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Wednesday, March 7, 2012

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 RemittancesGDPRemittances/GDP
Country(In USD$)(In Current USD$)(In %)
India54,034,710,9401,727,111,096,3633.13%
China51,300,000,0005,926,612,009,7500.87%
Mexico22,047,560,5501,034,804,491,2652.13%
Philippines21,423,000,000199,589,447,42410.73%
France15,629,349,6102,560,002,000,0000.61%
Germany11,337,656,2503,280,529,801,3250.35%
Bangladesh10,851,938,480100,357,022,44410.81%
Spain10,506,896,4801,407,405,298,0130.75%
Belgium10,178,155,270469,374,172,1852.17%
Nigeria10,045,019,530193,668,738,1075.19%
Pakistan9,690,000,000176,869,569,6545.48%




World444,754,231,53860,449,498,549,1370.74%








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%

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