Outsized Outsourcing Opportunity in the Philippines? Featured

bpo-01-smFrom: U.S. Global Investors

It’s no surprise the NBC show, “Outsourced” was set in India—in 2011, revenues for the country’s outsourcing and information technology industries reached $100 billion, according to The New York Times. However, if the now-cancelled show gets remade in the future, it may take place in the up-and-coming location of the Philippines.

Historically about 10 percent of the country’s GDP growth has been from workers living overseas, sending money back to their families living in the country, i.e. overseas remittances. In the U.S. alone, the Filipino population grew by nearly 40 percent over the past decade, according to the 2010 census. More than 2.5 million Filipinos live in the U.S., with the largest concentration in California.


Getting workers to stay on their native soil has been the challenge for a country with the 15th largest labor force in the world. Among a population of 104 million, nearly 40 million are in the workforce.

The Philippines has been meeting this challenge in recent days with the rapidly expanding business process outsourcing sector (BPO). The same services that made India’s outsourcing industry successful—call centers, IT outsourcing and engineering services—have been booming in the Philippines in recent years. Right now, about 638,000 people work in the BPO industry, and this should continue to grow, based on projected revenues, according to data from CLSA.

Whereas revenues coming from overseas remittances are much higher than the revenues generated from BPO today, BPO revenues are growing three times faster, according to CLSA. Each is projected to provide $25 billion in revenue by 2016.

CLSA finds that the Philippines is “increasingly being established as the favored service center, along with India” for outsourcing. Multinational companies are choosing to be in both locations. Three hundred multinational companies are currently involved in the outsourcing business in the Philippines, says CLSA.

bpo-02-smAttracting these multinational companies will become easier for the outsourcing companies, as the cost of capital has recently been significantly reduced. In the past, the Philippines had “one of Asia’s highest cost of capital.”  In late 2011, the real lending rate was 1.5 percent compared with the 10-year average of 4.2 percent. According to CLSA, bank lending increased 19 percent year-over-year in July 2011, “the fastest growth since March 2009.”

The booming outsourcing industry is only one area that is driving solid GDP growth in the country. While 2011 saw tepid GDP growth of 3.7 percent, CLSA says investors should expect a higher rate out of the Southeast Asian country in 2012.

In a recent report, the research firm increased its GDP growth forecast to 4.7 percent, up from its previous forecast of 4.2 percent. Its rising optimism is based on the fact that “large domestic development and construction firms have high expectations for a faster roll out” of numerous private public partnership projects in 2012. These projects, totaling $4.1 billion, include an airport terminal, expressways, water supply source project and other health and education projects.

The limited progress made last year was due to only a partial disbursement of the budgeted public capital expenditure, says CLSA. Only two-thirds was distributed because the government was concerned about transparency and cost-effectiveness of the spending.

Looking at what the impact of government spending would be on GDP growth, the chart below shows the disbursement rate of budgeted expenditure compared with the real GDP growth. According to the World Bank, if 80 percent of the planned expenditure is disbursed, GDP growth should rise to 3.6 percent. If 100 percent is disbursed, GDP growth could be as high as 6 percent.