OFW Remittances: Boon or Bane?

Last year, millions of Overseas Foreign Workers (OFWs) remitted a record USD $20.12 billion back to the Philippines. This represents a growth of 7.2% over and above the $18.76 billion in remittances posted in 2010. See: http://business.inquirer.net/44773/ofw-remittances-hit-record-20b. OFW Remittances have been posting historical highs every year since 1998. According to data culled from the World Bank, Worker Remittances (including other compensation) has been growing at a compounded annual growth rate of 12.50% a year, from $ 0.63 billion in 1980 to $21.42 billion in 2010.

Economic Dependence

However, the Philippines does not hold the top record as the top recipient of OFW remittances.  That distinction belongs to India, China, and Mexico.  However, their economies are not as dependent on Worker Remittances.  Among the top recipients of Worker Remittances, the Philippines (10.73%) is second only to Bangladesh (10.81%) in terms of Worker Remittances as a percentage of GDP.  On a global basis, Worker Remittances account for only 0.74% of Global GDP.

Worker Remittances
Top Countries
By Country
Year 2010
	Worker Remittances	GDP	Remittances/GDP
Country	(In USD$)	(In Current USD$)	(In %)
India	54,034,710,940	1,727,111,096,363	3.13%
China	51,300,000,000	5,926,612,009,750	0.87%
Mexico	22,047,560,550	1,034,804,491,265	2.13%
Philippines	21,423,000,000	199,589,447,424	10.73%
France	15,629,349,610	2,560,002,000,000	0.61%
Germany	11,337,656,250	3,280,529,801,325	0.35%
Bangladesh	10,851,938,480	100,357,022,444	10.81%
Spain	10,506,896,480	1,407,405,298,013	0.75%
Belgium	10,178,155,270	469,374,172,185	2.17%
Nigeria	10,045,019,530	193,668,738,107	5.19%
Pakistan	9,690,000,000	176,869,569,654	5.48%
World	444,754,231,538	60,449,498,549,137	0.74%
Source: www.worldbank.org

The country is also not the nation most dependent on Worker Remittances as a percentage of GDP.  Again, that distinction belongs to other  much smaller nations with much smaller economies.  However, among countries with a GDP greater than USD $100 billion, the Philippines is second only to Bangladesh.

OFW Remittances
By Country
As a % of GDP
Country	2010
Tajikistan	39.97%
Lesotho	34.98%
Kyrgyz Republic	27.63%
Samoa	25.01%
Tonga	24.27%
Moldova	23.58%
Haiti	22.34%
Honduras	17.20%
Kosovo	16.78%
El Salvador	16.26%
Gambia, The	14.35%
Jamaica	14.11%
Guyana	13.86%
Jordan	13.20%
Lebanon	13.11%
Nicaragua	12.56%
Bosnia and Herzegovina	11.49%
Bangladesh	10.81%
Philippines	10.73%
Armenia	10.63%
Source: www.worldbank.org

Within the ASEAN, the Philippines is number one in terms of the absolute value Worker Remittances received and as a percentage of its GDP.  The Philippines received over half the Worker Remittances received in the ASEAN.  In terms of economic dependence, only Vietnam's economic dependence on Worker Remittances is close to ours (Vietnam 7.52% vs. Philippines 10.73%). 

Worker Remittances
ASEAN
Year 2010
	Worker Remittances	GDP	Remittances/GDP
Country	(In USD$)	(In Current USD$)	(In %)
Cambodia	369,458,008	11,242,266,334	3.29%
Indonesia	6,916,051,270	706,558,240,892	0.98%
Lao PDR	40,854,836	7,296,361,374	0.56%
Malaysia	1,300,503,174	237,796,914,597	0.55%
Myanmar	132,994,507	NA	NA
Philippines	21,423,000,000	199,589,447,424	10.73%
Singapore	NA	208,765,019,308	NA
Thailand	1,763,508,789	318,522,264,429	0.55%
Vietnam	8,000,000,000	106,426,845,157	7.52%
Total ASEAN	39,946,370,584	1,796,197,359,515	2.22%

Our economic dependence on Worker Remittances has grown over time, ranging from only 1.93% of GDP in 1980, to a high of 13.16% of GDP in 2005.  As of 2010, that ratio stands at 10.73%.

Labor Release Valve

The Philippines has consistently deployed a significant chunk of its population as Overseas Foreign Workers.  As much as 10% of the whole Philippine population is employed overseas.

This has acted as a release valve for the ever growing Philippine labor force.  Without OFW jobs, the unemployment rate would be more than triple the official unemployment rate of 7.50% as of 2009.

