MONDAY MACRO: Robustness and resiliency of this source of funds remain a crucial factor for economic recovery
This source of funds has been a growth driver for our economy for decades, with its ability to assist targeted households and the country’s financial system.
Though its growth levels have been declining in recent years, this capital inflow has remained significant, especially during the pandemic.
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The overseas Filipino workers’ remittances have played a large role in supporting the Philippine GDP. While many economies hit a recession in the 2008 financial crisis, the Philippine economy managed to stay afloat thanks to the OFWs.
In fact, going back a few years to the 2001 dot-com bubble, we saw no recession in the Philippines as OFW remittances continued to grow, accounting for 9%-13% levels of GDP since then.
The strength of the Philippine economy amid global economic crises makes sense as OFW remittances tend to be more reliable compared to capital from foreign investors, especially during economic downturns or after natural disasters.
Furthermore, remittances directly increase the households’ capital, targeting their specific needs, and reducing poverty in the process.
By increasing household capital, remittances create the potential to boost domestic demand for the economy and provide long-term growth to businesses at an aggregate level.
As we mentioned in one of our previous Monday Macro report on GDP, remittances have supported consumer spending, a crucial component of the Philippine economy because of its 70% share of GDP.
Amid the pandemic, remittances originating from Middle Eastern, European, and Oceanian countries declined by an average of 10.3%.
However, this decline was partially offset by OFW remittances from the Americas, particularly from the U.S., (East) Asia, and Africa continued to improve by an average growth of 9.2% from 2019 to 2020.
Therefore, total cash remittances declined by only 0.8% despite massive layoffs around the world caused by the pandemic, proving remittances’ resiliency once more amidst economic turmoil.
In addition to boosting consumer spending, remittances improve foreign exchange reserves for the economy as well.
By delivering foreign capital to the country, OFWs will need to deposit these remittances into the banking system.
This foreign exchange inflow from the remittances results in more opportunities for the Bangko Sentral ng Pilipinas (BSP) to accumulate more dollars available in the market and store them as its foreign exchange reserves or gross international reserves (GIR).
The GIR is a common measure to evaluate the central bank’s liquidity, which can be used to mitigate sharp fluctuations in their exchange rates. It is also a common determinant for the creditworthiness of the country.
At USD 107.25 billion as of May 2021, the GIR level is equivalent to 12.2 months’ worth of imports when the standard is just 3-4 months’ worth. Because of this, the country will likely maintain its creditworthiness status to international credit institutions. This translates to better business opportunities and cheaper interest rates for debt obligations going forward, both favorable to the Philippine economic recovery.
About the Philippine Markets Daily
“The Monday Macro Report”
When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.
Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.
Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.
Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.
Hope you’ve found this week’s macro chart interesting and insightful.
Stay tuned for next week’s Monday Macro report!
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