By Bianca Cuaresma
For several years now, Filipino migrant workers help keep the economy afloat in crisis after crisis by sending home what they earn abroad, boosting the flow of foreign exchange, strengthening the country’s external position and injecting billions in liquidity that push consumption activities into overdrive.
In recent months, however, cash remittances from Filipino migrant workers have shown signs of slowing.
In the aftermath of the 2007-2008 global financial crisis, the volume of cash sent home by Filipino migrants steadied over five years at 6.9 percent, except for a downturn in 2009 following the global financial meltdown.
Towards the end of 2014, remittance growth alternately dipped and surged, at one time surprising markets with a 1.8 percent expansion in November that year. That was the slowest cash remittance growth since January 2009. Remittance growth averaged 5.9 percent in 2014.
2015, however, proved more problematic, with several months posting growth lower than 1 percent. Also in August that year, the volume of cash sent home by Filipino migrant workers contracted for the first time in 12 years by 0.6 percent.
For the first 11 months of 2015, remittances grew by 3.6 percent
The remittances growth path traced in 2015 generated apprehension in the $285 billion economy quite starkly reliant on remittances, particularly as other global economic worries started to pop up.
“The Philippines is heavily dependent on consumption. In fact we’re 70 percent driven by household spending. The purchasing power delivered by the $25 billion (in remittances) annually is an integral part of our economy and one of the major contributors to our recent string of growth. On top of the consumption angle, the remittances also provide a stable source of foreign currency, helping us build our store of reserves at the BSP [Bangko Sentral ng Pilipinas],” Bank of the Philippine Islands (BPI) research officer Nicholas Antonio Mapa told the BusinessMirror.
“In the past few years we’ve had our cake and ate it too. We have built our reserves, lowered our borrowing costs and pretty much saw just what a consumption economy on steroids could do: 7 percent growth,” he added. Latest data from the BSP show the country’s gross international reserves (GIR) hit $80.16 billion as of January this year no matter the steady depletion of the foreign currency reserves of other jurisdictions in the region for the period.
Manila’s GIR is enough to cover 10.2 months worth of imports of goods and payments of services and income. It is also equivalent to 5.5 times the country’s short-term external debt based on original maturity and four times based on residual maturity.
Remittances also account for 8.7 percent of the country’s local output measured as the gross domestic product (GDP) as of September 2015.
“A slowdown in remittances will inevitably have a direct effect on our growth engine as it provides fuel on two fronts. If remittances slowdown with no countervailing factors, our economic growth engine, if it does not evolve, will slow down,” Mapa said.
In earlier statements, Deputy Bangko Sentral ng Pilipinas governor for the monetary stability sector Diwa C. Guinigundo said the remittance sector has begun to mature and this helps explain its apparent deceleration in recent months.
“Overseas Filipino remittance growth is projected at four percent in 2016 and seen to taper in the medium to long term but should still be positive,” Guinigundo told the BusinessMirror.
Economist and Ateneo Eagle Watch senior fellow Alvin Ang corroborated the view the sector has reached optimum point. He told the BusinesMirror the remittances were to expand only 2.7 percent and plateau over the next two years.
Aside from having apparently hit optimum, the deceleration in remittances may not only be blamed solely on turbulence in the global economic stage and the prospect for its continued growth.
Government officials have cited technical constraints in reporting remittance data as one of several reasons for the slowdown.
Guinigundo blamed, for instance, the so-called de-risking of banks in certain jurisdictions as one important reason behind the slowdown.
Several foreign banks have adopted de-risking measures in which financial institutions avoid, cut contact, or even terminate the accounts of clients considered as high risks, including foreign nationals in their jurisdictions.
“The closure of bank accounts of some Philippine banks engaged in remittance services and money transfer companies, including their branches and agents, resulted mainly from the stricter regulatory measures enforced by various countries on the remittance business,” Guinigundo said.
“Some banks have closed their remittance services due to increasing regulatory compliance costs which made it challenging for them to support money transfer operations,” he quickly added.
In a recent report published in the BusinessMirror, an official of the Blas F. Ople Policy Center on Monday urged the Department of Foreign Affairs (DFA) to start discussions with 14 countries that threaten to stop the operations of remittance companies being used by Filipino workers owing to suspicions these were being used to launder money and fund terrorist activities.
