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 optimistic than 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.

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10 Responses to "How Far Will Remittances to the Philippines Fall in 2009?"

  1. Anonymous   February 28, 2009 at 1:05 pm

    thanks for the information!

    • Alma Mallari   March 17, 2009 at 4:02 am

      This is awesome..I didn’t know about this until I read your articles. More Power to RGE and to Mikka Pineda who gave me a lot of information.

  2. Mary   March 3, 2009 at 2:31 am

    You lay out a strong argument for slowing remittances and how this will likely hit the Philippines’ economy hard. I would imagine Central American economies, as well as certain Eastern European economies, will also be hard hit by rising unemployment and the drying-up of remittance flows. It seems like an unfortunate double-whammy.Do you think the slowdown in remittances will create political unrest and/or affect the political situation in the Philippines?

    • Mikka   March 5, 2009 at 12:59 am

      Mary, filipinos are accustomed to hardship. High and rising unemployment would be nothing new to them. Even when my family from the Philippines visited me 5 years ago, there was a pervasive sense that the economy was going downhill… which is the same thing my mom thought when she left her homeland 30 years ago. Filipinos’ low expectations for their country haven’t changed.For those families who live on very little money and depend a lot on remittances, taking a few dollars from them will hurt them but they are also politically powerless. Perversely, middle-class families benefit most from remittances since they are able to send out more highly skilled workers that fetch higher wages. Political unrest would be more likely if these middle-class families were subjected to sharply higher unemployment. But this is unlikely – the skilled workers will be able to hold onto their jobs better than the unskilled ones.On paper, it seems lower remittances and higher unemployment could be economically catastrophic. But politically, the unrest that may ensue would be not much different from what’s already there. Protests abound in the Philippines, for a variety of reasons – such as the lack of justice for filipinos raped by US military personnel, muslim separatism, land reform, passport fee hikes, the legalization of direct hiring (OFWs are supposed to be hired through a licensed recruitment agency), etc. Unemployment would just be another reason for protest – as has already happened in Manila this month.But will the protests turn into a coup? A coup like in Thailand looks unlikely. General elections take place next year. I think the current administration will be able to use populist spending to smooth things over until then.

  3. Jude   March 3, 2009 at 10:26 am

    Even in the “best case” of zero growth in remittances one may still have to ask if the sense of foreboding over a possible job loss in the near future might nonetheless have macro-consequences. In other words if households in the Philippines become cautious or fearful of a loss of remittances in the near future they may spend less and save more — leading to what might be termed a contagion of consumer pessimism from the US.In other words, even if remittances were to grow slightly this year it is entirely possible that this growth will be more than off-set by a decline spending by households that depend on overseas incomes. Can the likelihood of this scenario be quantified?

    • Mikka   March 5, 2009 at 1:27 am

      Hi Jude, this would be an interesting topic to research. I’ll see what data is available to me on the propensities to save vs. spend in the Philippines. Food, education, and medical care are usually the first things remittances get spent on. My guess is households will take on more debt to meet any shortfall in funding for these necessary expenses. On the other hand, less necessary uses of remittances – consumption and real estate investment – may be allowed to decline without recourse to alternate sources of funding. I don’t know how much filipinos engage in ‘precautionary saving’ though or what portion of households are even ABLE to do so. Households that live hand-to-mouth may be too poor to hold back on spending, although I’ve heard many women will go hungry just so the rest of their family can eat.

      • jude   March 11, 2009 at 1:29 am

        Hi Mikka,My own understanding is that Filipinos sending money from the US are among the better-paid overseas Filipinos, not just because wage rates are higher in the US. Maybe this is partly a function of the screening process that they must go through. They are educated and come from middle class families, so basic necessities are probably no longer a source worry except for the poorer relatives.A piece of information that i remember from a few months ago is related to housing — when remittances grew by 14 percent during the third quarter of 2008 (year-on-year), i remember reading that the two biggest creditors for housing registered 15 percent declines in the number of new housing loans approved by two of the biggest institutions engaged in home financing (BPI and PSBank); i don’t suppose this is mainly a result of the banks’decision to go slow on approvals or a result of a “glut” that has also being discussed. I’ve always heard it said that housing construction here has only one pillar, and that’s incomes from abroad.I hope a future piece takes this up.

        • Mikka   March 11, 2009 at 8:06 pm

          Hi Jude, it is true that OFWs in the U.S. are among the better-paid OFWs and tend to come from middle-class families. The screening process has a lot to do with this. Most visas in the U.S. were awarded to nurses and other professionals for which the U.S. had a shortage.As for my comment on basic necessities, I was referring to households in the Philippines, not OFWs. Most OFWs in the U.S. come from middle-class families. Their families back in the Philippines may not have much trouble with basic necessities. But there are also many OFWs – especially in the Middle East – who come from poorer backgrounds. Their families back home may have a harder time getting through the economic downturn.I have read news articles claiming the real estate market in the Philippines is mostly driven by OFWs – such as those building their retirement homes. Although, I like to believe that a little bit of real estate investment was also coming from the tourism industry. I’d like to look into this someday too, but for now I must turn my attention to other countries I cover – such as South Korea and New Zealand.

  4. Michie   March 9, 2009 at 1:41 am

    hi mikka, would just like to ask if the average remittance mentioned in the base scenario is monthly or annually? thanks a lot.

    • Mikka   March 11, 2009 at 7:52 pm

      Hi Michie, the average remittance per capita figure for 2009 is annual.