Remittance Trends

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Remittances, a crucial part of the domestic economy, saw a year-on-year rise in May. The news was welcomed by real estate developers, retailers and other consumer-driven sectors recently battered by high inflation, slow growth and higher input costs. However, a different set of figures threatens to dampen the mood of optimism.



The World Bank and some analysts, instead of focusing on the large increase in year-on-year terms, are concerned that the 3% drop in remittance growth from April to May this year could be a sign of trouble on the horizon. Economist Neil Ruiz of the World Bank argues that the global economic slowdown is starting to take effect, noting that "OFWs [overseas Filipino workers] are probably hurt more now."



Changes in remittance patterns are usually considered to have a delayed impact on the economy because they can lag several months behind actual economic shifts. Overseas workers are often able to absorb fluctuations in their disposable income by tapping into savings or cutting back on spending. Permanent or long-lasting changes, such as the recent increase in energy and food prices, eat into disposable income and leave less for workers to send home. Economists are concerned that May's remittance numbers reflect this change.



In the coming months, it will become clearer whether May's drop signals a lasting trend or a temporary blip. If the fears of belt-tightening prove accurate, the Philippine economy will surely feel the impact by the end of the year.



Remittances from OFWs have played an important part in the success of the Philippine economy over the past half-decade. Last year's remittances reached a record $17bn - contributing nearly 10% to the country's overall gross domestic product (GDP). Growth in remittances has averaged at nearly 50% from 2004 - 2007, outpacing that of GDP.



The rise in remittances has allowed Filipinos to spend beyond their means, funnelling money into nearly every sector of the economy. Retailers, manufacturers, tourism operators and other sectors all report that remittances have played an important part in boosting domestic demand. The real estate sector has especially benefited. Developers like Victor Manarang, chief executive officer of One Asia Development, argues that, "at least 30% of the industry's sales are supported or directly funded by remittances."



The good news for Manarang and others who depend on these inflows of cash, is that the demographics of the remittance business are shifting in their favour. The number of Filipino workers deployed overseas in the first five months of 2008 rose by 39.5% in year-on-year terms to 533,945. These individuals are increasingly looking at a wider pool of countries to work in.



Whereas the US and Europe accounted for the majority of Philippine remittances historically, greater numbers of workers are now heading to Asia and the Middle East. In 2006, inflows from Asian OFWs amounted to more than twice that of the US and Europe combined. Remittances from oil-rich countries in the Middle East reached $680m in 2006, compared to $220m from North and South America. This diversification in OFW destinations provides a natural hedge against regional economic slowdowns.



Another important change in recent years is the shift from low-skilled to medium and high-skilled workers. Whereas in the past Dubai and other gulf destinations imported maids, drivers and other manual laborers, they are now actively seeking nurses, construction workers, and other skilled tradesmen from the Philippines. These individuals have higher disposable incomes and are less vulnerable to economic downturns, making them ideal remitters.



Virginia Calvez, labour attaché at the United Arab Emirates' Philippine Embassy, recently stated that skilled and semi-skilled workers comprise 90% of the total Filipino workforce in the United Arab Emirates (UAE).
The World Bank does not dispute the importance of these demographic changes on future remittances. Along with the Philippine government, they believe that inflows of cash will grow this year, albeit at a slower pace. Their concern is that remittances will not be able offset the effects of slowing growth and increased inflation at home.



Sanket Mohapatra, an economist at the World Bank, noted that the 50% increase in remittances from 2004 to 2007 is actually close to 3% in real terms. She argues that the rising cost of food, energy and living have eroded the purchasing power of remittances. The 33% increase in the Peso-US dollar exchange rate has had a similar effect. "A large part of the increase has been simply to preserve the purchasing power of recipients," she told local press.



In the past, OWFs were able to cope with higher prices at home by reaching deeper into their wallets. Whether this can happen amidst global economic woes is the question facing millions of Filipinos and the Philippines economy as a whole.
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