Growth in OFW remittances seen slowing down amid cheap oil

REMITTANCES from overseas Filipino workers (OFWs) may grow at just half the pace expected by monetary authorities this year, as the prolonged slump in global oil prices gnaws sharply on the Middle East, which hosts about 2.5 million Filipino migrant workers.

As OFWs have helped fuel the local residential property boom in recent years, the property and consumer banking sectors may also be at risk now that the Middle East is navigating through tough times, New York-based Global Source said.

In a research note titled “Simian Flu” issued on Feb. 8, Global Source warned that remittance growth could taper further this year.

While the Bangko Sentral ng Pilipinas (BSP) expects a 4-percent growth rate in remittances this 2016, Global Source thinks the growth rate this year could be much less at around 2 to 3 percent.

The research note written by economists Romeo Bernardo and Marie Christine Tang underscored how continuing low oil prices had become a double-edged sword for the Philippines, an oil-importing country.

“While it helped last year to drive down inflation, reduce the import bill and fuel a consumption boom, there is now heightened concern about spillover effects from oil exporters’ economic malaise,” the research said.

Global Source cited, for instance, the Kingdom of Saudi Arabia (KSA)’s policy to switch away from foreign workers and its pullback from infrastructure projects where contractors include Filipinos.

There are about 350,000 Filipino workers deployed annually on average to KSA in the five years to 2014, about 40 percent of which were new hires.

Of 2.5 million estimated OFWs in the Middle East, 40 percent are in oil-rich KSA.

“A further worry is the tail risk from escalating geopolitical tensions in the region leading to forced repatriation of OFWs with possible repercussions on the real estate sector and on banks’ consumer loan books,” Global Source said.

Januario Jesus Gregorio Atencio, president of leading mass housing developer 8990 Holdings, said in a separate interview that if there was anything that could impair the collection efficiency of his company, it would indeed be if the situation in the Middle East would turn for the worse.

“The issues in the Middle East are already growing significantly,” Atencio said in a recent briefing. “We don’t feel it yet but for example, when you hear about the Philippine embassy in Oman issuing instruction to OFWs to have emergency [evacuation] bags, you think that the situation is getting worse.”

Atencio said he had identified two types of OFWs at risk: Those who work directly in the oil industry and those who work as seafarers in oil tankers.

The seafarers are likewise at risk as when there’s no oil shipment, there will also be job cuts, he said.

“We’re concerned that there may be contagion effect. If KSA implements budget cuts, there will be less people employed in hospitals, where a lot of OFWs are employed as nurses or administrative staff,” he said.

In the case of 8990 Holdings, he said OFW accounts constituted 20 percent of sales, of which 5 to 6 percent were from the Middle East and mostly from the KSA.

“In a way, we’re lucky [because of the lower proportion of Middle East clients],” he said.

If the situation worsens, he said the collection efficiency of property developers could take a hit unless affected clients immediately find jobs somewhere else.

Recognizing such a risk on the horizon, Atencio said 8990 Holdings may have to prepare to accept easier loan terms— whether to restructure or provide reprieve—in the worst case.

Overall, the BSP expects a $2.2-billion balance of payments (BOP) surplus for 2016, but Global Source thinks it may revert to a deficit due to capital outflows.

The country’s BOP surplus reached $2.6 billion at the end of 2015, with the BSP expecting the current account surplus at close to $9 billion.

The large amount may be traced to inflows from remittances—which grew by 3.6 percent year-on-year to $22.8 billion from January to November 2015—as well as service exports, particularly business process outsourcing receipts which grew by 8.7 percent to $12.3 billion in the first nine months, offsetting a larger trade-in-goods gap.

“We expect the pattern to continue this year, thus keeping the current account comfortably in surplus, albeit likely lower. Earnings from BPO will remain resilient judging by industry insiders’ view of continuing double digit growth rates in sales and reports of the sector, predominantly servicing Western clients, also now attracting the Japanese. However, we remain apprehensive about risks to remittances and merchandise exports,” Global Source said.

Even so, Global Source noted that with international reserves at $80.6 billion—equivalent to 10.3 months’ worth of imports and four times coverage for maturing short-term external debt—the domestic economy had more than adequate protection from external shocks.

Meanwhile, apart from the woes in the Middle East, Global Source said the Philippines must brace for other threats to the health of the global economy, such as: Spillovers from weaker growth in China and second round effects on economies in east and southeast Asia with closer trade and investment linkages to the Philippines; impact of US Federal Reserve rate hikes and exchange rate adjustments worldwide on US economic recovery; growth in other advanced economies particularly Japan, and overall impact on world trade.

“At this time, we are penciling in a 6 percent growth rate for both 2016 and 2017. We will revisit these numbers after the May elections and in the light of the strength of the new President’s mandate and the track record of his chosen team,” Global Source said.