How Far Will Remittances to the Philippines Fall in 2009?

Remittances may contract in 2009, according to a model based on the expected income of overseas Filipino workers (OFWs) around the world.

With adjustments made by industry and by country for the employment outlook of OFWs, the estimated share of income remitted, the composition of deployment, and the annual growth rate of deployment and wages. Our baseline scenario is -6.17% annual growth in remittances in 2009. Remittances will total only $15.4 billion compared with last year’s $16.4 billion. This would be a marked turnaround from the +13.7% growth (or $1.97 billion) seen in 2008 and the end of a multi-year run of double-digit growth rates.

Base Case: -6.17%

Under our base scenario, the model forecasts 2009 remittances to be 6.17% smaller than in 2008. Our baseline scenario assumes the slowdown in remittance growth begun in H2 2008 will continue into 2009 as the global economic downturn leads to further layoffs and pay cuts among Filipinos, most of whom are temporary migrant workers in some of the worst hit industries: manufacturing, construction, trade and tourism. The average remittance per OFW fell from $1656 in 2007 to $1626 in 2008 and will fall more sharply to $1467 in 2009. Deployment will decline by an average of 7%, with layoffs, pay cuts and wage deferments most concentrated among guest workers in manufacturing, construction, and shipping (including passenger ships) and least concentrated among domestic helpers, caregivers, nurses and other professionals. Domestic helper layoffs are unlikely due to the increased need for two-income households but, should they occur, will most likely be seen in Hong Kong where many domestic helpers are dispatched by unlicensed agencies.

Best Case: 0%

The best case scenario for remittances is 0% growth in 2009, assuming no net change in deployment and wages. This is conceivable considering that a large chunk of OFWs work as nurses, domestic helpers and caregivers – occupations which are unlikely to see layoffs in a context of aging populations in the developed world and shortages of healthcare and other service workers in the booming middle east. Continued high demand for these service workers will offset the decrease of Filipino workers in other occupations.

Worst Case: -11%

Our worst case scenario is -11% remittance growth in 2009. This assumes a 5% reduction in domestic helpers and a 33% reduction in employment of Filipino seafarers. Employers of domestic helpers are often bound by contract to keep their employees for a year but contract renewals may decrease in 2009. Seafarers constitute about 20% of the global OFW labor force. Remittances from seafarers grew 35.7% from 2007 to 2008 on the growth in commodities trade. But a sharp plunge in trade and tourism could lead to massive layoffs among seafarers and a concomitant reduction in remittances.

Government Forecast

News reports are piling up on the exodus of Filipinos from their recipient countries (see for example here, here, here, here, here). Yet the government remains sanguine about the prospect for deployments and remittances in 2009, projecting remittance growth of 6-9% y/y at best in 2009 and 0% growth at worst. Central bank governor Tetangco believes any contraction will be insignificant at most. The optimism is based on POEA claims that net deployment will remain strong and that Filipinos are landing higher-paying jobs. POEA claims there are still 400000 unfilled positions abroad for Filipino migrants and predicts only 50000 Filipinos will be sent home this year due to layoffs. The direction of the government’s forecasts falls in line with that of most analysts but disagrees on the magnitude. Like RGE, Royal Bank of Scotland and Citigroup are less optimisticthan the government, predicting -8% and -3% growth in 2009 remittances, respectively.

Implications of Lower Remittance Growth

Since the 1970s, the Philippines relied on labor exports for income and employment. Labor exports have been a crutch for an economy marked by high unemployment (8% as of April 2008), low job creation and very low wages. 40% of the population lives on less than $1 a day. Unemployment would be double if it weren’t for the migration of Filipinos abroad. Aside from relieving joblessness, Overseas Filipino workers (OFWs) also support domestic demand by sending money home to their families. Recipient families spend remittances mostly on food and education, but a large portion also goes towards consumption and real estate (i.e. retirement homes for returning OFWs). On a national level, labor exports constitute the second largest ‘export’ after electronics, contributing $16.4 billion of remittances in 2008 or 10.2%of GDP in 2008. Remittances offset the growing trade deficit (-$7.6 billion in 2008 versus -$5 billion in 2007) and help keep the current account in surplus.

Lower remittances and deployment in 2009 may decrease consumption and investment in the Philippines and increase unemployment. Families dependent on remittances will experience more hardship. The government has been providing financial assistance for laid off workers, which may help tide them over the year. But a prolonged global economic slump may mean fewer contract renewals in 2010. On a national level, the trade gap may quit widening in 2009 due to negative import growth as most imports are components later used for exported finished goods, demand for which has fallen rapidly. So, despite a fall in remittances, the current account may stay in surplus if the trade gap does not widen further. Nonetheless, remittances will be the financial Achilles’ Heel linking the Philippines to the global downturn brought on by the credit crisis.

Background for Model

Our model used 2007 and 2008 data from POEA (Philippine Overseas Employment Administration) and Bangko Sentral ng Pilipinas on the distribution of remittances abroad. The Filipino diaspora spans almost 170 countries, but is concentrated in the US, Saudi Arabia, Canada, UK, Italy, UAE, Japan, Singapore, Hong Kong and Australia. Except for Australia, these are also among the top ten remitters, with the addition of Germany, accounting for 88% of all remittances (see Chart 1 titled, “Major Sources of 2008 OFW Remittances”). Most OFWs in the US, Canada, Japan, Germany and Australia are permanent residents (Chart 2). Permanent residents often bring their families over to join them, hence they eventually have less need to send remittances back to the Philippines. Most of the stock of permanent land-based OFWs is nurses hired during the 1970s and 1980s to relieve nursing shortages in developed countries, especially the US.

Nowadays, most deployment growth is driven by the Middle East, despite overtures to workforce nationalization in the Persian Gulf (Chart 3). Most workers in the Middle East and in general are temporary. As of 2007, 42.3% of the stock of OFWs were permanent, 47.4% were temporary, and 10.3% were irregular (illegals or undocumented workers). Temporary workers tend to remit most of their income as they expect to return and reside permanently in the Philippines. Domestic helpers are able to remit half of their income as many are provided with food and shelter if they are live-in ho
usekeepers or nannies. Other temporary workers tend to be employed in other low-wage occupations, such as factory production or restaurant service (Chart 4).

Data for the employment outlooks and wage levels used in the model were based on surveys from Manpower, Michael Page International, Gulf Business, PayScale, U.S. Bureau of Labor Statistics, CareerCross, CareerTrack, JobsDB, and academic studies.