Monthly remittances inflows (US$ millions)
Source: World Bank

If anyone needed an explanation for the robust growth of the Philippine economy for the last nine years (two of which under the present dispensation), then the chart above would go a long way towards providing it. It shows monthly foreign remittances flowing from January 2003 to February 2012 into the country compared to that of some Latin American, Caribbean and South Asian countries of similar size or income to the Philippines.

In terms of its foreign remittances, the country is an absolute stand-out rising from about $600 million a month in early 2003 to about $1,500 million in early 2012. In the twelve months leading up to February 2012, the total inflows to the country was about $20.2 billion. If we convert that to pesos using the average exchange rate in 2011, that is roughly equivalent to PhP875 billion. In an economy of roughly PhP9.5 Trillion, that is about 9.2% of GDP. Given the multiplier effect that this income has, it would be safe to say that remittances contribute about double or about a fifth of the economy.

Unlike, Mexico which is dependent on its Northern neighbour the United States for providing a market for their cheap labour, the Philippine work force has its eggs in many baskets, not only in different countries, but many occupations, both high- and low-skilled. This is reflected in the data which shows that as the Great Recession unfolded in the US from September 2008, the growth in remittances to Mexico hit a ceiling, while that of the Philippines maintained its upward trajectory catching up with its North American counterpart towards the end of 2011.

As of October 2012, the nation’s gross international reserves reached a record high of $82 billion, 8% higher than it was a year ago at $75 billion. This would be enough to pay for close to a year’s worth of imports or settle half a year’s worth of debt resettlements. One can clearly see that without these foreign remittances, the gross international reserve position would be shrinking, not expanding.  In fact, if you took away the growth in remittances which was 7.1% year-on-year from 2010 to 2011, then you probably wouldn’t have seen any growth in the Philippine economy during that time.

These dollar remittances inflows are roughly the size of the Philippine government’s tax and revenue intake for a year. They could finance the government’s annual deficit three times over. The recent upgrade to the country’s credit status to one notch below investment grade owes more to this phenomenon than to the government’s “fiscal consolidation” and “debt management program”.

In its recent report for the third quarter, the global investment monitor Thomas White has said

The Philippine economy is in a sweet spot mainly due to the high infrastructure spending the country has unleashed. Adding to this, strong remittance income from oversees Philippine workers, a fast-growing domestic services sector, and increasing confidence from foreign investors bolstered to the country’s buoyant economic outlook.

If you averaged out the growth for the last four quarters, you would find that it would be  4.85% , the same as its average growth for the last ten years. The confidence of foreign portfolio investors in the local stock market comes largely from the country’s ability to keep the economy chugging along as events from Europe have dampened the outlook for other countries. This was admitted to by a senior official of investment bank Goldman Sachs in a recent visit to Manila. The White report continues by saying

With the country’s government awarding $16 billion worth of contracts to build social infrastructure that included constructing thousands of classrooms, the outlook for the infrastructure industry has grown rosy. The construction sector posted a growth of 10% during the quarter up from the 7.6% registered during the first quarter. As public spending rose, employment outlook also improved during the quarter, boosting consumer demand. Household consumption jumped 1.4% during the quarter, up from the 0.9% during the first quarter.

Notice that they say it was the “outlook” on employment from the “infrastructure outlook” that boosted consumer demand. That is either a lot of faith placed on the outlook or it was a result of hard cash pouring in from Filipinos living and working overseas (UPDATE: note that the construction boom is happening because the property and realty sector is benefiting from remittances, and this has actually gotten some analysts worried about a possible housing bubble). The report concludes by saying

…Meanwhile, despite maintaining a record low interest rate of 3.75%, inflation in the country fell to a low of 3.6% in September from 3.8% in August. The central bank has targeted an inflation of 3% to 5% for 2013.

The BSP has in fact cut interest rates recently to temper the appreciation of the peso that has been hurting the competitiveness of our export industries. The situation has been described as reaching a breaking point by industry insiders. The power of the peso relative to the US dollar is what is behind the low inflation figures as imports become cheaper. The so-called “sweet spot” of high growth, better employment and low inflation can actually be explained by the continued growth of remittances rather than any privately-financed stimulus that has yet to be spent.