The pace of growth of remittances from overseas Filipino workers is likely to slow, but the funds will remain a key growth driver, an economist from British banking giant HSBC said.
Joseph Incalcaterra, an HSBC economist based in Hong Kong, said in a research note dated Jan. 19 that the medium-term outlook for remittances remained favorable, noting that the Philippines would continue to have a surplus of workers.
While domestic economic growth has been robust as of late alongside an infrastructure boom and tourism sector growth, the economist said the country still had underemployment issues and was unable to create enough quality jobs.
He also noted that demand for Filipino workers would likely remain strong, especially from the aging societies in Asia that will need well-trained healthcare professionals.
Following the Bangko Sentral ng Pilipinas’ recent revision in its 2016 forecast from 5 percent to 4 percent, HSBC expects growth to naturally moderate from there due to base effects.
“As the economy expands alongside an infrastructure build-up, the effect of remittances on growth and the current account will wane over time. Services exports from ‘business processing outsourcing’ (BPO) and related sectors will partly offset the relative decline of foreign currency earnings from remittances, but the current account surplus may nonetheless weaken by 2017, unless the trade deficit sees a sustained improvement, which is unlikely,” the economist said.
The deceleration in remittances since July 2015 could be attributed to remittances from the US while transfers from other key geographies have been more stable—albeit there has been some moderation across the board, Incalcaterra said.
As for the drag from US remittances, HSBC sees three key factors at play.
First, it noted that the cost of remitting had been rising over the first three quarters of 2015.
There was a tangible negative correlation between quarter-on-quarter remittance costs from the US to the Philippines and the amount of US dollar remittances.
“Another factor to consider is the regulatory changes that limit US banks from dealing with non-bank institutions in rural parts of the Philippines, where financial penetration is weak,” the economist said.
“Lastly, there is the changing structure of remittances given the high transaction costs and regulatory pressures. Numerous start-ups are offering low-cost or free alternatives (particularly in Canada and the US). All of this may be contributing to short-term market frictions as new channels are created,” he added.
But the economist said the Philippines’ demographic trends should allow for overseas Filipino worker (OFW) deployment to continue, albeit the level may have already peaked in 2013-2014.
“When we break down the Philippines’ demographic contours, we find that roughly 80 percent of OFWs are in the 20-44 age cohort, which will see growth greater than the overall population through 2020. The increased supply of prime age workers suggests that some Filipinos will choose to go overseas,” the economist said.
On concerns on remittances from the Middle East slowing down, the economist said that while it was true that the region was going through a relatively sharp economic slowdown, he pointed out that there was scant evidence to suggest that employers are starting to shed their OFW workforce.