Faster remittance growth seen in 2016

The growth in remittance flows from Filipinos abroad this year is seen exceeding the government’s 4-percent target, according to Japanese financial giant Nomura.

Nomura said in a Feb. 19 note titled “Asia Special Report-Philippines: Challenging portfolio flows … but resilient remittances” that there were concerns over the impact of lower oil prices on remittances, given that two million overseas Filipinos are based in the Middle East.

“However, we believe that these concerns are overblown. Filipino workers in the Middle East who are most prone to layoffs are the semi/low-skilled workers with relatively low per-capita remittances. In addition, the terms-of-trade benefits help to offset the potential impact of lower oil prices on remittances,” Nomura said.

“A number of other structural factors mitigate the risks to remittances from workers in the Middle East and the energy sector: we have observed increased geographical diversification of remittances in recent years, an increased proportion of the contribution from more skilled workers in service sectors with strong demand and higher per-capita remittances reflecting a higher proportion of higher income workers,” it added.

Nomura said it expects OFW remittances to expand by 5.2 percent this year.

Data released by the Bangko Sentral ng Pilipinas last week showed that cash sent home by Filipinos abroad hit a record $2.47 billion last December—the biggest monthly amount to date—to bring the 2015 total to $25.767 billion, also the highest annual figure.

End-2015 cash remittances grew 4.6 percent from $24.628 billion in the previous year, hence exceeding the 4-percent growth target, albeit slower than the 7.2-percent year-on-year growth posted in 2014.

For 2016, the growth in cash remittances is also projected at 4 percent.

At the same time, Nomura noted risks to the country’s balance-of-payments position and the peso due to external developments.

These include increased financial market volatility and continued concerns over China’s economic slowdown, the impact of policy normalization from the Fed and worries over the impact of lower oil prices, Nomura said.

In general, external risks “resulted in material capital outflows from foreign and domestic investors and a flight-to-safety into US dollar bonds,” Nomura noted.

According to Nomura, “Philippine equity markets have similarly experienced outflows, possibly exacerbated by valuation concerns amid global risk-aversion.”

BSP data released last Friday showed that the Philippines started the year with more money leaving the country, posting a BOP deficit of $813 million in January mainly as the government settled maturing foreign exchange obligations that month.

The deficit recorded last month was the widest since January 2014’s $4.48 billion. It was also a reversal of the surpluses of $481 million last December and $136 million a year ago.

The BOP is a summary of all the businesses the country does with the rest of the world.

BOP data are tracked closely to ensure that the supply of dollars in the economy remains ample to allow the government and businesses to transact with the rest of the world.

Last year, the BOP swung to a surplus of $2.6 billion, a turnaround from the $2.9-billion deficit in 2014—the first annual deficit in a decade as well as the biggest on record, largely attributed to the normalization of monetary policy in the US during that time.

The BSP had projected the BOP surplus to reach $2.2 billion this year and result into an increase in the gross international reserves to $82.7 billion, equivalent to nine months of import cover.

“With our forecast of two more interest rate hikes from the Fed in 2016 and our below-consensus forecast for China’s growth, the risk is that subdued risk appetite may continue to pressure the Philippines’ BOP via capital outflows,” Nomura said.

“Domestically, the Philippines appears to be a victim of its own success: strong investment spending has kept capital goods imports elevated while higher tourism imports (Filipinos travelling overseas) have increased, possibly due to higher per-capita incomes. Although strong domestic growth prospects have indeed led to FDI [foreign direct investment] inflows, FDI outflows have picked up amid global risk aversion,” it added.