Wednesday, 20 March 2013

More nonsense about the Philippines

John Mangun

BECAUSE of the performance of both the Philippine Stock Exchange (PSE) and the broad economy, the Philippines is being mentioned more and more by the international financial press/media and the experts who share their opinions.

Really, though, it is like listening to the elected US official who said the country needed to be a US colony so that the people could be converted to Christianity. These words were spoken 250 years after Saint Pedro Calungsod had died. But not having a clue about the Philippine economy is not limited to just foreigners. The local “experts” are just as bad.

The call-center business

Contrary to the doomsday pronouncements you hear, the call-center business is not going to leave the Philippines because the peso is appreciating. Yes, profit margins of call-center companies are being squeezed. Those profits are also being squeezed by power rates, rental rates and increasing salaries for employees. But the reality is, it took nearly a decade for these companies to move from former leader India to the Philippines. Further, overseas companies that contract services to the Philippines cannot afford to move these jobs back home. Neither can the call centers afford to move the jobs elsewhere.

A medium-sized, not large, center employing 5,000 agents cannot move like the Ford plant having 250 employees. The services that the call center provides cannot be shut down like a factory. It would take at least one year to hire, train and put into production 5,000 new agents in Vietnam, for example. And that assumes you could even hire 5,000 new agents within a year. The hiring rate here in the Philippines is less than 20 percent of all applicants, applicants who apply knowing that the No.1 requirement is fluent English and then computer skills, not to mention a customer-service attitude.

While building up a center overseas, you would still need to maintain the Philippines operation or lose the clients adding to transition costs. In addition, after more than 10 years of Philippine operation, there is a vast pool of highly experienced local middle- and senior-level management that would not be readily available someplace else. You cannot train experience; you can only hire it.

By the way, the Philippine peso is at nearly the same exchange rate as it was at this time in 2008. Yes, the peso has appreciated 25 percent since 2005. So if the peso is such a problem, then why has business been growing by 20 percent a year since then?

Global companies do not make long-term plans based on short-term obstacles. Tell me what the peso exchange rate will be on January 1, 2018, and I might change my analysis.

The Philippine economy/stock market

Apparently, our local and foreign “experts” cannot remember anything before Y2K. To bring them up to speed, there was a significant event in 1997 called the Asian financial crisis. The Philippines came through that better than the others because: 1) The economy was not export oriented; 2) The banking system was strong; and 3) The Bangko Sentral ng Pilipinas (BSP) did not artificially value the peso pre-crisis.

The peso devalued then, not because of fundamental economic reasons, but to save the exporters and overseas Filipino workers. Unfortunately, bad planning by local dollar borrowers killed those companies. The stock market fell on peso devaluation, not economics, and by June 1999 was back to pre-crisis levels.

All those same factors apply today even with the BSP’s current peso intervention. That is why the Philippine economy will continue to outperform as will the stock market.

Our market may be called expensive by some but expensive is a relative term. The reasons the PSE is going up are twofold and those factors are not going to change.

First, interest rates are so low as to create a negative net return. The Philippines has always been a high-interest rate economy in comparison to our neighbors. With low rates, the only available liquid investment is the stock market. The other markets have always priced low rates into stock prices; not so here. The PSE index will go to 6,900 as investors look for deposit rate alternatives.

Second, none of our neighbors’ stock-market listed companies are making the kind of profits as here. Philippine companies are leaner (low debt) and meaner (sensible but aggressive expansion) and, therefore, have long-term sustainable and growing profitability. The PSE index will go to 6,900 as corporate profits continue.

Forget all the nonsense you hear. 2013 is the year of the Philippine Eagle, not the Snake.