Robust Philippine currency threatens business process outsourcing industry

Outsourcing to the Philippines is now said to be 30% more expensive than India and China, according to Business Processing Association of the Philippines (BPAP). But what is ironic is that the business process outsourcing (BPO) industry, which contributes much to the domestic economy, actually helped drive up the peso's value. The combination of an appreciating peso and a depreciating Indian rupee had provided India with a meaningful cost advantage. Ditto the steady Chinese yuan.

A survey of BPAP members on the impact of the strengthening peso revealed the following:

• about 46.7% of respondents said it had been more difficult to hit their respective revenue targets;
• about 40% of respondents said they had lost some business to other destinations;
• about 40% of respondents said they had canceled expansion plans.

Southeast Asia has become a preferred destination for global portfolio investors in which case their investment inflows result in increased demand for the local currency.

Aside from the BPO industry, exporters are also hit hard by a robust peso since they make less money in peso terms for every dollar they earn.

In a related development, some property experts are encouraging property developers to look beyond the BPO industry. Global consultancy firm Urban Land Institute, for one, advises property players to find new growth areas. One suggestion is to consider developing “middle office” hubs for financial institutions.

Front office usually refers to sales and marketing, and the back office covers administrative and support services, where call centers and BPOs usually come in. But middle office, on the other hand, refers to the segment within a bank or financial services firm that takes care of risk management, calculates profits and losses, and handles the information technology platform using the resources of front and back offices. Hence, the business of assigning middle office tasks to a third party is known as “knowledge process outsourcing” (KPO).

The Great Betrayal of 2012

An interesting but shocking revelation made by veteran financial analyst Larry Edelson about China has been circulating around the globe through e-mails. 

Major points in his latest research, which are contained in his self-produced short film clip entitled The Great Betrayal of 2012, show that China is now more superior than the United States. This revelation might be disturbing not just to investors but to some nations as well. It would only mean that China's massive influence will enable her to dictate her own terms and conditions. 

In fact, according to Edelson's presentation, China is already dictating the US at some points. Edelson claims he uncovered compelling evidence that the Chinese government is conspiring with the White House to impoverish the American people — and soon other nations — to lives of financial servitude.

This is not the first time that Edelson has made a “crazy” prediction that ended up coming true. His forecasts about the technology stock bubbles and the new bull market for gold have made him a bankable financial wizard, so to speak.

Feel free to watch his videos to hear his argument and then decide for yourself.

Click this link to watch the video: The Great Betrayal of 2012

Avoid market turmoils; park in Kenya

The stock markets are one of the lifebloods of economic development without which, it's hard for any nation to reach its full potential. While Africa still has a long way to go, it has made some promising strides in developing its stock markets.

Currently, there are only about 16 African bourses. The region's stock-market capitalization as a percentage of gross domestic product (GDP) is less than 30% . Liquidity is a pressing problem.

At the Uganda Securities Exchange in Kampala, just nine companies are listed with an average daily volume of merely over US$200,000.

However, there are some African nations like in Nairobi, Kenya wherein stock exchange transactions are very active. The country's biggest mobile-phone service provider Safaricom, raised a whopping US$800-million last June 2008 in an initial public offering (IPO) that was heavily oversubscribed. Also, Celtel Zambia raised US$200-million in the same month last year.

As a result, Nairobi stock market was up by about 5% last year as against double-digit plunges in the United States and Europe, and it turns out, Kenya has been a much better place to park investments in this period of market turmoil than the Dow Jones.

The Fed's quick-fix solution to avert global stagflation

The scenario called stagflation is characterized by a condition of slow economic growth and relatively high unemployment rate accompanied by a rise in prices of commodities. And the United States (US) is bracing for a repeat of what transpired in the 1970's when world oil prices rose sharply.

However, this time, the crisis is spawned by the subprime meltdown. Financial shocks are now spilling over into a global credit squeeze as more and more banks and financial institutions are writing off losses in their financial statements.

But the apprehensions over the domino effects of stagflation across the globe became more restrained as the probability of a US recession seemed more inevitable. The quick-fix that was immediately implemented by the federal government (i.e., slashing benchmark interest rate) somewhat preempted the occurrence of another stagflation.

The short-term effect of this quick-fix solution is that it serves as a cushion in the event of any drastic stock market fall. The monetary easing done by the US central bank forced investors to go to the stock market once again in search for higher yields.

Investing in Asia

The Philippines is the most progressive economy in Southeast Asia, if not the whole of Asia, during the post-war period. But it went into a serious dive in the 1970s up to the early 1980s when Martial Law was implemented.

