European Chamber of Commerce Magazine
Philippines
Is It!
By
Richard Mills, Chairman
Chalre
Associates
There
continues to be lot of misery in the newspapers about the Philippines
economic situation. Article after article talks about impending fiscal
collapse, infrastructure deficiencies and horrific corruption levels. Key
export industries like electronics and garments are said to be packing up
for China. Continuing economic decline seems to be the only possible future
for Philippines.
Don't believe it.
The economy grew by a solid 6.3%
in the third quarter of 2004, hardly a recessionary environment. And to
business leaders in the key growth sectors like outsourcing
telecommunications and now mining, the near term outlook is among the best
in the world. The reason they provide for such optimism are not always
obvious
First of all, the continuing
significant drop in value of the Philippine peso might seem like a dire
harbinger of poor economic potential. But for export-focused companies, this
has created a tremendous windfall that makes the Philippines more
competitive against other countries. A leading electronics CEO said to be a
group of us a couple of months ago. `If the peso drops by 10%, then most of
my cost drop by 10% and this is good for my business``. Who can argue?
Cynics have even stated that the one undeniable thing the Philippines
government is doing to improve the competitive position of its country is to
destroy the value of its currency.
Second, cost competitiveness and
quality in competitors like India (for outsourcing) and China (for
manufacturing) are declining. The growth in India (the king of outsourcing)
has been so strong over the past few years that salary costs are rising out
of proportion.
At the same time, quality of service is now generally felt by the industry
leaders to declining relative to Philippines as employee turnover rates has
become destructively high and the quality of new hires is poor. Adding to
all this , the Indian rupee has increased in value to the US dollar making
their labour even less competitive compared to Philippines.
In electronics, China has been a
very powerful growth force over the past few years. Because of this,
production cost among the coastal locations have risen dramatically and are
now said to be approaching Philippine level. Cost are still lower in the
interior of the country but quality is lower also because of lack of
experience. And the Chinese currency is felt by most of the world`s
financial analysts to be greatly undervalued. What happens when the Chinese
government stops buying billions of dollar worth of American treasury
securities in its currency? It is only a matter of time until they stop this
madness and allow their exchange rate to rise. This imminent adjustment will
dull China`s attractiveness relative to Philippines.
Third, infrastructure required
for outsourcing (mainly telecommunication, power and office space) is said
by almost all analysts to be superior in the Philippines to its main
competitors.
Fourth, the mining industry will
become an important contributor to economic development now that the Supreme
Court of the Philippines has ruled in favour of the country`s prosperity.
Philippines is the 5th most mineralized country in the world and has metal
prices are historically high levels because of the demand from China,
progress will be swift. Various projects are already said to be standing by
ready to start work. The economic impact of this industry should be felt
over the next couple of years as long as there are no political
interruptions.
Senior Management in the
outsourcing industry are excited about their business and glad to be in
Philippines. The only worries they speak of have to do with how to handle
all the growth. The worldwide potential of services outsourcing has,
according to them, so far only begun. ``It`s like 1965 in manufacturing,``
they say. Titanic growth is said to be coming over the next 2 to 5 years as
companies become more comfortable with services outsourcing. Among all of
this, Philippines will be front-and-center. One American who runs a large
call center operation here said it best, ``for right now, PHILIPPINES IS
IT!``
Telecommunication is another
growth industry that is gearing up for tremendous growth. Most people are
aware that the Philippines has established itself as a world leader in
wireless communications. These days, industry leaders say GSM technology is
``old news`` and the next phase of development will be more profound still.
Broadband wireless is the new technology and the zealots who run the
Philippine industry are sprinting for world leadership in it. If these
crazed revolutionaries are able to do for us in broadband what they did in
GSM, then in 2 to 4 years Philippines will have fully functional telecom
infrastructure that will be greatly superior in cost and performances to the
old fixed-line technology that exist in most rich countries.
The electronics industry in
Philippines - our largest exporter earner - will not expand much over next
year but it is not going to disappear either. Business leaders say we will
hold on to he business we have. This situation may change over the longer
term - say 4 to 5 years down the road - as China intensifies it grip on
worldwide manufacturing. But for the time being. electronics is safe in
Philippines.
For 2005 then, it seems that the
various sunrise sectors will supply all of the growth we can handle and we
will hold on to most of our current key export industries. As long as there
are no significant shocks to the world economy, then the near term future
looks very positive for Philippines. Our current economic growth rates
exceeding 6% should be maintainable and possibly expanded
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