Filipinos abroad keep country growing
Published: 27 April 2011
Remittances form key economic factor
Consistent high levels of remittances from its large work force abroad and steady domestic consumption helped the Philippines economy through the recent global financial turmoil – and look likely to continue doing so, according to HSBC Economist Sherman Chan.
She also believes the Japanese earthquakes will have a limited effect on the Philippines' remittances and will instead increase demand for Overseas Filipino Workers later in the year as rebuilding begins.
"One key supporting factor for the Philippine economy is remittances, which have been growing at a healthy pace in recent years and make up about 10 per cent of the country's GDP," Ms Chan said.
"This, along with the timely increase in government expenditure, helped the Philippines to grow at 1.1 per cent in 2009, when many neighbouring countries contracted. GDP growth was 7.3 per cent in 2010 but this was partly because of the low 2009 base and, due to the same reason, GDP growth for 2011 is set to moderate.
"Nevertheless, growth momentum is still strong in the Philippines. On a sequential basis, the economy did rebound strongly in 4Q 2010 after a mild contraction in the previous quarter.
"The Philippines is expected to remain on a solid footing through 2011, thanks largely to healthy remittances, which help to fuel private consumption."
The Philippine government's most recent estimate (Commission on Filipinos Overseas, December 2008) is that there are 3.9 million permanent and 3.8 million temporary Overseas Filipino Workers (OFWs). A further 653,000 'irregular' workers give a total of 8.35 million OFWs, or about nine per cent of the country's total 91.9 million people (World Bank 2009 estimate).
Remittance growth stabilising
"Remittances are important," Ms Chan said. "Each Overseas Filipino Worker is sending more and more money home. Per person, we see an increase from USD820 in 2000 to over USD2,000 a year now.
"The overall increase in remittances is therefore not only driven by an increase in the number of workers heading overseas but also because they are sending more money home. In recent years, we see more skilled workers heading overseas, in healthcare for example, and they earn more money than the non-skilled."
Ms Chan said 30 per cent of OFWs worked in the Middle East, which might create concern over remittances, but she felt that the impact would be limited. "This is partly because the countries experiencing issues right now – such as Libya, Bahrain, Yemen, and Syria – are not actually major employers," she said.
"The key ones are Saudi Arabia, with 13 per cent, and the UAE, seven per cent, and so far these two markets are looking reasonably stable. In fact, Saudi Arabia recently announced a fiscal package that bodes well for the Philippines' remittance outlook. They are increasing spending on housing and healthcare and that will boost demand for Overseas Filipino Workers."
Healthy remittances will help to fuel consumption growth and also keep the current account positive this year
Meanwhile, reconstruction in Japan later in the year was also likely to boost demand for OFWs, she said: "In Japan, we expect a similar story because of reconstruction which means there should be higher demand for Overseas Filipino Workers as well, from construction workers to medical professionals who will be able to help with the aftermath of the recent disasters.
"And don't forget that the West is gradually recovering, and demand within Asia is still pretty strong. Healthy remittances will help to fuel consumption growth and also keep the current account positive this year."
Ms Chan said it was difficult to overstate the importance of remittances to the Philippine economy. They had helped to sustain household spending power regardless of local employment conditions.
Persistent remittance flows had wiped out the country's chronic current account deficit – despite a stubborn trade deficit. This had stabilised the international value of the peso, even in times of global financial turbulence, allowing the central bank to pursue a structural reduction of interest rates.
Strong remittances keep current account balance positive
The US – with a total of about 2.8 million OFWs – has been the dominant source of remittances according to official data, meaning that the economic health of the USA is important to the Philippine remittance outlook. However, the true picture may have been somewhat distorted, as many remittance centres are linked to American banks, with official statistics therefore recording payments originating in the USA even if in reality the money was earned elsewhere.
Ms Chan said the Japanese earthquakes also had implications for Philippine remittances. There would be an initial drag as economic activity in Japan's capital city had been significantly disrupted.
Fiscal consolidation on track
"The overall impact is expected to be minor, as less than three per cent of OFWs are in Japan, and less than five per cent of total remittances come from there," she said. "Demand for OFWs is likely to rise when reconstruction begins later in the year.
"Moreover, most OFWs in Japan are employed in the healthcare sector, where demand will likely rise because of the rapidly ageing local population. Current disruption aside, the outlook for remittances from Japan is not a huge concern.
"We still expect an annual remittance growth rise of 8.5 per cent compared to 8.2 per cent last year, which will continue to support household consumption and subsequently GDP growth. It will also provide much-needed support to the current account by helping to offset the trade deficit."
Ms Chan said the new Philippines government had been consolidating finances since last year's elections, and public-private partnerships (PPPs) were gathering steam.
"We expect a pick up in investment later in the year," she said. "GDP growth is forecast to come in at 5.4 per cent for 2011 and accelerate to 5.9 per cent in 2012 when infrastructure projects under the PPPs are in full swing."
Sherman Chan
Sherman Chan is a Hong Kong-based economist covering Vietnam and the Philippines. Before joining HSBC, she lectured for undergraduate and MBA university programmes in Australia.
Ms Chan also worked as an economist at Moody's Analytics in Sydney and as an analyst at the Australian Prudential Regulation Authority, where she specialised in banking and superannuation supervision. She holds a Bachelor of Commerce with honours in Economics from the University of New South Wales.
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