The myth & reality of currency appreciation

Michael Alan Hamlin

Posted on February 29, 2008

But myth could become reality

There has been a lot of anecdotal moaning and groaning about the impact of the appreciation of the Philippine peso on the offshoring and outsourcing (O&O) industry lately. A professor at the University of the Philippines, Dr. Raul V. Fabella, for example has suggested that industry growth targets should be “revisited” given the negative impact of the peso’s appreciation, according to one report.

Fabella warned that, “It is scary that this dynamic industry will be buried at [the] stake,” apparently urging the Central Bank to take steps to curb further appreciation. “If we can hold it at P40, it [the industry] will still be viable.” Notwithstanding Business Processing Association of the Philippines (BPA/P) CEO Oscar Sañez’s assertion in response to Fabella’s comments that “we believe our targets are still achievable,” I’d like to present a preview of a survey recently conducted Outsource2Philippines (O2P) and BPA/P in which they asked the industry what the real score is.

From February 4 to 20, O2P and BPA/P asked 276 members of the association to respond to a short survey meant to gauge the practical impact of the peso’s appreciation on the O&O industry. Sixty-two of the invited prospects did so, providing a 22.5% response rate. Fifty-nine percent of respondents have less than 500 employees, and 41% have from 500 employees to over 10,000, and 28% have 1,000 to over 10,000 employees.

Their assessment: At worst, the appreciation of the peso has had only modest impact on the industry. And, 55% of respondents said they will remain competitive even when the dollar slips to P37-38. A significant 42% will be competitive as the peso climbs above P37. It is also important to note that for many O&O firms that are shared facilities rather than third-party service providers, the peso’s appreciation is even less relevant.

These findings hold for the most part across the industry, regardless of size. Among all respondents, 31% said the peso’s appreciation has had no impact on expansion plans. Another 48% of respondents said the peso’s appreciation has had some or moderate impact. Just 21% said it had significant or very significant impact, with only 10% indicating very significant impact.

Let’s compare. For companies with 1,000 to more than 10,000 employees, 35% said appreciation of the peso has had no impact on expansion plans, and 47% indicated some or moderate impact. Just 18% said appreciation of the peso has had significant (6%) or very significant impact (12%) on expansion plans. Together, results for all respondents and large firms indicate that for 90% of O&O companies, the appreciation of the peso has had no or manageable impact on expansion plans, and 80% feel no or only moderate impact on plans. Only eight percent of respondent companies have actually shelved expansion plans completely. No large firm has shelved expansion plans.

You have to wonder, therefore, where experts claiming that the impact of the appreciation of the peso on the O&O industry is “scary” are getting their data. It seems clear to me, at least, that they are not getting it from executives in the industry, or at least not from a representative sample. In fact, where there has been impact on expansion plans, respondent companies are leveraging the strengthening peso to become better companies.

Sixty-one percent of respondents said that they are taking steps to reduce the impact of the peso’s appreciation. A number said that they are improving efficiency and productivity of business processes. These responses are important because they show that executives in these firms are adapting to changing conditions rather than throwing up their hands or fleeing to other lower-cost countries.

There is an additional benefit for the Philippine countryside, too. Although O&O companies have been expanding outside Metro Manila for several years, the appreciation of the peso may be encouraging them to accelerate investment in tier-two urban centers. About 20% of respondent companies said they have or will move to lower-cost locations in the Philippines.

To be sure, some O&O sectors that are particularly price-sensitive face significant challenges. Notable among these are medical transcription and firms specializing in low-end creative services. And significant pressure on other sectors has been avoided in part by currency appreciation in competing global O&O centers, particularly India. Eighty-three percent said currency appreciation in these other centers somewhat, moderately or significantly offsets the peso’s appreciation.

Whatever the reasons the Philippine O&O industry has been much less affected by the peso’s appreciation than anecdotal evidence suggests, the fact is the industry, so far, is in much better shape than some suggest. But it’s also important to guard against the chance that myth could become reality, according to O2P CEO Frank Holz, if these companies don’t continue to improve the way they operate, and manage inevitable change.

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