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Message to New Philippines Government: Sustain Outsourcing

Whoever assumes power in the Southeast Asian country’s elections next week should make strides to bolster this lucrative sector.

The next president of the Philippines, to be elected May 9, is expected to maintain the momentum of the country’s vibrant economy. A key challenge, however, will be to remove potential blocks to the country’s booming business process–outsourcing industry.

Under President Benigno Aquino III, the Philippines economy has posted six years of solid expansion. During that period, business process outsourcing ­— primarily call centers for multinational companies — has become a pillar of growth. It accounted for 7 percent of gross domestic product in 2015 and ranked as the economy’s second-largest sector behind only remittances from Filipinos who work abroad.

Information technology, which underpins the business process–outsourcing sector, is growing at 15 to 18 percent a year, meaning that business process outsourcing could overtake remittances as the top contributor to the economy in 2017, according to the Information Technology and Business Process Association of the Philippines (IBPAP).

In recent years, numerous global companies — including Wells Fargo, Verizon Communications and Siemens — have outsourced work to the Philippines, drawn by the large English-speaking population and attractive demographics. The average age of workers in the outsourcing sector is 25, and about 60 percent are women. The industry employs close to 1.2 million workers, according to IBPAP.

Wages in the business process–outsourcing sector are two to five times higher than entry-level positions in other industries. The impact on people’s aspirations — and consumption trends — has been profound.

On a recent research trip, we met Julian, a 30-year-old business process–outsourcing worker with three children in Makati, just south of capital city Manila. He is typical of those working in this industry. Julian began work in tech support for a business process–outsourcing company nine years ago and today earns three times what he did in his previous role as a tutor. This large boost to his income has enabled him to purchase an Xbox, two iPads and an iPhone and to eat out four times a week with his family, usually at fast food chains such as Jollibee and McDonald’s.

Many people we interviewed described similar changes to their lives: spending more on discretionary items and being able to enjoy leisure time at places such as Starbucks — perhaps the most popular venue at which to indulge with friends and get free Wi-Fi to boot.

Earning higher pay at a business process–outsourcing company can come at a cost, however. Sarah, a 45-year-old worker in the sector we met in Cebu City, in the central region, said her health has deteriorated because of late shifts and an unhealthy diet resulting from her job requirements. Shifts are often timed to fit in with business days on the other side of the world. For Sarah, that’s usually a graveyard shift, from 9 p.m. to 6 a.m., leading to a lack of sleep and diminished time with her family. Fast food is usually the only option at work — not a good thing, considering that she recently suffered a heart attack.

Many people we interviewed were overweight and expressed concerns about diabetes and heart issues. The country’s National Nutrition Council reported that in 2015, 31.1 percent of Filipinos were obese, compared with 16.6 percent of the population two decades earlier. And many business process–outsourcing workers faced stress and exhaustion from daily commutes of up to two hours each way, because of traffic and congestion en route to the expensive urban areas where the call centers are often located.

The technology and connectivity sectors have gotten a clear boost from business process–outsourcing. Spending on Internet, mobile services and gadgets is a high priority for employees in the sector. E-commerce is benefiting too, with an annual growth rate of just over 20 percent expected between 2016 and 2020, according to information company Statista.

In a low-growth world, the Philippines stands out as an especially attractive market. Still, there are big structural challenges ahead. Poor infrastructure and a rising obesity rate have a negative effect on productivity, which in turn hurts business performance and raises questions about the sustainability of the country’s business process–outsourcing sector. Although there is broad consensus that no one can derail the Philippines’ impressive growth path, whoever is elected president will need to push through improvements to the economy and infrastructure that can help maximize growth potential.

Liliana Castillo Dearth, based in Singapore, is a portfolio manager of Emerging Consumer and International Discovery Equity, and Denise Boynton, based in New York, is a co–portfolio manager of the emerging consumer segment; both at AllianceBernstein.

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