Susan Ople said the center has tried calling the countries with large Filipino populations as the United States, Australia, New Zealand and United Kingdom.
She said aside from the four, other jurisdictions like Hong Kong, Singapore, Brunei Darussalam, Austria, Canada, France, Italy, Cyprus, Papua New Guinea and Saipan have similar plans.
Guinigndo corroborated this information, saying that since 2013, bank- or independently-owned or even stand-alone remittance or money transfer companies from the Philippines operating in various countries reported the unilateral closure of bank accounts maintained with foreign banks, effectively denying them access to critical financial services, including international fund transfers.
“Without these bank accounts, the operations of Philippine money transfer companies abroad are affected because these depository accounts play a critical role in transmitting funds abroad to local beneficiaries here,” Guinigundo said.
“It must be emphasized, though, that the closure of accounts is not confined to Philippine money transfer companies. Rather, it is implemented across the global sector, with the exception only of those which meet certain retention criteria set by the foreign or global banks,” he added.
Guinigundo said that as consequence of the disruption in the money transfer chain, three interrelated consequences were identified. These include the increase in the cost of remittances, the shift toward informal channels and financial exclusion.
The deputy governor said the position paper submitted by the Association of Bank Remittance Officers, Inc. (ABROI) and the Association of Private Remittance Service Companies (APPRISE) acknowledged that the closures can potentially double the remittance cost from 6.32 percent at present to 11.77 percent down the line.
“This will be a reversal of global efforts taken in the past years to bring remittance costs down to an average of 5 percent,” Guinigundo said.
As a result, overseas Filipinos should prove unwilling to give up patronizing the informal and unregulated remittance channels.
“On top of the monetary cost, the time and hassle of filing out forms and opening an account may have turned off overseas Filipinos who may have opted to return to more traditional ways of sending home their money: the sobre-padala system,” Mapa said.
“This move decreases the reliability, certainty and safety of remittances, which is recognized as a greater anti-money laundering/CFT risk and may increase the vulnerability of financial systems,” Guinigundo also said.
In turn, the shift to informal channels lessen the possibility of accessing a broader range of financial services from the formal financial services providers, resulting to so-called financial exlusion.
Also, in his recent economic bulletin, Department of Finance (DoF) Undersecretary and Chief Economist Gil Beltran bared certain limitations on capturing remittance data by source.
“Existing central bank database uses the location of the remitting bank as the proxy for the source of the remittance. This may be the best proxy at the moment considering that the remitter does not go far from his residence or to another country to remit his earnings. However, banks may transfer the funds to another country before remitting to the Philippines,” Beltran told the BusinessMirror.
“Since banks operate world-wide and can do the transfers online, it is very difficult to point the exact origin of all funds being remitted to the Philippines,” he added.
Mapa of BPI said once the BSP has resolved this weakness in reporting remittances data, economists like himself should be able to make a better assessment of the situation.
For this year, the Development Budget Coordination Committee (DBCC) has projected the remittances to grow by only 4 percent, unchanged from an earlier revision.
The 2015 remittance growth forecast was revised lower due to low actual outcome.
The slower growth in 2015 has not yet factored the impact of falling oil prices in the international market that has roiled the Middle East which hosts one of the largest populations of OFWs anywhere on the planet.
The continued decline in oil price has left government officials and economists worried and apprehensive on future remittance flows.
Only recently, Labor and Employment Secretary Rosalinda Baldoz acknowledged the possible displacement of Filipinos working in the region once oil companies lay off employees as crude oil price falls.
“The threat mentioned by Secretary Baldoz is real and a decision to retrench these workers, to be replaced by citizens of those nations, will threaten the flow of remittances. If the overseas Filipino is unable to find a way to keep a job in these countries or are forcibly sent home to the Philippines, we may face a slowdown in the flow of foreign exchange and hard times for their families,” BPI’s Mapa said.
Data from the central bank show remittances from the Middle East total $5.243 billion in the first eleven months last year, about a fourth or 23 percent of aggregate remittances of $22.83 billion.
As of end-November that year, remittances from the Middle East grew by 9.6 percent from 2014 level.
Remittances from Asia grew by 9.57 percent during the period while such flows from the Americas grew by 0.55 percent. Remittances from Europe, meanwhile, contracted by 3.38 percent during the period.
