Lower BPO revenue poses risk to growth

By Lawrence Agcaoili (The Philippine Star) , Sep 19, 2017

MANILA, Philippines — Declining growth revenue in the business process outsourcing (BPO) sector could drag down the country’s economic growth over the next two years, according to Credit Suisse.

Michael Wan, economist at Credit Suisse, said the decelerating revenue growth could subtract up to 0.3 percentage point from the country’s gross domestic product (GDP) next year.

Wan said the BPO slowdown would have a negative impact on the GDP, current account and the peso.

This prompted Wan to slash the country’s GDP growth forecast to 5.9 percent from the original target of 6.2 percent next year.

He added the slowdown also puts at risk the bank’s 6.1 percent GDP growth forecast for this year.

“Lower BPO exports would cut the current account cumulatively over the next two years equal to 0.2 to 0.4 percentage points of GDP, with negative consequences for the peso,” Wan said

Credit Suisse said the country’s BPO industry is facing a combination of cyclical and structural headwinds.

It pointed out political issues related to US President Donald Trump’s economic nationalism, concerns over extra judicial killings under the Duterte administration, delays in the issuance of ecozone permits, and personal security worries are already weighing down on BPO investments by the US and European companies.

The investment bank said the worsening shortage of skilled workers, proposed cuts to tax incentives, rapidly rising wages, and automation pose risks to competitiveness, revenue growth, and staffing needs.

Based on the type of work done in the country, Credit Suisse said that from 50 to 55 percent of the local BPO workforce can be automated.

The bank expects a slower growth of 3.7 percent in full-time employment in the industry between 2017 and 2022 from the 12.4 percent compounded annual growth rate recorded over the past five years.

“Since automation will reduce the labor component of the total costs, it also could reduce incentives for offshoring to low labor cost economies like the Philippines,” it said.

Credit Suisse said the BPO sector is entering a period of slower growth with a rapid decline in absorption of new workers.

It said the total office demand from information technology/ business processing management companies would contract to 1.46 million square meters in gross leasable area between 2017 and 2022 compared to the 2016 base.

Credit Suisse said the declining growth in the revenue of the business process outsourcing(BPO) sector could drag down the economic growth of the Philippines over the next two years.