Transformation into a Service Economy

OFW Remittances has also powered the Philippine economy's transformation into a Service Economy as well as an increase in the national Gross Savings Rate.  But it has not led to an increase in investment (as measured by Gross Capital Formation as a percentage of GDP).

Instead, we consistently lag behind our ASEAN neighbors in terms of Gross Capital Formation as a percentage of GDP, indicating that we are not laying a stronger foundation for future economic growth.

We also consistently lag behind our ASEAN neighbors in terms of Net Foreign Direct Investment as a percentage of GDP, indicating that we are not attracting enough Foreign Investment.

Geographic Origin of Remittances

The bulk of OFW Remittances have consistently come from four main world regions: Americas, Europe, Middle East, and Asia.  

OFW Remittances
By Region of Origin
In USD $K
2003 to 2011
Country	2003	2004	2005	2006	2007	2008	2009	2010	2011	CAGR
Americas	4,370,705	5,023,803	6,605,231	7,198,212	8,244,344	9,213,372	9,307,781	9,987,628	10,656,862	11.79%
Europe	1,040,562	1,286,130	1,433,933	2,061,067	2,351,704	2,658,726	3,061,625	3,180,474	3,348,118	15.73%
Middle East	1,166,376	1,232,069	1,417,491	1,909,208	2,172,417	2,502,639	2,665,031	2,964,341	3,215,819	13.52%
Asia	894,310	918,329	1,172,373	1,496,120	1,543,173	1,883,996	2,078,241	2,363,001	2,568,567	14.10%
Oceania	44,470	42,600	54,573	85,610	121,417	149,423	212,983	236,358	297,378	26.81%
Africa	11,371	3,439	4,517	10,272	16,027	17,746	22,282	31,187	30,248	13.01%
World Total	7,527,794	8,506,370	10,688,118	12,760,489	14,449,082	16,425,902	17,347,943	18,762,989	20,116,992	13.07%
Source: www.bsp.gov.ph

In 2011, over half of the remittances came from the Americas, almost 17% comes from Europe, 16% from the Middle East, and 13% from Asia.  Oceania and Africa count for less than 2% of all OFW Remittances to the Philippines.

In 2011, the United States is the source of  USD $8.48 billion in OFW Remittances, followed by Canada (USD $2.07 billion), and Saudi Arabia (USD $1.61 billion).  United Kingdom and Japan provided close to USD $1.0 billion in OFW Remittances as well.

Economic Exposure

As a consequence of this, the Philippine Economy is significantly and directly exposed to the economies of those countries.

As it stands right now, the economies of both the USA and the European Union (EU), which together comprise around 50% of the global economy, are forecast to have very slow or non-existent growth for 2012.  The EU, in particular, is forecast to have zero growth in 2012.

Within the European Union, the area known as the Eurozone, otherwise known as the 17 EU countries that adopted the Euro as their national currency, looks set to head back into recession.  It is expected to post a negative GDP growth of -0.3% for 2012, dragging the rest of EU into a zero growth scenario for 2012.

The reason for this impending recession is the strong possibility of sovereign defaults of the peripheral countries of the Eurozone, collectively known as the "PIGS" - namely Portugal, Ireland, Greece, and Spain (usually known as the "PIIGS" which includes Iceland, a non-Eurozone country that has already defaulted).  Italy, another country with slow anemic growth, an aging population, sovereign debt, and spiking yields on sovereign debt, can take the place of Iceland as part of "The New PIIGS".   "The New PIIGS" are forecasted to have low to negative growth for 2012 and 2013.

Their weak economies and high sovereign and private debt provide very potent ingredients for sovereign default and financial contagion. This has the potential to induce a global recession.  See this article for a quick summary http://www.usatoday.com/money/world/story/2011-10-26/eurozone-financial-crisis/50946302/1 and this article for a more comprehensive explanation http://www.aei.org/outlook/economics/international-economy/finance/how-did-europes-debt-crisis-get-so-bad/?gclid=CP2Yu-OP1a4CFWUQNAodNjKvdg

Impact and Vulnerability

The impending recession in the Eurozone has the potential for:

1. A significant loss of OFW Jobs
2. A significant reduction in OFW Remittances denominated in EUR, as well as 
3. A significant devaluation of the USD:EUR Exchange Rate

Mexico, for instance, is a good illustration of a loss of OFW Jobs and OFW Remittances in the face of declining economic growth.  Mexico is one of the USA's largest trading partners.  It also shares a 2,000 mile border with America.  Since Mexico is significantly underdeveloped relative to the USA, a lot of Mexicans go over the border to America to seek work, often illegally.  According to the Pew Hispanic Center, as many as 6.5 million to 7.0 million Mexicans live and work in the USA illegally. (See: http://www.pewhispanic.org/2011/02/01/ii-current-estimates-and-trends/)  The sheer number of illegal and legal Mexicans living in the USA has produced an abundance of Worker Remittances back to Mexico over the years, at least USD $22.0 billion a year in the last five years.  

