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.