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Remittances and the Philippines' economy: the elephant in the room

Eric Le Borgne's picture

In the World Bank's latest semi-annual economic update for the East Asia and Pacific region, titled "Battling the Forces of Global Recession" and released today, we mentioned the Philippine economy's resilience, both in absolute and relative terms. The latter is easy to grasp in a few numbers: global growth is projected to turn negative in 2009, as will growth in a large number of countries in the region (for example, Malaysia and Thailand).

In absolute terms, while we project growth to decelerate from its 2007 peak of 7.2 percent to 1.9 percent this year (after a respectable 4.6 percent in 2008), the Philippines would still be far from a recession – contrary to what happened during the 1997 Asian crisis. Many reasons explain the country's resilience, including policy and regulatory reforms that responded to the lessons drawn from the Asian crisis. However, there is one key factor driving this resilience.

It is, you guessed it, remittances. The fairly stable 10 percent of GDP sent back home year-in and year-out for the past six years from overseas family members is key to the health of the Philippines economy. Not only does it boost private consumption (from the purchase of basic necessities to big ticket items such as cars and housing – private consumption accounts for over 75 percent of GDP), it also lifts foreign exchange reserves, the current account, and deposits in the banking system.

But as the wealthiest countries drag the world into a recession, and world unemployment is projected by the International Labor Office to potentially increase by 50 million, many Filipinos working overseas will also be affected. Some will loose their jobs, others will see their incomes reduced, net deployment overseas will decelerate (though still expected to remain positive), but all are adjusting to the risk that their income and jobs are less secure than they thought even a few months ago.

How will that impact remittances sent back home? Empirical research finds that, on the whole, remittances have been countercyclical in the Philippines. This time, as the downturn is truly global both in terms of geographic reach and scope of jobs affected, one of the strengths of the Filipino diaspora, namely its diversification in terms of geography and skills, will be less effective this time. Ongoing study from the World Bank's Manila office points to some potentially large downsides, though the confidence interval from our analysis is fairly large, as several empirical and theoretical channels are at play and the magnitude of the shock being experienced is fairly unique.

The latest data do point to a significant weakening of remittances as of the last quarter of 2008. In January, remittances posted zero annual growth in dollar terms. Looking into the details of the January numbers, we see that remittance from the all important USA (accounting for over half of total remittances to the country) were down by 25 percent compared to January 2008 (in dollars). Surging remittances from the Gulf managed to offset the decline from the U.S. Can growth from the Gulf continue at such a pace? To what extent is this surge masking the return of OFWs (bringing with them their total savings and severance packages)? As the Gulf-related surge is expected to slow down, and given global growth prospects in the rest of the world, we have revised our estimate downward for the dollar growth rate of remittances to the Philippines to minus 4 percent. In real Peso terms, given our expectation on exchange rate and inflation, the impact will be more muted. Nonetheless, this means that around 2 in every 10 families who are receiving remittances will be adversely affected, and the fight against poverty with it.

In Battling the Forces of Global Recession, the Philippines' overseas foreign workers are its front line soldiers.

Image credit: danielygo at Flickr under a Creative Commons license.

Comments

Submitted by El Joma on
dear eric, may i ask for your kind guidance in understanding two points? 1. when you say that above that "private consumption accounts for over 75 percent of GDP" how do you compute that? 2. how can it be said that the philippines' annual remittances worth us$18.6billion (estimate for 2008 by world bank: http://siteresources.worldbank.org/INTPROSPECTS/Resources/RemittancesData_March09-Release.xls) is calculated at 11.6% of the philippine gdp. i tried to verify this the following way: 1. i got the philippine gdp for 2008 (http://222.127.10.196/cgi-bin/st2.cgi?/eds/db/national/national/national_accounts_phil_a.sc) but found that it was in pesos: php1,432,088,000,000.00 2. i got the official average peso dollar exchange rate for 2008 (http://www.bsp.gov.ph/statistics/spei_new/tab25.htm): php44.4746:us$1. 3. when i divide php1,432,088,000,000.00 by 44.47 i get us$32,200,132,210.29. 4. when i divide the us$18.6billion with the us$32.2billion, i get 57.7%, not 11.6% now verifying even further: the world cia factbook (https://www.cia.gov/library/publications/the-world-factbook/geos/RP.html) places the philippine estimated 2008 GDP at us$320.6billion (based, it says, on purchasing power parity) or us$168.6billion (based on the official exchange rate). could you help me to understand how it can be said that the philippine remittances of 2008 is 11.6% of its gdp? thank you very much! el joma iloveapu.blogspot.com

Submitted by Unknownymous on
This is regarding my school paper: 1) How do you measure the development of the Philippines?! is it based on GNP or GDP? 2) How do you compute the percentage that the remittances contribute to the GDP or GNP (basis of development)? Thank you very much! :D Unknownymous

Submitted by Anonymous on
I am really really saddened that with bulk of money coming into the country through remittances nothing is mentioned about using part of the remittances for co-development projects...not even on the level of the local government. Somehow money will not be pouring in forever and surely there is no guarantee that filipinos will always find work abroad... especially with present global crisis. I am studying co-development and using remittances for local development. I have learned in countries with less in-flow of remittances,the gov´t both local and national are pushing projects to steer businesses for those poor sectors to have some sort of income. WHEN ARE WE GOING TO OPEN OUR EYES AND REALLY MIND THE POOR NOT BY DOLES OR REACH OUT PROGRAMS ALONE... LET US LIFT UP THE COUNTRY BY INVESTING IN IT THROUGH OUR REMITTANCES? WHAT CAN OUR GOV´T AND CONCERN CITIZENS DO ABOUT THIS?

Submitted by TruePinoy on
Culturally, Filipinos have unwritten laws to always look back to their families back home because we want to share to our family what we have experienced here even though we know that sometimes they are going beyond. Whether there is a recession or not, typical Filipinos would always remit a part of their income even if it means slashing our meal budget here abroad. Interesting but it's true. We are not sending money back home from our Disposable Income but really from a fraction of our take home pay. We can afford to experience the recession but we can't afford to see our families back home suffer since we know they suffer there more than us here abroad. I believe that this is a concept that your analysis greatly missed. As resilient race as we are, we will always find ways how to send money back home.

Submitted by Anonymous on
It is extremely selfish for family members to demand money be sent from abroad. The cost of living in the U.S., Europe and Australia is very high. Family that is abroad need their money to support themselves. Plus, what if they married a citizen of the country they migrated to? Most cultures don't demand money from abroad the way Philippinos do. This can add a lot of stress to a relationship. The family in the Philippines needs to read its bible and understand that once married, the family member abroad has a new responsibility to their new family. READ THE BIBLE. In the end, remittance provides a false economy for the Philippines. We need to develop the economy with infrastructure and development from within. Relying on money from abroad leaves us open for being bought by, for example, the Chinese. Think about it.

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