The Philip­pines’ sturdy growth rate is in dan­ger of slip­ping

Re­mit­tances from the Mid­dle East are a large per­cent­age of GDP “The gains we have had in the past will be at risk”

Bloomberg Businessweek (Europe) - - CONTENTS - −Bruce Ein­horn, with Nor­man P. Aquino and Di­tas B. Lopez Edited by Christo­pher Power and Matthew Philips Bloomberg.com

Manila used to be the city the Asian eco­nomic boom for­got—over­looked in fa­vor of more dy­namic spots in China and Thai­land. But with the Philip­pine cap­i­tal now a fa­vored des­ti­na­tion for call cen­ters and other out­sourced ser­vices, it isn’t such an out­lier. As multi­na­tion­als such as JPMor­gan Chase and Amer­i­can Ex­press ex­pand there, more than 1.4 mil­lion square me­ters of of­fice space will be added over the next two years, says Julius Guevara, an an­a­lyst at Col­liers In­ter­na­tional.

The econ­omy is on pace to grow around 6 per­cent in 2016 and 2017, the Asian Devel­op­ment Bank says, com­pared with less than 5 per­cent for South­east Asia as a whole. While a slump in China has hurt other Asian coun­tries, “the Philip­pines is tick­ing to a very dif­fer­ent rhythm,” says Joseph In­cal­caterra, an econ­o­mist with HSBC.

That rhythm faces some dis­rup­tion as the May elec­tion to re­place termlim­ited Pres­i­dent Benigno Aquino III ap­proaches. More than 2 mil­lion Filipinos work in the Mid­dle East, and the econ­omy de­pends on money they send back. A slow­down in coun­tries hurt by low oil prices has pinched re­mit­tances. Pay­ments from the 10 mil­lion Filipinos who work abroad rose just 4.6 per­cent last year, the slow­est since 2001.

A high-pro­file cy­ber­crime case may also lead to tighter scru­tiny ap­plied to money trans­fers to the Philip­pines. In Fe­bru­ary hack­ers stole $81 mil­lion from the Bangladesh cen­tral bank by rout­ing it from the U.S. Federal Re­serve to a bank in the Philip­pines. The thieves then gam­bled $30 mil­lion of the stolen cash at a Manila casino that’s ex­empt from anti-money-laun­der­ing laws be­cause of a loop­hole cre­ated to en­cour­age in­vest­ment in the tourism in­dus­try. The rest of the money went to other gam­bling op­er­a­tors, Ju­lia Abad, ex­ec­u­tive di­rec­tor of the Philip­pine Anti-Money Laun­der­ing Coun­cil, said at a Se­nate hear­ing on April 5.

The tele­vised in­ves­ti­ga­tion hear­ings have cre­ated a “global spec­ta­cle,” Philip­pine Vet­er­ans Bank Chair­man Roberto de Ocampo said in a state­ment. “If we con­tinue on this path, the gains we have had in the past will be at risk.” Some for­eign lenders have closed the ac­counts of re­mit­tance com­pa­nies af­ter im­ple­ment­ing rules to fight money laun­der­ing and ter­ror­ism fi­nanc­ing, cen­tral bank Gover­nor Amando Te­tangco said on March 29.

Even as the econ­omy has out­per­formed most of South­east Asia, the

Philip­pines has lagged in at­tract­ing for­eign di­rect in­vest­ment. That’s led to chronic in­fra­struc­ture prob­lems. De­spite $4.2 bil­lion in gov­ern­ment con­tracts awarded since 2010 for roads, ports, and mass tran­sit, it’s still dif­fi­cult to travel across the coun­try’s ar­chi­pel­ago of 7,000 is­lands. “Ev­ery­thing is run­ning at over­ca­pac­ity right now,” says Ant­ton Nord­berg, an an­a­lyst at KMC MAG Group, a Mani­l­abased real es­tate ser­vices com­pany.

There hasn’t yet been a spike of lay­offs in the Mid­dle East, but some em­ploy­ers there may be freez­ing salaries, La­bor and Em­ploy­ment Sec­re­tary Ros­alinda Bal­doz said in Fe­bru­ary. Last month her de­part­ment teamed up with Coca-Cola Far East to help women who re­turn home af­ter work­ing over­seas. The pro­gram of­fers en­trepreneur­ship train­ing and other sup­port so re­turnees can start busi­nesses.

For those who do re­turn, get­ting a job in a fac­tory prob­a­bly isn’t an op­tion. Un­like other Asian coun­tries that rely on ex­ports, in the Philip­pines fac­to­ries don’t gen­er­ate much growth. Man­u­fac­tur­ing makes up just 20 per­cent of gross do­mes­tic prod­uct, com­pared with al­most 60 per­cent for ser­vices. The Philip­pines “by­passed the whole man­u­fac­tur­ing thing,” says HSBC’s In­cal­caterra.

For now, the growth of the out­sourc­ing in­dus­try can com­pen­sate for that weak­ness, but call cen­ters and other out­sourc­ing busi­nesses are look­ing to cut head count by us­ing more au­to­ma­tion. That could present a chal­lenge to Aquino’s suc­ces­sor. Still, Gareth Leather, a se­nior Asia econ­o­mist with Cap­i­tal Eco­nomics, writes in an April 5 re­port, “Who­ever re­places Aquino will take over a coun­try that is in bet­ter shape than it has been in for a long time.”

The bot­tom line The oil bust, plus a hacked banking sys­tem, threaten re­mit­tance pay­ments from 10 mil­lion Filipinos work­ing over­seas.

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