The Philippines’ year

Michael Alan Hamlin

Posted on February 7, 2008

The real challenges aren’t the obvious ones

A U.S. recession forcing companies to accelerate cost-cutting, productivity-enhancing outsourcing and offshoring (O&O) plans, excess global liquidity and a rise in investible petrodollars, and attractive returns on real estate investments in emerging Southeast Asian markets will make 2008 the Philippines’ year, according to CB Richard Ellis Philippines (CBRE Philippines) chairman Rick M. Santos.

Speaking to reporters last Thursday, Santos said that we are witnessing a historic real estate market and the best growth rates in 30 years for the Philippines. The Philippine government reported the same day that the economy grew 7.3 percent in 2007, surpassing its 6.1-6.7% target. The expansion was the Philippines’ best since 1976 when the economy grew 8.8%.

For 2008, National Economic Development Authority secretary Augusto Santos is maintaining his forecast of 6.3-7.0% growth, allowing for a slowdown in exports to the U.S. due to slower growth there. Exports slowed 3.7% in the fourth quarter last year, compared to 2.2% growth in fourth-quarter 2006. In fact, exports have been slowing all year, and growth turned negative in the third quarter, declining 7.5%.

In November, the latest month for which statistics have been announced, 61% of the Philippines exports was semiconductors, and 19% of all exports went to the U.S. For the month, exports were down 2.0% to about $4 billion compared to last year. Semiconductors were down 4.5%. But, exports to the U.S. were actually up slightly in November by about 1.0%.

Exports to the Philippines’ two other principle export markets, Japan (15%) and China (11%), contracted somewhat by 0.6% and 1.3% respectively. Aside from semiconductors, other exports that contracted slightly included electronic products, cathodes of refined copper, and apparel and accessories according to the National Statistics Office (NSO). Those trends have been apparent throughout the year.

Although fears of a U.S. recession or a more modest slowdown and the potential impact on global economies have been discussed by economists and analysts for several months, so far there is little to suggest that slower growth in exports has made a great dent on the Philippine economy. Neither has a weakening appetite for Philippine exports by its other major trading partners. Analysts believe that Japan may also be sinking into recession, and a U.S. recession would end double-digit growth in China.

Santos (Full Disclosure: CB Richard Ellis is a client of my firm) acknowledged that a U.S. slowdown would likely result in a decrease in Philippine exports not just to the U.S. but to its two other major trading partners as well. But he also believes that factors buoying growth will continue to dominate the economy, and support sustained growth. Among those factors is, ironically, the anticipated U.S. slowdown. Santos believes it will increase the urgency with which U.S. managers outsource processes to reduce costs. O&O revenues are expected to reach $7 billion this year.

A more important issue may be whether the Philippines can meet demand for O&O services in terms of people and facilities. CBRE Philippines vice chairman Joey Radovan told reporters that approximately 60% of office space in the Makati business district is already occupied by business process outsourcing firms. In 2008, he said 520,000 square meters of new space will become available across Metro Manila. More is coming online in tier-two business districts, with Cebu the most notable.

Much of this space is opening up in new or relatively new business districts. Almost 200,000 square meters devoted to the O&O industry will come online in Taguig within the year, and about 125,000 square meters each will be occupied in Mandaluyong and Quezon City. Makati will provide about 75,000 square meters, and Pasig will account for about 60,000 square meters (People readiness is another issue for another column.).

This expansion is supported by what Santos refers to as excess liquidity in global markets, which is “exacerbated” by high oil prices resulting in overflowing coffers in petroleum producing states. When these funds are invested in Asia, they typically go to mature markets – Tokyo, Singapore, Hong Kong, and Mainland China – but returns in these markets are declining. CBRE Philippines general manager Trent Frankum noted that emerging markets are increasingly attractive to investors because of the average 15% returns they continue to offer.

Incidentally, Radovan also noted that the Philippines continues to win strategic industrial investments, pointing to the recent decision by Texas Instruments to build one of its largest plants in the world in the Clark Special Economic Zone, rather than a location in China. That investment, he noted, is only the beginning. The benefits of this investment include other tier-two investments by hundreds of suppliers that support Texas Instruments.

As Santos suggests, this could be the Philippines best year yet, despite some formidable challenges. But as Santos and his team also suggest, the challenges the Philippines faces may not be the obvious ones.

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