Mexico
Remittances, Illegal Mexicans in USA, USA GDP Growth
2000 to 2010
Account	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Remittances (In USD$ M)	7,525	10,146	11,029	16,654	19,862	22,742	26,543	26,871	26,035	22,014	22,048
Unauthorized Mexican Immigrants to the USA (In Millions)	4.6	4.8	5.2	5.5	6.0	6.3	6.5	7.0	6.8	6.7	6.5
USA GDP Growth Rate (In %)	4.1	1.1	1.8	2.5	3.5	3.1	2.7	1.9	-0.3	-3.5	3.0
Source: Worldbank, Pew Hispanic Center, Eurostat

But the number of Illegal Mexican Immigrants to the USA and the value of their remittances back to Mexico is acutely sensitive to the state of the US economy.  When the US economy dropped by -0.30% in 2008 and by -3.50% in 2009, Unauthorized Mexican Immigrants to the USA dropped substantially, by -3.11% in 2008 and by -15.44% in 2009.  The drop in remittances reflected a drop in Mexican Illegals: -2.86% in 2008 and -1.47% in 2009.  Although USA GDP growth rebounded by 3.00% in 2010, the economy has remained moribund and unemployment high.  As a result, this has led to a further drop of -2.99% in Mexican Illegals in 2010, while remittances have grown at an anemic 0.15% the same year. Fortunately for Mexico, the Mexican economy is not dependent on Worker Remittances.  Worker Remittances accounted for only 2.13% of the Mexican GDP in 2010.

Another case in point is Italy.  When GDP growth in Italy dropped from 1.70% in 2004 to 0.90% in 2005, the number of Philippine OFWs in Italy dropped by 10.67% in 2005 and OFW Remittances from Italy to the Philippines also dropped by 4.28% in 2005.  When an economic recession struck in Italy in 2008 and 2009 (GDP declined by -1.20% in 2008 and by -5.10% in 2009), OFW Remittances from Italy to the Philippines posted a very substantial -23.17% decline in 2009, although the stock estimate of OFWs in Italy declined by -2.58% in 2008 and grew by 2.07% in 2009.

Italy
Remittances, OFW Workers, GDP Growth Rates
2003 to 2010
	2003	2004	2005	2006	2007	2008	2009	2010
Italy GDP Growth Rate (In %)	0.0	1.7	0.9	2.2	1.7	-1.2	-5.1	1.5
Philippine OFW Workers	124,188	138,461	123,686	128,080	120,192	117,090	119,508	123,379
Remittances (In USD $ Thousands)	309,807	449,289	430,071	574,662	635,944	678,539	521,297	550,515
Source: BSP, Commission on Overseas Filipinos, Eurostat

But the Euro Crisis is more than just a mere recession.  It is a debt crisis that has the potential to lead to a chain of defaults and a series of massive currency devaluations.  Devaluations are often a means to restoring competitiveness to an otherwise overvalued currency.  Based on a table of recent major devaluations, the size of the average devaluation was -42.66%.  In other words, the value of the currency being devalued tends to decline by 42.66% relative to another benchmark currency such as the US Dollar.

Major Recent Devaluations
Country	Date	Size of Devaluation
Argentina	January 2001	-72.2%
Finland	September 1992	-23.9%
Georgia	December 1998	-36.8%
Iceland	October 2008	-32.6%
Indonesia	July 1997	-82.5%
Iran	March 1993	-95.9%
Italy	August 1992	-31.3%
Malaysia	September 1997	-37.8%
Mexico	December 1994	-48.6%
South Korea	December 1997	-39.7%
Sweden	November 1992	-22.8%
Thailand	July 1997	-52.1%
UK	August 1992	-23.1%
Latvia	4th Qtr., 2007	2.1%
Average		-42.66%
Source: http://www.cepr.net/documents/publications/latvia-2011-12.pdf

Breakdown of European Remittances

Europe provided around USD $3.22 billion or 17% of Total OFW Remittances in 2011.