After the phenomenal "People Power", the Philippine economy was on a roller coaster ride, groping in the dark during the late 1980s, but showing some teeth during the early 1990s. Many observers said that it could have been a "tiger economy" by now if not for the Asian financial crisis that swept all the gains made during the decade.

Last year, the economy grew fast with record-breaking GDP figures, "hot money" and remittances were coming in, the property sector was upbeat, the stock market was bullish, and the peso exchange rate was strong versus the dollar. However, this year, a runaway inflation and weak peso seem wrecking havoc on the economy.

In the same manner that Myanmar, also known as Burma, was one of the richest country in Southeast Asia in the 1960s. But now it's the poorest. A military junta runs the country. It's the most corrupt country in the world, with high inflation, no infrastructure, and lack of education. However, it does have 2,000 kilometers of white sandy beaches, and huge reserves of natural resources. The country could be the next Thailand.

Another promising southeast Asian nation is Malaysia. Its most southern state Johor is a prime location in Asia. In fact, the Malaysians have made Johor their own special economic zone. Anyone looking to build a new Asian manufacturing plant will look at Johor. The place also is surrounded by beautiful beaches.

Going to the Korean peninsula, North Korea, who shares a border with China, has all the minerals and the cheap labor. On the other hand, South Korea has all the intellectual capital, the technology, and the expertise. It's the perfect match had these two countries merged.

South Korean retail space could appreciate when the North Koreans come flooding across to buy their first technological gadgets. Real estate is very cheap in northern part of South Korea. Since, it is the borderline, everyone's worried about wars and gun battles. And that's probably a good place to start developing retail establishments. By the way, South Korea will be providing the technology for the establishment of Cambodia's first stock exchange next year.

Meanwhile, Taiwan has the world's third-largest stash of foreign exchange reserves and holds some of the world's most competitive technology firms. Currently, it boasts of a 25% household savings rate. The country is also the home of Taipei 101, the world's second-tallest skyscraper, after the Burj Dubai, which houses the Taiwan Stock Exchange. However, its stock market is the worst performing stock market in Asia over the last 20 years. It's down 40% from 1990 levels. Nonetheless, there are several Taiwanese firms that are very profitable with average returns reaching 20% and they pay generous dividends. In addition, Taiwan elected a new president this year, who promised to bring China and Taiwan closer together. And for the first time in 60 years, direct flights started between the two countries.

Speaking of China, the country's capital Beijing has recently gained world prominence with its successful staging of the Olympics, whereby the country was able to showcase to the world its rich cultural heritage and economic might amidst urban smog and hazy backdrop. The country's largest manufacturing city, Shenzhen, is located right across the water from Hong Kong. Shenzhen has its own stock market, and is China's second largest port. The change in leadership preference in China, from engineers to economists, is seen as a welcome development as it will further open up the giant economy to foreign investments.

Euro's rise causes Big Mac in Europe 50% more expensive than in the U.S.

The Economist magazine's Big Mac Index suggests that a McDonald's Big Mac hamburger in Europe is now 50% more expensive than in the United States. This is because of the continuing appreciation of the euro as against the greenback. Currently, the EUR/USD pair trades between the range of 1.5250 and 1.5750.

The Big Mac Index, which is based on the theory of purchasing-power parity (PPP), is a useful gauge of ascertaining which currencies are cheap and which are expensive by simply comparing the price of a McDonald's Big Mac in all the major currencies of the world. The theory goes that countries with similar levels of development should have similarly priced Big Mac hamburgers.

Could the Big Mac in Euroland continue to get even more expensive? Most probably.

The trend is still bullish in favor of the euro. But as the chart suggests, the euro "rubber band" is stretched as far as it's ever been stretched. And we all know that a rubber band returns to its original state once stretching has stopped. Thus, we may expect that the EUR/USD pair will return to its "equilibrium" state of value anytime soon especially so that some European central banks are beginning to worry about inflation.

Just when and how soon is the question.

Want to be a billionaire? Go to Zimbabwe...

In a bid to tackle rampant cash shortages, the central bank of Zimbabwe has introduced a new 100-billion-dollar bank note. The new note will go into circulation on July 28, 2008. Grappling with a record 2.2-million percent hyperinflation recorded in June, this Mugabe-ran southern African nation has already issued a number of new notes this year, starting with a 10-million-dollar note in January, and a 50-million-dollar note in April. Then in May, 100-million-dollar and 250-million-dollar notes were issued, swiftly followed by five-billion-dollar, 25-billion-dollar and 50-billion-dollar notes. Currently, one U.S. dollar value is equivalent to 27.215-billion Zimbabwe dollars. In fact, a cheese burger could cost 50-billion dollars in Zimbabwe. A full meal with a softdrink could cost around 80-million dollars. Some economists, however, believe that the inflation figure is grossly understated as based from their estimates the inflation rate is between 10-million and 15-million percent. The country's chronic economic crisis has left at least 80 percent of the population living below the poverty threshold.

