News Analysis Trade

Cold facts and hot air

What a difference seven months make. On 6 June last year, 24 days before President Rodrigo Duterte took office, we wrote this headline: Philippine exports – becalmed. That article talked about the pitiful state of the country’s export sector which had just chalked up 12 consecutive months of decline. Now the picture is very different. In January, shipments from the Philippines achieved their fastest rate of growth in three years.

This is an impressive turnaround and should – though it won’t – quieten Duterte’s critics who continually paint a picture of a looming economic Dark Age for the Philippines. The fact is though, it’s not just the pace of growth that’s impressive; it’s also the volume of the increase.

January’s shipments leapt by 22.5% year on year, accounting for US$5.1 billion. That’s an increase of US$936.74 million (PHP47.08 billion) worth of exports from the corresponding month last year.

Here’s a snapshot breakdown of the export performance compared to January 2015. Eight out of 10 export items recorded an increase. Among these were electronics products, coconut oil, and apparel and clothing accessories. Electronics retained its top slot accounting for 46.1% of total shipment revenue, up from 35.7%.

Japan, meanwhile retained its top slot as an export destination, despite a 6.6% decline. US$887.7 million worth of Philippine goods went there which amounted to 17.3% of all exports. The US was second taking US$847 million worth; this was 21.2% up. Shipments to China also increased; up by 23.6%, as did those to Hong Kong; a rise of 20.7%. For a sector that was struggling so badly half a year ago, this is quite a turnaround.

It’s also a result that’s left economists’ forecasts for the sector looking decidedly inaccurate: the median growth forecast, according to data compiled by Bloomberg from a number of economists’ estimates, was 10.5% – in other words, less than half of what actually materialised.

With predictions like that you couldn’t be much further out if you used tea leaves. Part of the problem could be that the mass media campaign to discredit the Duterte administration is seriously affecting the ability of some economists to assess the true picture of what’s happening in the Philippines. In a way it’s understandable. If the news is predominantly bleak, it’s hard to make the case that the economy is actually growing.

But it is. Just last week the International Monetary Fund projected that gross domestic product (GDP) growth for the Philippines this year will remain strong at 6.8%, allowing the economy to remain resilient even in the event of external turbulence. Bangko Sentral ng Pilipinas, the central bank, meanwhile, believes GDP will top 7%. In the third quarter of 2016 it had hit 7.1%, marking the fastest growth rate in Asia.

Outside the figures though, there’s mounting evidence that the Philippine economy, far from declining, is in the ascent. Duterte’s much-maligned China-friendly foreign policy has not only put foreign relations between Manila and Beijing back on an even keel, it’s also won massive Mainland business and investment for the Philippines. And it’s done something else; it’s provided a cushion against future economic shocks – something that economists and other commentators choose to ignore.

One such shock could be (and we stress the word “could”), a possible (and we stress the word “possible”) fly in the ointment concealed within the move by US President Donald Trump to repatriate American businesses.

The fear among some in the Philippines is that US companies which provide around 70% of the customers for the archipelago’s booming business process outsourcing (BPO) industry could be targeted in a new culture of US protectionism.

The Philippine BPO sector is worth billions of dollars – globally this industry is worth US$140 billion annually, and the Philippines is the world leader. In 2015, annual revenues from the sector in the Philppines amounted to US$22 billion, kicking in 7% of GDP. Last year, it earned US$23 billion leading to forecasted earnings by 2022, the end of Duterte’s term in office, of US$39 billion. If it were to be hit by a mass exodus of clients, therefore, the impact from that would certainly register on the economy.

There’s no doubt concern exists among Philippine BPO operators, so much so that the Information Technology Business Processing Association of the Philippines which represents the sector’s interests is considering hiring a US consultant to evaluate a possible Trump threat.

So far though, no such intention has been voiced by Trump. His goal is to return manufacturing jobs to the US; the services sector, which BPO is a part of, has never been mentioned. To corrupt a well-known saying, “there’s no fire without smoke”.

Furthermore, if the measures were extended to cover this industry, while there would undoubtedly be a contraction, the notion that all American companies – which provide the lion’s share of the archipelago’s BPO revenues – would disappear, is verging on hysteria.

These companies are patching business through the Philippines because they’re getting a tremendous bang for their buck by doing so. Based on average annual wages, BPO staff in the Philippines are 372% cheaper than their counterparts in the US. After India, they’re the cheapest in the world.

America can’t compete with that and so if these companies had to relocate their business to the US it would have a strong negative effect on their profits. After all, that’s precisely why they took their business to the Philippines in the first place.

And so, what relocating BPO to the States would succeed in doing, in effect, would be to make American products less competitive which would be damaging to the US economy and therefore self defeating.

But again, how much of this conjecture is based on scare stories put out by the mainstream media which is not only anti-Duterte but also anti-Trump? How much of the analysis and the forecasting is coloured by agenda-driven reporting rather than cold facts?

In our article of 2 February – The Trump effect? – we wrote this. ”Behind much of the speculation [concerning Trump’s plans to repatriate US businesses], however, is the American Chamber of Commerce. Recently it told financial-services provider, Credit Suisse, that US BPOs have put their expansion plans on hold, though it didn’t name any specific companies … In September, AmCham Philippines put out this statement. ‘The American Chamber of Commerce of the Philippines voices growing concern over developments that could harm the long-standing optimism of American business to invest in the Philippines’ … [because] Duterte’s War on Drugs and the death toll associated with it was damaging the country’s image”.

The fact is that in the present political climate there will always be those talking down the Philippine economy and they won’t be above manipulating the narrative to make their point. Even more important then that analysts and country watchers maintain their discipline and do their job.

The fact that the Philippines is the world leader in BPO is not a flash in the pan. The sector is solid and resilient and it’s developing all the time. And it continues to remain attractive to overseas customers. On Friday, for example, German engineering and electronics behemoth, Bosch, which makes power tools and car parts, announced it was expanding its Manila BPO operation as part of a broader expansion drive which has seen the company open in Cebu, Cagayan de Oro City and Davao City.

And so, once you take away the hypothetical arguments and the scare-mongering what you’re left with is a burgeoning BPO sector that’s never been more healthy. Couple that with the country’s latest export numbers and add the IMF’s latest growth figures plus the US$14 billion in investments from China and Japan just announced by the Department of Trade and Industry and the picture of the Philippine economy, far from being under threat, is looking decidedly rosy. Not what Duterte’s critics want to hear, we know. But cold facts are cold facts and they beat hot-air every time.

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