Life in PNoy’s Enchanted Kingdom

This report from the Davao Sun Star is all about the effect of the bubble peso on the BPO industry.

Gloria should temper her enthusiasm for a peso that has appreciated for all the wrong reasons - hot money and OFW remittances.

Small call centers start closing shops

MANILA — Already about 10 to 20 percent of the total number of small companies in the business processing outsourcing (BPO) industry have closed shops since the start of this year.

This was a result of the peso appreciation that has significantly reduced their revenues.

This grim situation currently experienced by the BPO industry, considered to be one of the country’s bright prospects, was conveyed by Oscar R. Sañez, chief executive officer of the Business Processing Association of the Philippines, in an interview with Philexport News and Features.

The peso has already appreciated against the US dollar by 20 percent since the middle of last year, thereby affecting dollar-earning sectors, particularly the BPO and call center industries, service exporters, and families of overseas Filipino workers.

Sa¤ez admitted the industry suffered a “direct hit” because its contracts are with US clients and measures revenue in US dollars.

“Its (strong peso) impact is 20 percent since last year, but only 10 percent this year. If we look only at the current year, the appreciation is 10 percent. This means our total revenues have declined by 10 percent,” he said.

Total revenues generated by the BPO industry in 2006 reached $3.4 billion from just $350 million in 2001. The Philippines currently stands fourth in terms of industry size, next to Australia, India, and China.

Like an export company, call centers and BPOs spend in pesos because they operate in the Philippines, he explained.

“In fact, we are seeing some increases in our peso cost by about 3 to 5 percent in line with the current inflation,” he said. “But for the meantime, our costs have remained the same.”

Sañez said the rising peso has particularly hit the small players in the industry because they are the ones with little capitalization and could not thus afford continuing losses.

“We operate on narrow margins 10 percent or less. If you have a margin that is wiped out, it would eat up your capital,” he said. “So, we’re losing some businesses, we can tell that because many of them are not renewing their memberships. Ten to 20 percent of our small operators may have closed shops since the start of this year.”

There are currently about 450 BPO companies in the country. An industry expert, however, estimated the total number of players in the industry at around a thousand to include the smaller players.

This disappointing situation, according to Sañez, would definitely affect the BPO industry’s growth target with the small players not being able to expand.

The peso appreciation has also affected new investments because some local players may choose not to expand operations for lack of capital and due to their inability to meet margins expected for the sector, he added.

To stay in business, bigger BPO companies are exerting more efforts to improve their operational efficiencies by ensuring that their costs are well managed, their productivity up, and some of their planned expansions and investments reduced.

Sañez cannot say how long these call centers and other BPO firms sustain operations in case of the further strengthening of the peso.

“It depends on the size of the companies. We don’t know, as long as the peso is appreciating, it continues to put pressure on (the firms),” Sañez said as he expressed hopes that the local currency be kept at P48 to a dollar.

The BPO industry has been using exchange level of P48 to P50 in its financial planning assumption. The peso has been hovering at P44 to P45 against the dollar for the past months.

Despite these challenges, Sañez dispelled presumption that the BPO industry has already reduced its hiring rate.

In fact, he is optimistic that the industry’s ambitious $12-billion revenue target by 2010 would still be achieved. This would enable BPO companies to generate the target one billion jobs also by that time.