergone a remarkable transition from a pussycat into a tiger economy over the past decade,” said Rajiv Biswas, Asia-Pacific chief economist at IHS. Biswas expects the country’s gross domestic product (GDP) to more than double over the next ten years, reaching $1.2 trillion in 2030.
The backbone of this success story is the information technology-business process outsourcing (IT-BPO) industry, which was barely existent just 15 years ago. With growth rates of up to 30%, the industry has outpaced the expansion of the global offshore services market for more than a decade. Today, the sector is contributing about 6% to the nation’s GDP and is expected to employ one million Filipinos this year, according to Gillian Virata, senior executive director at the IT and Business Process Association of the Philippines (IBPAP).
The services are delivered in a wide range of areas such as engineering, healthcare, legal, financial, creative and software services for the energy, banking, investment, insurance, shipping and other industries. They reach from animation and customer support services such as call centres and help desks, to IT services and marketing research. In 2011, the Philippines emerged as the number-one provider of voice IT-BPO services worldwide, overtaking India, and is increasingly expanding its non-voice, more complex services sectors. The country is also the second most preferred location for non-voice services.
“The rapid growth of the IT-BPO industry is also creating positive transmission effects for the rest of the economy, including rapid growth in the demand for commercial floor space, underpinning the development of existing and new office parks in urban centres,” Biswas said. The service exports of the industry are also a main contributor to the Philippines’ foreign exchange reserves.
By 2016, the Philippine IT-BPO industry is forecast to generate revenues of up to $25 billion and have 1.3 million direct and 3.2 million indirect employees, according to IBPAP. If these targets are reached, the Philippines will have consolidated more than 10% of the global BPO industry – a $250 billion market. Last year, the BPO sector in the Philippines expanded 17% to $15.5 billion.
“The outlook is bright,” said Martial G. Beck, the Manila-based vice-president and general manager of the European Chamber of Commerce of the Philippines. “The industry growth is expected to reach about 15-20% per year in the foreseeable future.” The fastest sector-growth is seen in game development and creative industries in general, followed by health information management, Beck added. “We still see a steady growth in engineering and financial services. Very exciting and promising for the coming years is the vast domain of analytics.”
To foster the industry, the Philippines’ government has embarked on various incentives, such as an income tax holiday, which can be extended up to eight years and the exemption from value-added tax on allowable local purchases such as telecom, power and water bills. Apart from that, the government has provided funding for remedial training for applicants to the industry in many key sectors such as customer relationship management and software development.
The favourable environment has attracted global players such as Accenture and Convergys, which currently have more than 35,000 employees each in the Philippines. Among the biggest BPO companies are JP Morgan Chase, IBM, Shell, HSBC and Thomson Reuters.
“The Philippines is well-positioned as the ideal global outsourcing location in Asia,” law firm Baker & McKenzie said in a study published last year. “Its highly skilled, trainable and customer-oriented workforce is known for its strong work ethic.” The country boasts an annual pool of talent of more than 450,000 university graduates with degrees in business management, mass communication, computer science and engineering courses, which are all highly relevant to the BPO industry.
Other advantages attracting foreign companies to the Philippines include the high literacy rate of 92% and the labour costs for English-speaking professionals, which are among the lowest in the world. New recruits start at about $500 a month. In addition, the Philippines is the world’s third-largest English-speaking country, with most Filipinos having a ‘neutral’ accent and a high affinity with the US – by far the country’s biggest service export market.
“The country’s decades of experience and success as a supplier of labour at different skill levels, its strategic location both physically and virtually – being a key player in the BPO industry – and the growing network of Filipino service suppliers and consumers around the globe provide the building blocks to establish the Philippines as the heart of services trade in the Asia-Pacific region,” Ramonette Serafina, a consultant at the Philippine Institute for Development Studies, wrote in a recent research note.
Last year, the services industry increased by more than 7% and accounted for almost 60% of the country’s GDP, according to data from the central bank. Still, the Philippines shouldn’t solely rely on the strength of its services export sector, especially since its manufacturing industry is lagging behind.
“While the current growth drivers of the Philippines are the IT-BPO industry and the strong and stable remittances of the overseas Filipino workers, the long-term outlook for the future development of the Philippines will be heavily dependent on the ability to make the manufacturing sector more competitive and to mobilise both foreign and domestic investment flows into the manufacturing industry,” IHS’s Biswas said. “This will require considerable improvement of the business climate.” Out of 189 countries, the Philippines this year ranks at position 119 of the World Bank’s Ease of Doing Business index.
Another huge problem is the country’s lack of infrastructure. The government has identified these shortcomings as a key policy focus this year and aims to boost infrastructure spending to about 5-7% of GDP in 2016, up from the current average of 3%.
“The infrastructure overhaul is critical [moving] ahead. Changing the investment climate to make the economy more foreign-investor-friendly is also important – foreign ownership is still very limited in many industries,” said Gundy Cahyadi, an economist at DBS Bank in Singapore. “These two areas will speak volumes to the capabilities of the government in pushing for reforms. We are positive on the Philippines as a whole but would also like to see the economy get more dynamic,” Cahyadi added. “That overseas foreign workers remittances make up close to 10% of [the country’s] GDP is a telling sign that there is more to be done domestically.”
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