Last week I sat in a panel on a seminar organized by the Japan Center for Economic Research (JCER) on Asian economies in the midst of the new global environment. Together with research economists from Japan, India, Indonesia and Thailand, we tackled how the Trump Effect and the rise of new nationalism will affect Asia and our individual economies. We have concluded that these new headwinds will not stop Asia, particularly Southeast Asia, to be one of the growth centers of the world. Not because Southeast Asia is better, but because the rest of the world will remain sluggish due to slow global trade. Hence, the America First policy will most likely weaken further world trade. A weaker world trade, in turn, could further slow the economy in China.
Slower world trade will significantly affect economies that are part of the supply chain to China. While the Philippines is part of this supply chain, our exposure is relatively smaller compared to our Asean neighbors. Export of goods has become less significant in the Philippine economy, growing only by 40 percent in 15 years, as against the 150-percent growth of Indonesia and the 400-percent growth of Vietnam in the same period. In a way, since the country is relatively detached to the global trade, this will be a plus factor in another downturn.
The exports of goods-led path taken by our neighbors was not the path we took. Instead, our focus went to service exports and the sustained growth of remittances. In a much shorter period of 10 years, the business-process outsourcing (BPO) revenues grew by about 150 percent, ending 2016 at about $22 billion. Overseas Filipino workers’ remittances, on the other hand, still posted growth of 5 percent in the last three years, contributing $28 billion to the economy. Finally, tourism revenues have started to contribute significantly. We estimate its contribution to be about $5 billion from about 6 million international tourists who visited the country last year. All told, these foreign-exchange sources have strengthened our foreign-exchange reserves position.
The table shows the country’s relative strength. The contribution of remittances, BPO revenues and tourism receipts helped maintain gross international reserves (GRIs) at about $80 billion, which is equivalent to about one year of imports. Although our GIR is the lowest among the Asean 5, it is able to cover more months of imports. The rule of thumb says once the cover falls below three months, a devaluation is possible as what happened during the Asian financial crisis in 1998. The same foreign-exchange inflows have allowed us to continue to have positive current-account position, allowing us to pay our imports and have extra foreign exchange added to our reserves. In terms of external debt, the Philippines actually has now the smallest foreign debt among the Asean—a reversal from the 1980s and the 1990s. In terms of percentage to the GDP, this is also the lowest.
All told, these data show the Philippines is relatively in a better position to face external challenges in the short term. This position is much better than our conditions during the 1997 crisis and during the 2008 global financial crisis. Needless to say, this position does not assure us of being able to escape any crisis without any challenge. For instance, the threat of America First is causing concerns on the sustainability of BPOs staying in the Philippines. Considering its low sunk costs, it may actually be the easiest to move back into the United States. However, such analysis is incomplete, because BPOs have moved out of the US, basically because these jobs are no longer preferred and they are more expensive to retain. Hence, it is unlikely they will shift back to the US. Nonetheless, the possibility of it happening is still not remote.
As of this writing, the peso actually has breached the psychological P50-to-$1 barrier, depreciating by about 5 percent in a year. Compared to the peer economies, only Malaysia and the Philippines depreciated in the same period. Thailand, Indonesia and Singapore actually appreciated. What we are seeing is that there is significant movement in the currency beyond the fundamentals. It is likely combination of various internal and external factors are affecting it. What may be critical to consider is not to be fixed in this short-term movement but to look at how the government is building up further strength in the coming months, such as those that will improve tourism and attract specialized BPOs.