Remittance decline seen weakening consumer spending, demand — Diokno

THE DECLINE in cash remittances due to the coronavirus pandemic will translate to lower consumer spending as well as demand, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

“The impact of lower overseas Filipino remittances on inflation is via lower consumer spending hence less aggregate demand,” he said in a text message.

Consumption accounts for 70% of the economy, which posted a record 16.5% gross domestic product contraction in the second quarter.

Mr. Diokno said  the pandemic is “unprecedented” because remittances would increase in the past regardless of crisis. He described it as “invariant to world economic performance.”

The peso’s strengthening past the P48 per dollar level is expected to encourage overseas workers to send money to take advantage of the favorable exchange rate.

“That said, the impact of peso appreciation on inflation is tilted on the downside,” he said.

The peso ended trading at P48.485 to the dollar on Friday, gaining P14.50 centavos. Its Friday close was also its strongest in more than three years.

Inflation in July was 2.7%, against 2.5% June result and the 2.4% year-earlier level. It remained within the 2-4% target by the BSP.

A BusinessWorld poll of 16 economists yielded a median estimate of 2.8% for August inflation, which would be significantly higher than the year-earlier 1.7%. The official August data will be reported by the Philippine Statistics Authority on Sept. 4.

Economists studying the link between remittances and inflation have concluded that overseas Filipio workers (OFWs) tend to send more to their relatives back home when prices are rising.

“We surmise that increases in inflation in remittance-recipient economies motivate migrant workers to send more remittances to their families, by virtue of altruism, to smooth their family’s consumption, provide additional funds to maintain their consumption as well as their standard of living,” John Paolo R. Rivera, an economist from the Asian Institute of Management and Tereso S. Tullao, Jr., an economist from the De La Salle University said in their paper, “Investigating the link between remittances and inflation: evidence from the Philippines.”

The authors said their research showed that remittances reacted “instantaneously but at a lethargic pace.” They noted that the impact of rising inflation on remittances tapered off after six months.

“An increase in inflation… will immediately increase remittances, which we attribute to the altruistic motive of sending remittances so that recipient households can maintain their consumption levels despite the reduction in purchasing power due to inflation,” they said.

The authors argued against previous studies which showed remittances induced inflation in developing countries by fueling domestic consumption and creating short-run demand pressures.

“We did not find empirical evidence that remittances directly cause inflation in the Philippines. Results from the Philippine case present conclusions dissimilar from other economies,” they said.

The Philippines is the fourth largest recipient of cash remittances in 2019, behind only India, China, and Mexico, according to World Bank data.

More than 153,000 OFWs have been repatriated as of Aug. 29 due to the crisis, the Department of Foreign Affairs said. — Luz Wendy T. Noble