SLOWING growth of remittances from Filipinos abroad is not likely to cause a significant dent in overall economic expansion, although it will make the peso “more vulnerable to sudden shifts in global risk appetite” through a widening current account deficit, Capital Economics said in a March 14 note.
“Remittances, which are money sent by overseas workers to their families back home, have been slowing over the past 15 years,” the economic research outfit said in its note, titled: “Philippines: is the slowdown in remittances a concern?,” noting that the dollar value of these inflows last year — at $28.943 billion — increased by 3.1% which was “the weakest pace since 2001.”
Capital Economics attributed slowing growth of these inflows to an improving Philippine economy “which has made it easier for people to find employment at home and reduced the need for them to go overseas in search of work” and an economic downturn in the Middle East, which is the source of a third of remittances to the Philippines.
“These factors are likely to continue to weigh on remittances,” Capital Economics said, adding that it expects the dollar value of these inflows to sustain a three-percent pace “over the next few years”, or half the average rate seen in the past decade.
With remittances equivalent to around a tenth of gross domestic product (GDP), weakening of these inflows is “likely to act as a drag on consumption and investment” which, in turn, are key drivers of Philippine economic expansion.
“However with fiscal and monetary policy set to be loosened this year, economic growth should remain fairly strong.”
Philippine GDP has so far grown by 6.45% in 2017 and 2018, the first two years of the administration of President Rodrigo R. Duterte. The government has a 6-7% growth target for this year that was a downgrade from an original 7-8%. In its meeting on Wednesday, the inter-agency Development Budget Coordination Committee also slashed GDP growth target next year to 6.5-7.5% — also from 7-8% previously — and maintained the 7-8% goal for 2021 and 2022, when Mr. Duterte ends his six-year term. Those targets compare to a 6.3% actual annual average in 2010-2016 under former president Benigno S.C. Aquino III.
“We are more worried about the implications of the slowdown for the balance of payments,” Capital Economics said, noting that the component current account “has gone from a surplus to a deficit over the past couple of years and is likely to widen further over the next couple of years”.
Weakening remittances, it noted, has added to a surge of capital goods and raw materials importation for the government’s stepped-up infrastructure drive in growing the current account deficit.
The current account, which measures fund flows from goods and services trading, posted a $6.47-billion deficit in the nine months to September last year. The central bank expects this level to have held until December at $6.4 billion, equivalent to 1.9% of GDP, amid a steadily rising import bill. As of its mid-December estimates, the BSP sees the current account gap growing further to $8.4 billion this year, equivalent to 2.3% of GDP, as it expects even more imports of raw materials and capital goods for the government’s infrastructure drive.
That, in turn, makes the peso “more vulnerable to sudden shifts in global risk appetite” — “a big worry” since the Philippines’ foreign currency-denominated debt is equivalent to around a fourth of GDP.
The peso on Thursday ended at P52.60 to the greenback, just 0.04% weaker than its end-2018 finish of P52.58.
The DBCC saw fit in its Wednesday review to maintain the peso-dollar exchange projection at P52.55 annually until 2022. — KANV