Doha round enters final stage

The World Trade Organization (WTO) conducts negotiations through what is called "rounds". The Doha Development Round commenced at Doha, Qatar in November 2001. Its objective is to lower trade barriers around the world, permitting free trade between countries of varying prosperity.

At present, negotiations to free up world trade are finally set to enter the final stage with the release of new draft deals involving agriculture and industrial goods. The texts were released by the Geneva headquarters of the WTO last July 10.

For industrial goods under the Non-Agricultural Market Access (NAMA) talks, countries are being given three-tiered tariff cut options which use the so-called Swiss Formula, where in deeper cuts mean more flexibilities. The Swiss Formula relies on coefficients to "harmonize" tariffs or reduce differences across countries, instead of uniform cuts which will only reproduce existing tariff profiles at a lower scale.

The tariff cuts will be on "bound" tariffs, or the maximum rates that countries have committed to the WTO, rather than "applied" or actual rates being charged on imports, supposedly to make the international trading system more predictable. To get the final bound rate, the formula is:

Bound Rate = (Base Rate x Coefficient) / (Base Rate + Coefficient)

In the latest NAMA draft, already on its third revision, the coefficients are seven to nine for developed countries, and 19-21, 21-23, and 23-26 for developing countries.

Developing countries opting to apply the lowest set of coefficients, 19-21, can shield 12%-14% of their most sensitive tariff lines from cuts, as long as they do not exceed 12%-19% of the total value of imports, or keep 6%-7% of tariffs lines unbound or exempt from cuts as long as they do not exceed 6%-9% of the value of imports.

For the middle range coefficients, developing countries can apply just half of the formula cut for up to 10% of its most sensitive products as long as they do not exceed 10% of the total value of exports, or keep 5% of tariff lines unbound or exempt from cuts as long as they do not exceed 5% of the value of imports.

On the other hand, there are no flexibilities for the highest set of coefficients.

For tariff lines that do not have bound rates, countries can add a markup of 25 percentage points to the applied rate before applying the Swiss Formula.

On the other hand, the base level for reductions in Overall Trade-Distorting Domestic Support (OTDS) for agricultural goods shall be the sum of the final bound rate, plus 10% of the average total value of agricultural production in the 1995-2000 base period for developed countries. Meanwhile, developing countries shall have additional 20% of the average total value of agricultural production in the 1995-2000 or 1995-2004 period as may be selected by the nation concerned.

The base OTDS shall be reduced in accordance with the following tiered formula: 75%-85% reduction if the base ODTS is greater than US$60-billion; 66%-73% reduction if the base ODTS is between US$10-billion and US$60-billion; and 50%-60% if the base ODTS is less than or equal to US$10-billion.

Vietnam to supply rice to the Philippines

About a couple of decades ago, Vietnam and other Asian countries, like Thailand and Indonesia, were coming over to the Philippines to study about rice farming. The Philippines was then a major exporter of rice across the globe.

But nowadays, it's the other way around. It is now one of the world's biggest rice importers, and Vietnam is one of its major rice suppliers.

Due to the growing global anxiety over climbing commodity prices, the Philippine government has asked Vietnam to guarantee at least one million tons of rice supply this year. The Philippines' agriculture department has expected that rice output for 2008 will fall between 1.5-million to 1.8-million tons short of demand. Hence, the government is in dire need to stockpile for food security reasons as early as now.

That's why inspite of a Vietnam guarantee, the agriculture department would still be proceeding with its open auction of about 550,000 tons of rice on Mar. 11, 2008.

Meanwhile, average prices have nearly doubled at about US$393 per ton in the past five years due to increasing demand and shortage of available farmland.

Philippine banana exporters see bigger growth

The Philippines expects to increase its banana exports to South Korea after the latter exclude Philippine bananas from the list of products subject to a 10% tariff adjustment on imports.

The Philippines, which has nearly 340,000 hectares of banana plantations, exports about two-million metric tons of banana yearly to Japan, the Middle East, South Korea, China, Hing Kong and New Zealand.

Last year, Japan bought a total of 641,253 tons, making it still the largest importer of bananas in the country. It was followed by the Middle East with about 425,082 tons of bananas bought in 2007.

