Analysis: Peso a turnkey in OFW money flow

by ISAGANI DE LA PAZ
OFW Journalism Consortium

IT’S a catch-22 of sorts for the Philippines as remittances from Filipinos abroad continue to strengthen the peso, threatening to dampen its flow.

The latter occurring, while expected by some financial executives, won’t help an economy already hurting from a drop in exports that continues to reel from a strong peso.

The peso flexed its muscles again on the first day of trading of a new year, reflecting a sustained strengthening against a weakening greenback.

The Philippine Dealing System showed on January 4 the peso closing at P45.95 to a US dollar from P46.2 in the last trading day of 2009.

Among many reasons offered for the uncanny strength of the peso, the steady flow of remittances is one.

Citing Bangko Sentral ng Pilipinas data, former Finance Secretary Roberto F. De Ocampo noted the “resilience” of remittances, hitting US$12.8 billion for the first nine months of last year and representing a growth rate of 4.2 percent cumulative year-on-year.

He added that the surge in remittances may be due to the spike in the need of families of overseas Filipinos after two typhoons hit the country hard during the last quarter.

“As households affected by typhoon Ondoy and Pepeng constitute a large share of remittances flowing into the country, a strong increase in remittance inflows for the fourth quarter is expected.”

De Ocampo said in a forum mid-December that remittances “act as an insurance to households affected by natural disasters”.

Sans citing sources, De Ocampo added that an average of 60 percent of household income lost through natural disasters is replaced by remittances.

“Revival of private spending should continue with the steady rise in remittances from overseas family members, and may even strengthen as those affected by the typhoons tap savings or borrow to fix and refurbish their homes.”

And with the holiday spending, the volume of cash sent by Filipinos abroad is expected to increase, economist Alvin Ang of the University of Santo Tomas told the OFW Journalism Consortium.

But while the Philippine government expects US$19-billion worth of remittances for the whole year of 2009, according to De Ocampo, Ang pegged remittances to hit only $17 billion.

Ang’s forecast is based on an annualized computation of remittances divided by month.

He also forecast in 2008 that a slowdown in remittance flow is in the offing, mainly due to the weakening US economy.

Face-off

PHILIPPINE Exporters Confederation Inc. (Philexport) president Sergio Luiz Ortiz Jr. said in a briefing the Monday before Christmas that a strong peso may break the remittance flow rally.

Exports form nearly 37 percent of the country’s gross domestic product; remittances at 10 percent, according to government statistics.

Ortiz said he expects overseas Filipino workers, or those working abroad on a temporary basis, to reject the peso going down to the P45-exchange rate level.

De Ocampo forecast a band of P45 to P47 versus the greenback this year.

Financial institutions like the World Bank has forecast a P47.3-to-a-dollar while there is a consensus that the peso will stay at the P46.6 level for the whole of 2010.

“OFWs would be the noisiest group if the peso continues its climb,” Ortiz said.

He noted that with an election year, politicians should very well address the strong-peso regime.

“It won’t be politically and economically-feasible to let it [peso] go down below P45.”

A strong peso, notably, is also anathema to exporters who, according to Ortiz, have seen a dramatic slash in revenue as the country’s major trading partner, the United States, went into recession in 2008.

But according to De Ocampo, the peso is the least of the reasons for the weak exports.

The former president of the Asian Institute of Management said the “projected slow increase in RP exports reflects the projected slow expansion in world trade volume” this year. It also mirrors the limited prospects for international market share gains.

These two elements also impact on remittance flow as, again according to De Ocampo, overseas demand for Filipino labor in traditional sectors like healthcare and other basic services is not projected to remain strong.

This “could result in lower demand in some sectors,” he noted citing seafarers in particular would be affected by the slow growth in world trade volume.

Trouble

SUCH scenario spells trouble for the economy as, according to de Ocampo, he sees “lower economic growth due to lower growth in personal consumption expenditure largely due to a slowdown in overseas remittances.”

“Though remittances have increased, it has done so in a much slower pace.”

“Likewise,” Small Business Corp. president Benel P. Lagua said in a separate forum, “there have been downward pressures on remittances.”

A strong peso is a source of this pressure.

Still, studies and data have shown that despite this, Filipinos still send money home.

Dilip Ratha of the World Bank explained that a weak greenback has “encouraged higher remittances to compensate for the loss of purchasing power vis-à-vis appreciating local currencies and rising costs of living in the origin countries.”

Also, with no let-up in overseas labor deployment, remittance volume has been increasing, further fueling the peso’s strength.

Lagua, hence, urged that “since remittances are more stable source of foreign currency than many other non-trade sources, Asian governments should ensure that they are able to maximize the labor flows.”

He added this can be done “by ensuring that the migration channel is kept open, enhance the safety and security of formal systems for fund transfers, and provide an environment that encourages households to invest more of the funds that they receive.”

“International remittances are very important sources of foreign exchange and funds for developing countries like the Philippines and many other Asian economies. The earnings and remittances of our migrant workers are considered important mechanisms for reducing poverty.”

But a slowdown amid a strengthening peso may still mean a long climb to development for the Philippines.

___
OFW Journalism Consortium