Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017

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What Bubble?

           A few foreign and local analysts have been expressing doubts about the sustainability of the ongoing high growth of the Philippine economy.  Taking a page from what happened in Thailand in 1997 or in China in the last two years, these doubting Thomases are spreading the "bubble" talk.  They say there could be a bubble in OFW remittances; or in the BPO sector; or in real estate.  Let me treat each one of these present engines of growth plus more.

          Can there be a sudden decline in the more than $20 billion annual remittances from the overseas Filipino workers (OFWs)?  I actually estimate that the total remittances are closer to $25 billion if we add to the official receipts the amounts sent through informal channels or carried personally by the OFWs when they come home to visit.  Ever since 2007 when I was residing in Barcelona, Spain, I have been monitoring very closely these remittances, especially after some international agencies actually warned about precipitous declines because of the beginning of the Great Recession.  As anyone can verify, however, for the last six years through all the  crises resulting from the financial derivatives collapse, the bankruptcy of Lehman Brothers, the Arab spring, the PIGS defaulting and the slowdown of the US economy, remittances from our OFWs continued to increase at a constant rate of 5 to 6 percent.  As I have written many times in my columns, my first hand observations of OFWs in Europe convinced me that Filipino overseas workers are always the first to be hired and the last to be fired.  They are the most resilient of all immigrant workers.  Even the continuing stagnation of the US economy will hardly make a dent on these dollar flows into the Philippines.  Most of the dollars that come from the US are actually incomes earned in the Middle East and elsewhere that are channeled through US banks.  Most of the more than 3 million Filipinos in the US are already either US citizens or green card holders and send very little money to their relatives in the Philippines.

          What about the BPO/KPO industry?  Can there be a sudden large decline in its foreign exchange earnings? In a recent briefing held at the University of Asia and the Pacific, David Leechiu, Country Head of Jones Lang LaSalle Philippines, the leading real estate services firm in the country, presented hard data showing that there is absolutely no danger of an oversupply in the Office Market because of the continuing increase in new BPO and KPO companies locating in the Philippines, including investors from our major competitor in this industry which is India.  In fact, in addition to the burgeoning offshoring and outsourcing firms, there will be other demand drivers such as financial services, insurance companies and consulting firms that can create an additional demand of anywhere from 20,000 sq.m. to as much as 100,000 sq. m. of office space from non-BPO or traditional offices.  These office buildings are also being constructed in such cities as Cebu, Davao, and Cagayan de Oro. There is no bubble here.

          What about the residential market?  Mr. Leechiu presented two segments:  the high-end market with selling price of P 10 million and above and the mid-range market from P1.5 million to P10 million.  The typical unit size of the high-end units is 160 sq.m. while that of the mid-range one is below 150 sq.m.  The former accounts for only 3 to 4% of the total supply, the rest being accounted for by the mid-range units.  Some 55% of the residential units are under P3 million, catering to the millions of OFWs and almost a million of the BPO/KPO employees.  There is very little danger of a bubble in this market because the buyers or their relatives usually are the ones occupying the units.  Besides, there is an increasing number of investors from Singapore, Hong Kong, and other neighboring countries who purchase these mid-range units to rent to university students (such as those of De La Salle University on Taft Avenue) or to BPO workers.  Of  the high-end condominium units, such as Raffles Residences, Discovery Primes, Grand Hyatt Residences, Two Roxas Triangle, and Shangri-La at the Fort, the total supply in the Metro Manila area expected for the period 2012 to 2018 is about 2,032 units, not a very large figure.  Even if there should develop an oversupply during that period, there is no danger of a bubble since the rich buyers are not overleveraged.  Most of them have enough liquidity to pay in cash.  They can afford to wait in case a glut develops in the market.

          The outlook presented about the retailers market can be summarized as follows:  Demand is forecast to remain healthy as international and local retailers are expected to continue their expansion.  The large incoming supply may slightly push vacancy in the next 12 months.  Upcoming supply in Metro Manila is approximately 700,000 sq.m. and is dominated by the major players.  Several upcoming retail spaces are refurbishments and expansions of existing malls.  Rents are projected to grow steadily in the next 12 months buoyed by the stable retail demand and healthy domestic recovery that is fueled by robust consumption spending.  No bubble here either.

            Needless to say, two other growth sectors--tourism and infrastructures--are in no danger of an oversupply.  In fact, the greatest challenge to the economy is to increase the number of hotel rooms, the lowest  among its peers which are Thailand, Indonesia, and Vietnam.  In contrast with less than 16,000 rooms in the Philippines, Thailand has 184,147; Indonesia, 124,789; and Vietnam 42, 098. Present room capacity in the Philippines is clearly inadequate for the more than 5 million foreign tourists and over 20 million domestic tourists expected in the next two to three years.  Furthermore, anyone who fears a glut in infrastructures in the Philippines must be talking about another country.  A bubble in the Philippine economy?  That exists only in the fertile imagination of some uninformed analysts.  For comments, my email address is