But no matter the slowdown, government officials remain positive foreign currency inflows should persist at roughly current levels as other sectors continue to grow rapidly, such as the country’s business process outsourcing (BPO) sector. “The BPO sector is poised to take over as the biggest source of foreign exchange. It has been growing by 19.7 percent annually for the last ten years (2005 to 2015) and the BPO industry foresees continuation of double-digit growth during the next two years (18.5 percent growth) to reach $25 billion by 2017,” Beltran said.
Tourism receipts were likewise seen helping boost continued inflows should the money sent home by overseas Filipinos continue to slow in the years ahead.
“As both industries grow, the other sectors of the economy likewise attract more investments in the country. Aside from the more popular and established IT-BPM centers of excellence such as Metro Manila, Metro Cebu, Metro Clark and Metro Bacolod, the industry also has what they call the Next Wave Cities™ (NWCs) which are rich sources of untapped IT-BPM talents and present attractive investment options,” Guinigundo said.
“More local destinations such as Cebu, Kalibo and Davao had become more accessible to international flights, resulting in higher visitor traffic. Likewise, the country’s capacity to accommodate tourists had expanded, not only in Metro Manila but also in other key destinations,” he added.
Beltran, for his part, also said the country’s manufacturing sector could lend a helping hand over the next few years.
“Manufacturing resurgence is also competing to bring in more foreign exchange. Many FDIs moving from China are benefiting the Philippines because they see the robust domestic market as a springboard to their export activities,” he said.
BPI’s Mapa, however, said receipts from the BPO industry may not prove effective substitutes for remittance flows to the country.
“Despite its strong growth in the recent past, BPOs can generate foreign exchange liquidity at a slower pace compared to overseas Filipino deployment. The BPO does make its money in foreign currency but must repatriate a substantial portion of these earnings as well as opposed to OFs who send a large portion of their salaries home,” Mapa said. Should OFWs decide to go home due to unfavorable environment in their working stations, private economists warn the economy may not be able to absorb them quickly and efficiently into the system.
“I do not think the Philippines can successfully absorb all returning OFs in the exact field that they have left in their previous work places. Energy related workers will not find work here although perhaps construction workers will find opportunities as private and public outlays continue to grow onshore. As for the services sector, I think we’re currently brimming with workers in the services sector (nurses and doctors come to mind) and finding a place back in the Philippines may be a tough call or it may be at the expense of currently employed Filipinos,” Mapa said.
“If there will indeed be a mass migration of labor back home, the Philippines will be hard pressed to absorb them. For years we’ve been complacent while Tita Remy sent home money, without addressing glaring deficiencies in infrastructure and institutions. Our manufacturing and agricultural sectors are in an identity flux and any workers returning from abroad who belong to these sectors may find it difficult to find jobs, sadly, in their home country,” he added.
Government officials, meanwhile, said they have adopted reform measures to boost the employment capacity of the economy.
“Institutional and governance reforms in the country are positively recognized by independent third-party assessors as shown by the country’s elevation to investment grade territory,” Guinigundo explained.
“The Philippine Overseas Employment Administration (POEA) has reported that local jobs in construction, transport, logistics, as well as tourism and other service-related occupations are available for returning semi- and low-skilled OFWs. Likewise, there are 78,000 available jobs for professionals and skilled workers who may choose to come home,” he added.
DOF’s Beltran also said the government has programs helping OFWs return to the Philippines to start their own entrepreneurial activities. With the assistance of the Technical Education and Skills Development Authority or TESDA, the agency conducts training programs for entrepreneurial and livelihood skills for interested OFWs.
“The BSP is also conducting financial literacy courses to assist OFWs on financial investments that could help generate sustainable income for OFWs using their savings,” Beltran said.
Economist and Ateneo Eagle Watch senior fellow Ang said that what is critical for government is to identify jobs that are most at risk in emerging conflict areas and the slowdown in the global economy.
Ang also said what the government should do is create job opportunities that match those of returning OFWs.
Guinigundo also said to sustain the country’s growth outlook as the remittances inevitably slow down over the medium to long term, there is a need for continuity of good governance to support the current reform agenda well into the next administration. Pursuing the pending PPP [public-private partnership] projects should also help secure continued economic expansion.
“I sincerely hope that incoming leaders will use the opportunity that our OFWs have loaned to them to build a nation worthy of coming home to and afford them a decision to work in our homeland on better terms,” BPI’s Mapa said.
Image credits: NONOY LACZA