Could the Philippines remittance bonanza be about to hit a wall? Most of the success as the Arroyo government has achieved in terms of economic growth can be attributed to the remarkable rise in overseas remittances over the past five years. Now totaling about $15 billion a year they have underpinned successive years of consumer-driven growth even while investment has remained weak. By strengthening the peso they have contributed hugely to lowering the cost of servicing government foreign debt and held down inflation.
This growth, however, has a strongly cyclical element that may be about to go into reverse. The remittance boom is partly a product of a period of very rapid global growth that increased both demand for Filipino migrant labor and the earnings of the huge Filipino community in the US, the largest single source of remittances. This is now ending.
But two other factors must be taken into account. First, the rise in the peso spurred by remittances has itself increased their value by raising confidence in the currency and hence the willingness of overseas Filipinos to remit their earnings and savings. Secondly, the higher the peso, the more dollars had to be remitted to meet the school, food and other peso bills of families back in the Philippines.
Perhaps dollar weakness still has a way to run against the peso along with other Asian currencies. Remittances should also continue to increase from the oil-rich states of the Gulf, the second largest source. Meanwhile, East Asian demand for Filipino labor also remains high.
The cloud is the US. Worker remittances from the US to Mexico were already down 6 percent in January, the biggest drop in 13 years – and that was before the US recession really began to take hold. Of course, Mexicans and Filipinos are in different situations and do different kinds of jobs. The Mexicans, often illegal immigrants, are at the bottom of the income scale. Many are in the construction industry, which has been hard hit by the collapse of the housing bubble. Many Filipinos, by contrast, are professionals – nurses, doctors and others.
That said, the trend is clear and at some point it is likely to impinge on all remittance sources to varying degrees. High and rising energy and food import costs are also likely to erode a Philippine current account which has been in a healthy surplus for an almost unprecedented time. Looking ahead, the issue will be whether remittances will stagnate because of the US (and probably very slow growth in Europe), resulting in a weaker peso and the unwinding of a cycle that has taken the usually sickly peso from 56 to 40 against the dollar over the past three years, the fastest rise of any Asian currency.
Many would argue that the strong peso has been damaging the wider economy, encouraging imports, reducing the peso value of remittances, deterring investment in industry and agriculture, helping rentiers at the expense of productive capitalists. But to politicians, not least Arroyo, it is a virility symbol.
The nation has become so dependent on the seemingly endless increase in inflows which created the strong peso that any major reversal or even slowdown will be shock to the system. Don’t be surprised if the peso is back at 56 before the decade is out.