Remittances seen to calm markets, support peso

Cash from overseas Filipino workers (OFWs) will continue to serve as one of the main buffers of the Philippine economy from possible shocks caused by the shifting monetary policy settings in the United States.

According to Singaporean bank DBS, remittances from OFWs, which are the Philippines’ largest source of foreign exchange income, would serve as a calming influence amid volatile market conditions.

“This is important especially as investors remain concerned about potential capital outflows (due to) the US Federal Reserve’s tapering,” DBS said in a recent report.

DBS, Southeast Asia’s largest bank, was referring to the Fed’s plan to cut its monthly asset purchases by $10 billion starting this month.

The Fed has been pumping freshly printed cash into the US economy since late 2009 by purchasing $85 billion worth of mortgage-backed securities and US treasuries a month. This bond-buying program, known as quantitative easing, has kept interest rates down, helping the US economy recover from the global crisis it started in 2008.

As interest rates in the US fell to record lows, fund managers fled to emerging markets to invest in higher-yielding assets in countries like the Philippines.

This helped bring down interest rates in Asia and other regions to record lows. Currencies like the peso also appreciated against the greenback amid the abundance of dollars in foreign exchange markets.

The prospect of the Fed’s asset purchases coming to an end sent jitters through financial markets in emerging economies like the Philippines.

The Philippine Stock Exchange Index lost about a fifth of its value from its peak in the first half of the year, while the peso was 7.53 percent weaker at the end of 2013 from its end-2012 level.

In its report, DBS said strong OFW remittances would allow the BSP to make the necessary policy adjustments from a “position of strength.”

DBS said OFW remittances, which likely grew by at least 5 percent in 2013 to a record $22.5 billion, would help the country maintain a balance-of-payments surplus of about 2.5 percent of gross domestic product.

These robust inflows, which help support the peso’s strength, would give the BSP less to worry about as it deals with factors that may push inflation higher.

DBS said Typhoon “Yolanda” would likely lead to higher consumer prices in the first half of 2014 due to infrastructure bottlenecks that choke the supply of food coming from Visayas.

“The last thing that the central bank would want to avoid is overheating the economy,” DBS said, adding that the BSP may choose to raise interest rates by 50 basis points in 2014. Paolo G. Montecillo