The growth in the sector is mainly driven by higher productivity and expanding operations, according to the agriculture department.

Philippine government earmarks Php104-billion for infrastructure projects

The Philippines will use internal funds to finance 11 infrastructure projects worth around Php104-billion. Perhaps due to the recent controversy regarding the ZTE network broadband deal, the government decided to put on hold all official development assistance (ODA) loans which are not yet finalized. But since the said projects are deemed important by the government, locally generated funds will be use to finance them.

The 11 infrastructure projects are:

• New Communications, Navigation, Surveillance and Air Traffic Management Systems Development Project in Northern Luzon;
• Regionalization of mental health services;
• Phase 2 of the redevelopment of the Tacloban Airport;
• Construction of elementary and high school classrooms in areas with acute shortage;
• Cyber Education Project;
• Light Rail Transit Line 1 south extension;
• Luzon Urban Beltway mainline south railway project;
• Light Rail Transit Line 2 extension;
• Bataan-Manila pipeline project;
• Light Rail Transit Line 1 north extension project; and
• the Angat water utilization and aquaduct improvement.

The Department of Budget and Management (DBM), tasked by the Office of the President, will coordinate with multilateral agencies to come up with a uniform loan conditions.

The Philippines gets a positive outlook rating from Moody's

Moody's Investors Service upgraded yesterday, January 25, its outlook on the Philippines from “stable” to “positive”, citing the government's easing dependence on foreign loans. The ratings include those for long-term government foreign and local currency, foreign currency bank deposit ceiling, and foreign currency country ceiling.

Improved macroeconomic environment and good fiscal performance are mutually reinforcing each other as a stronger peso and lower domestic interest rates have significantly lowered debt service payments.

This positive outlook rating may pave the way for an actual credit ratings upgrade for the country. Thus, the government hailed the decision of the prestigious credit rating agency. A credit rating upgrade may entail cheaper foreign borrowing. It will likewise make the country more attractive to foreign direct investments – an area in which we are lagging behind four Southeast Asian neighbors, namely Singapore, Malaysia, Thailand and Indonesia.

The last time Moody's raised the country's credit rating was in November 2006. The agency then upgraded the rating from “negative” to “stable” credit rating.

Philippine FDI over eight percent growth

The Philippines netted about US$2.5-billion in foreign direct investments (FDI) last year, up by 8.7% from its 2006 figures at US$2.3-billion. But compared to its neighboring countries, the country attracted fewer investments.

In the United Nations Conference on Trade and Development (UNCTAD) report released on January 8, the Philippines was shown lagging behind four Southeast Asian economies, namely Singapore with US$37-billion FDI, Malaysia with US$9.4-billion, Thailand with US$10-billion, and Indonesia with US$6-billion.

Nonetheless, growth prospects for the Philippines, according to the World Bank's Global Economic Prospects 2008 report, is expected to reach 6.7% – above Asian average. The forecast figure is also higher than the the 6.2% record growth attained in 2004.

Philippine Property Market: Bubble or Bubbly?

*Space+ vol. 2, iss. 1 (May-July 2007).

**Re-published in the CREBA Developer of the Year Award supplemental magazine dated Oct. 2007.

Will the US GDP derail the Euro rally?

Well this week it was the Fed helping push the euro currency higher against the greenback. The unexpected 50 bps cut on interest and discount rates had pushed the EUR/USD to reach record levels. And it seems that pretty much everyone is afraid of being short for an extended period of time.

The currency pair will still have its moves to the downside but there is one thing that is for sure: This market moves almost as quickly to the upside as it does to the downside!

Event risk due out of the US on Sept. 27, Thursday, could continue to weigh on the greenback, as new home sales are expected to drop and Q2 GDP is anticipated to be revised lower. If the figures are worse than expected, this could prove to be especially gloomy for the US dollar, as EUR/USD would target a break above 1.4165 to fresh highs near 1.4210. However, if the GDP revision proves to be surprisingly positive, traders may judge that the economy may be able to weather the stormy conditions of the housing recession, which could help send EUR/USD down to test 1.4030 level.(Refer to DailyFX).

Also remember this Friday is the last day of the month and the last day of the quarter. Watch for that day to be very active. Remember more opportunities means more risk.

Real Estate Industry Showing Signs of Robustness

*Space+ vol. 1, iss. 2 (Dec. 2006 - Feb. 2007).

QUASAR Report: 1st Quarter Review

*Space+ iss. 1, vol. 1 (May-July 2006).