OFW Remittances
European Country of Origin
In USD $K
2011
Country	2011
Italy	550,654
Germany	478,688
Greece	275,926
Netherlands	133,447
Spain	72,626
Cyprus	57,325
France	51,286
Belgium	50,518
Austria	43,214
Ireland	5,633
Finland	3,018
Luxembourg	1,993
Malta	1,839
Portugal	1,547
Slovenia	154
Total Eurozone	1,727,868
United Kingdom	956,639
Norway	352,755
Switzerland	83,950
Denmark	61,202
Sweden	20,960
Isle of Man	3,696
Monaco	3,039
Andorra	1,721
Turkey	1,157
Liechtenstein	1,052
Russian Federation	702
Channel Islands	504
Kazakhstan	487
Gibraltar	355
Czech Republic	336
Hungary	233
Azerbaijan	200
Latvia	140
Iceland	129
Poland	127
Greenland	50
Faeroe Island	32
Croatia	18
Romania	18
Bulgaria	11
Turkmenistan	5
Ukraine	3
Albania	2
Armenia	2
Azores	1
Uzbekistan	1
Bosnia	0
Madeira	0
Martinique	0
Moldova	0
Tajikstan	0
Yugoslavia	0
' Total Non-Eurozone	1,489,527
Total Europe	3,217,395
World	20,116,992
Source: www.bsp.gov.ph

Of this USD $3.22 billion in OFW Remittances, around 54% came from the Eurozone.

Impact Scenarios

As mentioned earlier, the Euro Crisis could lead to a loss of OFW Jobs, OFW Remittances.  Because there is the potential of a massive devaluation of the Euro, the volume of Euros remitted by overseas Filipinos back to the Philippines may remain the same in Euro terms but the value of those remittances relative to other benchmark currencies such as the US Dollar may decline substantially.  The following scenario analysis  attempts to quantify these two effects on the following:

1. Overall % Drop in Worldwide Remittances
2. Overall % Drop in Philippine GDP Growth Rates

As a caveat, this scenario analysis assumes that the Remittances Ex-Europe (meaning from the Rest of the World) remains constant in US Dollars.  It is difficult to quantify the effects of financial contagion or a currency war wherein Europe and the US or other major economies mount a series competitive devaluations of their respective currencies in order for their economies to remain competitive in the global marketplace.  The scenario analysis assumes that devaluations are limited to Europe. Because of this, the actual effect on OFW Remittances and on the Philippine economy may be much larger than anticipated.

Based on the tables below:

1. A 50% drop in the volume of Euros remitted back to the Philippines with no corresponding devaluation of the EUR:USD exchange rate (pegged at USD $1.34 per Euro as of 2011) will result in an 8.32% drop in Worldwide Remittances.  In terms of Philippine GDP Growth Rates, this will lead to a -0.84% decline in GDP.
2. Likewise, a 50% devaluation of the EUR:USD exchange rate from USD $1.34 per Euro to USD $0.67 per Euro  but with the volume of Euro remittances remaining constant, will result in an 8.32% drop in Worldwide Remittances.
3. A 50% drop in both the volume of Euros remitted and 50% devaluation of the Euro will lead to a 12.48% drop in Worldwide Remittances and decline of 1.26% in Philippine GDP.

OFW Remittances
% Drop in Worldwide Remittances
Scenario Analysis
Constant ROW Remittances
Drop in EUR Volume
Drop in EUR Exchange Rate
	Drop in EUR Volume of Remittances
EUR Devaluation	0.00%	10.00%	20.00%	30.00%	40.00%	50.00%
0.00%	0.00%	-1.66%	-3.33%	-4.99%	-6.66%	-8.32%
10.00%	-1.66%	-3.16%	-4.66%	-6.16%	-7.66%	-9.15%
20.00%	-3.33%	-4.66%	-5.99%	-7.32%	-8.65%	-9.99%
30.00%	-4.99%	-6.16%	-7.32%	-8.49%	-9.65%	-10.82%
40.00%	-6.66%	-7.66%	-8.65%	-9.65%	-10.65%	-11.65%
50.00%	-8.32%	-9.15%	-9.99%	-10.82%	-11.65%	-12.48%

OFW Remittances
% Drop in GDP
Scenario Analysis
Constant ROW Remittances
Drop in EUR Volume
Drop in EUR Exchange Rate
	Drop in EUR Volume of Remittances
EUR Devaluation	0.00%	10.00%	20.00%	30.00%	40.00%	50.00%
0.00%	0.00%	-0.17%	-0.34%	-0.50%	-0.67%	-0.84%
10.00%	-0.17%	-0.32%	-0.47%	-0.62%	-0.77%	-0.92%
20.00%	-0.34%	-0.47%	-0.60%	-0.74%	-0.87%	-1.01%
30.00%	-0.50%	-0.62%	-0.74%	-0.86%	-0.97%	-1.09%
40.00%	-0.67%	-0.77%	-0.87%	-0.97%	-1.07%	-1.17%
50.00%	-0.84%	-0.92%	-1.01%	-1.09%	-1.17%	-1.26%