Remittance Driven Growth

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.


The Daily Roundup: 28 January 2011

Tetangco given second 6-year term as BSP governor | Inquirer
MANILA, Philippines—President Aquino has given Bangko Sentral ng Pilipinas Governor Amando Tetangco a new six-year term after the end of his current tenure in July, Presidential Spokesperson Edwin Lacierda said Thursday night.

Fed gives BSP room on rates | BusinessWorld

THE US FEDERAL RESERVE’S decision to maintain its policy rate at near zero supports the Bangko Sentral ng Pilipinas’ (BSP) current stance of keeping its own rates at a record low, the central bank chief yesterday said. “The Fed move relieves some pressure off the consensus that has been building up that the US economy is at a pace of recovery which may lead the Fed to change its policy stance, and the effect of such development on inflation expectations and portfolio rebalancing out of EMs (emerging markets),” BSP Governor Amando M. Tetangco, Jr. said in a text message yesterday.

US monetary authorities cautious on recovery | BusinessWorld

Inflation fears overblown | BusinessWorld

‘P50-M send-off gift for Reyes’

Colonel explodes bombshell in Senate | Inquirer

MANILA, Philippines—A retired lieutenant colonel on Thursday made a surprise appearance at the Senate and disclosed how he and his ex-bosses allegedly amassed wealth, with a large portion of the loot taken from soldiers’ salaries.

Angie: I’ve never been corrupt | Philippine Star

Massive corruption in AFP traced | Malaya

No need for Palace to draft new RH bill–Lagman | Inquirer
MANILA, Philippines—There is really no need for Malacañang to draft a new responsible parenthood bill for endorsement to Congress as a consolidated bill with identical provisions is now on third and final reading at the House of Representatives, according to Minority Leader Edcel Lagman.

Witnesses recall death fall from Makati building | ABS-CBN News

MAKATI CITY, Philippines – Images of human bodies bent and broken like ragdolls are haunting witnesses and emergency workers who were among the first to respond to a construction site accident in Makati City on Thursday.

Economic officials head for Japan to pitch projects | BusinessWorld

ECONOMIC OFFICIALS will leave for Japan on Sunday in a bid to drum up interest in six key sectors pushed by the Aquino administration as well as promote public-private partnership (PPP) projects, officials said yesterday. Trade Secretary Gregory L. Domingo said he will be joined by Finance Sec. Cesar V. Purisima, Energy Sec. Jose Rene D. Almendras and a Bangko Sentral ng Pilipinas (BSP) official, who BSP Investor Relations Office Executive Director Claro P. Fernandez identified as Deputy Governor Diwa C. Guinigundo, on a visit to Japan from Jan. 30-Feb. 2.

Economy expected to grow by 5.2% in ’11

Hike in key rates may take place in Q4 | Inquirer

MANILA, Philippines – The global economic crisis is pushing more people into poverty, and the picture is even more grim in developing countries like the Philippines, according to the Asian Development Bank.

UN agency sets new guide in fight against high food prices | BusinessWorld

ROME — The UN’s food agency published a guide on Wednesday for policy makers in developing countries to help address negative impacts of high food prices but said there was no one solution for all countries effected. The Rome-based Food and Agriculture Organization (FAO) warned countries to carefully reflect before launching into policy actions that may appear useful in the short term but could be harmful in the long term.”The experience of the 2007-2008 food crisis shows that in some cases hastily taken decision by governments to mitigate the impact of the crisis have actually…aggravated its impact on food security,” Richard China, head of FAO’s Policy division, said in a statement.

Aquino says Filipinos’ innate talent fuels nation’s progress | Manila Bulletin

MANILA, Philippines, Jan. 27 (PNA) — President Benigno S. Aquino III cited the innate talent among Filipinos, particularly their creativity which, he said, fuels the progress of the nation. In his keynote address during the 13th Cycle Philippine Quality Awards (PQA) Conferment Ceremony on Thursday at the Rizal Hall of Malacañan Palace, the Chief Executive noted the Filipino workers’ natural talents that make them exceptional among others in the world.

Aquino should take opportunity for Charter change — Marcos | Manila Bulletin

By MARIO B. CASAYURANJanuary 27, 2011, 7:00pmMANILA, Philippines — President Benigno S. Aquino III has all the chances of seeing the 1987 Constitution amended during his six-year term with the people believing he is not personally interested in any changes after stating he won’t run for office again, according to Senator Ferdinand R. Marcos Jr.

Bishops will fight HIV, but won’t endorse condoms | Malaya

ARCHBISHOP Angel Lagdameo, president of the Catholic Bishops Conference of the Philippines, yesterday said the Church has told the United Nations Program on HIV/AIDS (UNAIDS) that it would be lending a hand in the fight against the disease by focusing mainly on the social aspect of the problem.

