BPO firms may pull out if strong peso continues

The continuing appreciation of peso has started to impact on a few business process outsourcing (BPO) firms in the Philippines that have sent out signals of possibly closing shop.

BPO — poised to become the country’s biggest service export — is now starting to hurt from the strong peso, according to Business Process Association of the Philippines (BPAP) CEO Oscar Sañez.

BPO small operators may close shop as revenues dwindle, said Sañez.

“At P43 to the dollar, small operators would be hurting as they would already be operating at a loss. If you have small capital, you might close shop,” he said.

“When the peso is very strong, it is not good for business. In fact, a big part of the economy will be seriously affected by a strong currency,” Sañez said.

Most countries in Asia like Thailand and Japan have already initiated moves to stop the further strengthening of their currencies to protect their export incomes and over-all investment competitiveness, he added.

Strong currency

In the case of the Philippines, the government is promoting a strong currency, said Sañez.

“If you listen to the pronouncements of the government, it actually prefers a strong peso. That is dangerous because the economy is dependent on OFWs [remittances] and exports of products and services,” he said.

As of July, money sent home by overseas Filipino workers totaled $10.679 billion. The remittance volume this year could even reach $18.735 billion, Deputy Gov. Diwa Guinigundo of the Bangko Sentral ng Pilipinas (BSP) said in September.

Last year, remittances amounted to $17.348 billion, according to BSP data.

BPO companies might be threatening to close down their operations to put the value of peso back on track to its “normal level,” according to an analyst.

“We are seeing here manipulations or maneuverings,” chief market strategist Jonathan Ravelas of Banco de Oro Unibank Inc. said Friday in an interview with GMANews.TV.

In fact, there are available strategies including currency forward contracts that BPO firms could use to hedge against risk and protect them from appreciation, Ravelas pointed out.

In currency forward contracts, exporters use the currency at a specified price, at a specified quantity, and on a specified future date.

“Exporting can be a good business if you know how to manage the currency risk and the accounting side of the process,” Ravelas said.

Once BPO companies close shop the Philippines could be less attractive a destination for setting up contact centers, Sañez said.

“BPO firms are all worried,” he added.

Lack of clear action

“Our industry is afraid that the seeming lack of clear action steps by our government to stem this surge of our currency may cause the Philippines to lose the post-crisis rebound to our neighboring countries again,” Sañez said.

Sterling Bank of Asia executive vice president Ronald Avante said that tax preferential policies should be given BPO companies — one of the industries where the government is encouraging investment.

“As the peso continues to appreciate, the government should give them tax breaks,” Avante said.

Peso rose 0.60 percent week-on-week to P43.175 as the US dollar continued its decline against major currencies particularly the Euro, said Ravelas.

Sañez said the country’s financial managers should to be “proactive” in addressing the surging value of the peso or else “another big setback for the economy” can take place.

President Benigno Aquino III has to address how to attract foreign direct investments (FDIs) that will feed the future the economy.

“Over the past years we have fallen behind in terms of FDIs [among] members of the Association of Southeast Asian Nations. We need to promote [ourselves more]. FDIs will feed our future growth or else we have to rely on what we have,” Sañez said.

The BPO industry has already attained half or $4.7 billion out of its $9.4-billion revenue target this year after players reported a 50-percent revenue growth.

Sañez is confident that the industry is going to hit its 2010 revenue growth target from $7.2 billion in 2009 with more revenues in the second half of the year.

BPAP was aiming for a 26- to 30-percent revenue growth this year from 2009. Last year’s $7.2 billion reflected 19 percent drop in growth over 2008.

Job generation from last year’s 450,000 is expected to reach 540,000 this year. “We are still very much in the game and very much attractive despite the [strong] peso,” according to Sañez. — VS/OMG, GMANews.TV