When you think of the ‘Asian Tigers’ that have shaken up the traditional global economic hierarchy over the past decade, you might think their stories went something like this: thousands of years of traditional agriculture, technological advances permitting pastoral and arable farming beyond subsistence, a leap forward to the manufacture of textiles, then perhaps electronic gadgets, landing most recently somewhere in the financial services sector. That has loosely been the journey for Hong Kong and Taiwan, Singapore and South Korea.
But what if a country decides to leapfrog the significant manufacturing step – the step that put them on the Western radar – and go straight to the more specialised and potentially money-making financial services sector? The Philippines, or more accurately, Manila, is doing precisely that.
More than a call centre destination In 2010, Manila overtook Mumbai – long-known and still often assumed to be the world’s number one call centre destination – as having the largest business process outsourcing (BPO) industry on the planet. In 2015, Manila was
pipped to the top spot by another Indian city, Bangalore (see table below for the top five). Nevertheless, it is estimated that BPO will account for 10% of the Philippines’ GDP by 2016, amounting to around $25bn, and that it will employ about 1.3 million people.
While at a basic level BPO is understood to mean call centre services, Gareth Leather, Asia Economist at macroeconomic research company Capital Economics, explains that it extends much further than that. “It can get a lot more technical than the basic call centre operations,” he says. “It can be administrative or it can be things like diagnosing clinical tests. And operators do a lot of complex and niche back-office work for banks. It can be quite varied.”
Captive service, for example – whereby firms use wholly owned subsidiaries offshore rather than third-party vendors – is an area of BPO that gained notable media attention after the sub-prime mortgages scandal. Large financial institutions, such as Lehman Brothers, scrambled to sell off their captive units as they filed for bankruptcy.
While Manila’s crowning as the top BPO hub in 2010 may have gone unnoticed by telephone banking customers in Europe and the US, it came as no surprise to Ken McGowan MCSI, CISI Regional Director in Asia, or indeed the CISI in general, whose representatives have been visiting the Philippines since at least 2009.
Establishing a presenceMcGowan discusses emphatically the reasons why, seven years later, the CISI is preparing to open a new office in Manila, which will be officially unveiled in January 2016. “There’s a big opportunity in the Philippines. We already have established corporate clients here and they are very keen for the CISI to develop a presence,” he explains. “Manila is close to Hong Kong and it has a growing economy,” he continues, referring to
GDP growth of 5.6% in the second quarter of 2015.
Other
encouraging numbers include the “estimated 57 million people who speak English with a neutral accent,” says McGowan. Add to this the clear overhead savings of cheaper labour and office rent and it is no surprise that the CISI is looking to this quietly emerging economy. Of course, the Institute is not alone – dozens of large organisations and banks, including HSBC, JPMorgan Chase and Barclays, seeking an English speaking and US culturally aligned workforce, have opened operations offices in Manila over the past few years.
Rooted culture of education But it is by no means just the BPO sector that the CISI is keen to capitalise on, although it has harboured strong relationships in this area. The education sector is another that the Institute is keen to crack. With a literacy rate of 97.5%, far higher than some of its Asian peers, the Philippines is an ideal location for the Institute to make strides in its charitable goals – particularly that of improving financial literacy. “Our qualifications at the foundation level are very relevant to schools and colleges in the Philippines, and our newly appointed Country President, local man Anton Mauricio, is the Co-Founder of the Financial Educators Association here,” says McGowan, pictured below with CISI Chief Executive, Simon Culhane, Chartered FCSI, and CISI Country President Anton Mauricio at the official blessing of the CISI office in Manila.
This focus on the education sector has been the keystone of the support the CISI has received from the British Embassy in the Philippines. Iain Mansfield, Director of UK Trade and Investment at the British Embassy in Manila, describes the relationship the Embassy has
fostered with the Institute so far: “It began earlier this year when Alderman Alan Yarrow, Chartered FCSI(Hon), CISI Chairman and Lord Mayor, led a trade mission in Manila. This resulted in the
signing of a statement of intention between the CISI and the Philippines Securities and Exchange Commission (the country's equivalent of Companies House in the UK).” The relationship was consolidated when, following that, the CISI participated in an education and skills seminar hosted by the Embassy.