Aquino government gets first rating upgrade from S&P

Aquino government gets first rating upgrade from S&P
By Iris C. Gonzales
The Philippine Star

MANILA, Philippines – Standard & Poor’s Rating Services raised the Philippines’ debt rating yesterday, marking the first rating upgrade for the Aquino administration, as the global credit watcher cited the country’s strong external liquidity, growth prospects and improving debt ratios.

The smooth presidential and national elections in May set the scene for improved political stability, S&P also said.

As such, the global debt watcher raised its foreign currency sovereign credit rating on the Philippines to BB from BB-. The outlook on the ratings is stable.

The one-notch rating upgrade brings the Philippines to two levels below investment grade, the same as Indonesia and Vietnam.

“We have upgraded the Philippines based on its steadily improving external liquidity profile and the underlying strengths of its external accounts, which increasingly mitigate the vulnerabilities posed by still high public and external debt, and provide buffer against adverse shifts in terms of trade or investor sentiment,” said S&P credit analyst Agost Benard.

The upgrade also reflects the progress achieved in debt reduction and the underlying fiscal consolidation, which brought public debt ratios in line with many of its ‘BB’ rated peers.

“Positive structural features of the current account and prudent exchange-rate management afford an enhanced ability to accumulate a reserve buffer, which has been an evolving credit strength for the Philippines. This and a manageable foreign debt amortization schedule combine for increasingly strong external liquidity, compared to similarly rated sovereigns,” Benard said.

He also said the stable outlook balances expectation that the structural strengths of the current account will continue to improve the external accounts, against the prevailing high public and external debt burden and ongoing fiscal weaknesses, which will take time to resolve.

At the same time, S&P said the narrow revenue base and high incidence of tax evasion have been the principal contributing factors to weak public finances.

This has resulted in still high public debt, and severely depressed public investment for an extended period, it said.

S&P said that the government has to improve its revenue measures for more long-term improvement.

It warned that it could lower the ratings if the government’s commitment to fiscal consolidation weakens, resulting in an upward debt trajectory or if the external liquidity position deteriorates.

At the same time, S&P said: “We could raise the ratings on evidence of sustainable structural revenue improvement, or further strengthening of the external balance sheet and reduced vulnerability to shocks.”

Economic managers welcomed the action on the country’s credit rating.

“The one notch upgrade is a testament to our economic and fiscal stability and more importantly to the new administration’s credibility and integrity. They recognize President Aquino’s resolve to reform long standing issues that have handicapped the Philippine economy in the past,” Finance Secretary Cesar Purisima said.

The Finance chief also expressed confidence that the government would meet its P325-billion deficit ceiling this year.

Budget Secretary Florencio Abad, for his part, said the government would continue with its fiscal discipline.

“We are optimistic of meeting our fiscal goals and aligning our fiscal performance with our rating peers out given our efforts to control government spending and use public resources in the most efficient manner,” Abad said.

Bangko Sentral Governor Amando Tetangco Jr., for his part, said: The BSP is committed to maintaining the soundness of our country’s financial system and further strengthening the external accounts while keeping to our mandate of price stability. Together with the other government agencies, the BSP will continue pursuing sound macroeconomic management and structural reforms that would create an environment that would support higher levels of economic growth.”

Peso closes at 2-year high of 43.88:$1

Peso closes at 2-year high of 43.88:$1
By Lawrence Agcaoili
The Philippine Star

MANILA, Philippines – The peso broke into the 43 to $1 territory yesterday, closing at a more than two-year high of 43.880 to $1 as the greenback remained under pressure after the US Federal Reserve decided to keep its benchmark interest rates at record lows but vowed to continue to supporting its fragile US economy.

The peso gained 12.50 centavos to close at 43.880 to $1 from Tuesday’s close of 44.005 to $1. The local currency opened stronger at 43.95 to $1 before closing at the day’s intraday high of 43.88 to the dollar.

This was its strongest level in 25 months or since it closed at 43.820 to $1 last Aug. 6, 2008.

Trade at the Philipping Dealing and Exchange Corp. remained brisk as $1.267 billion changed hands compared to $987.93 million last Tuesday.

Currency traders said in an interview that the US dollar fell sharply lower versus other currencies including the peso after the Federal Open Market Committee stated it was ready to provide stimuli for the US economy.

Traders said the US government printed more greenback in preparation for additional quantitative easing to address rising unemployment as well as falling prices.

The US Fed kept funds rate in the target range of zero to 0.25 percent “for an extended period” and maintained its policy of reinvesting principal payments from its securities holdings that it established in August.

The body said it would continue to ‘monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate’.

Another trader said the Bangko Sentral ng Pilipinas (BSP) intervened in the foreign exchange market to smoothen the movement of the peso against the US dollar.

The trader pointed out that the central bank shelled out as much as $400 million to intervene in the forex market yesterday.

Had the BSP not intervened, the trader said the peso could have strengthened further to 43.75 to $1.