“We’re glad we’ve been able to work with the CISI on a practical level to provide advice where needed on the nuts and bolts of establishing an office here,” Mansfield adds.
The emphasis on education in the Philippines is recognised throughout the wider region as a real positive. Paul Hedges is a former CISI Regional Head in Asia who was tasked with “helping the Institute decide if they wanted to be in Singapore and then helping it to establish a footprint”. Hedges now works as Head of Network Management & Market Intelligence for Asia Pacific at HSBC in Singapore. He explains: “There is a big, rooted culture of education in the Philippines. Part of people’s overall compensation package – typically in the financial services sector – is an expectation of education and knowledge acquisition.
“Even when you look at the more informal sector – maids and other domestic workers – their primary objective is to earn money to pay for their family to be educated. That’s a massive positive,” Hedges adds. But there is a downside: “The big negative is that often the reason they want to be educated is to leave the country. The economic legs are not necessarily there,” he says.
Power in numbers: ASEAN
The economic potential of the Philippines is likely to be strongly influenced by developments in the Association of South East Asian Nations (ASEAN) Economic Community. The ten-country collective ASEAN was established in 1967, but this year sees the consolidation of its shared economic community. A single market and production base and full integration into the global economy are two of its main goals. Economists have valued the alliance as having a voice “arguably rivalling those of China, India and the US”.
The economies and politics of each nation vary quite dramatically. Laos and Cambodia have practically authoritarian governments and very low GDP, while Myanmar and Malaysia float in forms of semi-democracy. But together, the ASEAN nations have garnered significant international attention for their individual and shared financial influence, and have become valued economic and political allies. UK Secretary of State for Business, Innovation and Skills, Sajid Javid, recently called for the UK and ASEAN to forge closer ties.
Given that the Philippines is considered a consolidated democracy, it could prove an appealing trading partner, over and above the BPO sector.
Beyond BPOThis begs the question of whether the Philippines can move beyond its clear successes in the BPO sector and expand into the broader financial and investment services sphere that is currently reserved for the likes of Hong Kong, Singapore and Tokyo.
Hedges describes the growth seen in Singapore as starting much like Manila, in the functional operations sector, but then he adds: “We started to see Singapore attract more of the wealth management sector, private banking and so on. We started to see people needing to move up the intellectual curve.”
And there is some debate over whether Manila will be able to follow Singapore up this curve. Hedges seems doubtful, citing difficulty in “moving people around” due to the modest infrastructure as one large obstacle, and political uncertainty around next year’s presidential elections as another.
Capital Economics' Leather considers the lack of a manufacturing foundation to be another fundamental stumbling block for substantial economic growth: “I don’t think the country can get away from the fact that it needs to develop its manufacturing industry.” And he, like Hedges, thinks infrastructure is a concern. The BPO sector does not rely on well-entrenched infrastructure, unlike other areas of finance, and that could be part of the reason why this sector has thrived so rapidly. So, as Leather says, “Realistically, beyond that, the Philippines will struggle – Hong Kong and Tokyo are streets ahead in terms of infrastructure.”
There is also the issue of the Philippines’ potential for corruption. The nation ranks
85th out of 173 countries in corruption league tables, while Singapore comes 7th.
Asking the wrong questionOn the other side of the fence is Mansfield, who says that to ask whether Manila will ever be able to seriously rival Singapore and Hong Kong is to ask the wrong question. “By definition, not everywhere in a region can be a hub,” he points out. “Singapore and the Philippines have different strengths and will continue to do so, even as the latter develops.”
Mansfield reminds investors that the opportunities outside of the BPO sector – which itself “remains very strong and has continued to upskill, moving up the value chain” – are growing all the time. “The banking sector continues to expand dramatically, for example. Peso deposits have more than doubled since 2008,” he says.
But perhaps most significantly for foreign investors, emphasises Mansfield, is that with the introduction of the
Republic Act no. 10641 (allowing the full entry of foreign banks in the Philippines), which was approved in July 2014 and scrapped limits on foreign ownership, the Philippine market is now fully open to foreign investment. That has got to be an incentive for foreign investors looking for opportunities outside of business processing.
For now, the CISI is focusing on the well-established education and BPO sectors, but where the Institute’s footprint will extend going forward remains to be seen.