The law of diminishing returns continue to plague the OFW Remittances
Let us hear it straight from the Bangko Sentral ng Pilipinas. Observe how the BSP attempts the sanitization of the news (bold mine)
Personal remittances from Overseas Filipinos (OFs) reached US$23.2 billion for January to September 2017, registering 4.8 percent year-on-year growth, BSP Governor Nestor A. Espenilla, Jr. announced today. Personal remittances from land-based OFs with work contracts of one year or more including other household-to-household transfers rose by 5.1 percent to US$18.4 billion while those from sea-based and land-based OFs with work contracts of less than one year likewise increased by 3.5 percent to US$4.8 billion for the same period. However, personal remittances in September (at US$2.3 billion) were 7.0 percent lower than the level posted in the same month last year.
For the first nine months of 2017, cash remittances from OFs coursed through banks recorded 3.8 percent growth from the level posted in the same period a year ago, reaching US$20.8 billion. Cash remittances from land-based and sea-based workers grew by 3.8 percent and 3.5 percent to reach US$16.4 billion and US$4.4 billion, respectively. For September alone, however, total cash remittances fell by 8.3 percent year-on-year to US$2.2 billion.
The framing begins with the citation of the positives followed by the negative.
By relegating the negatives to the last sentences of the paragraphs, the hope is that the data would either have limited sticking power or have a reduced impact on the reader.
In fairness, the BSP provided possible reasons for such blowout in the month's deficit.
This was attributed to the 11.7 percent drop in cash remittances from land-based workers which offset the 6.0 percent increase in transfers from sea-based workers. There are reports that a number of global correspondent banks have closed their service facilities on money service business (MSB), reflective of the increasing global trend to reduce correspondent banking relationships and focus more on home market. This may have partly affected remittances flows during the month.
The countries that registered the biggest declines in cash remittances in September were Saudi Arabia, followed by Kuwait, Qatar, and Australia. For Saudi Arabia, the decline in remittances could partly be the result of the continued repatriation of OF workers under the Saudi Arabian Amnesty Program which started last March 2017. On 26 September 2017, the Saudi government extended the amnesty program anew and a total of 8,467 undocumented Filipinos already availed of the initial offer, according to the DFA.
Cash remittances coming from the United States (US), Saudi Arabia, United Arab Emirates (UAE), Singapore, Japan, United Kingdom, Qatar, Kuwait, Germany and Hong Kong comprised about 72 percent of total cash remittances in the first nine months of 2017.
First of all, the gist of remittance recipients has likely been from the lower income segment which serves as their sustenance. Hence, if disruptions have occurred in the foreign banking system’s money service business facilities (MSB), OFWs will likely resort to sending money through the informal channels.
Next, the OFW’s destiny has been grounded upon the state of global political-economic affairs.
Back in 2015, I warned that Saudi Arabia could be a material factor in the OFW’s slowdown [Phisix 7,550: Sorry Folks, But Declining Growth Rates of OFW Remittances Represents An Established TREND! October 18, 2015]
Here is an excerpt:
Saudi Arabia is state of economic funk. As evidence, she has declared a cut on political spending in response to ‘record’ budget deficit, have been drawing from her foreign currency reserves to bridge this record deficit (forex reserves has plunged 11% from August 2014 highs), Saudi’s sovereign wealth fund has been selling equities (mostly European equities) also designed to shore up her government’s finances, and lastly, statistical GDP has been falling and has been expected to fall further.
Saudi’s plight has not entirely been about oil, but also about her huge welfare state. She has been an active geopolitical player in the Middle East where Saudi forces have been militarily involved in the Yemen civil war against Iran supported Shia Houthi insurgents.
And it has been more than Yemen. The Saudi Arabia government has long helped in the plotting of the overthrow of the Syria’s Assad regime which she has been forthright.
Syria’s civil war, which is an extension of the proxy war between the US and Russia (aside from Ukraine), has become an enormous humanitarian disaster.
And Saudi’s anti Assad stance brings her directly against the alliance of supporters of the Syrian regime: Russia, Iran, Iraq and China which raises the risks of escalation of war in the region.
Well, Saudi Arabia is in a tight spot.
Despite the rally in oil prices, Saudi’s foreign exchange reserves continue to dwindle.
Also, the Crown Prince of Saudi Arabia Mohammad bin Salman (MBS) recently “purged” rivals to his father’s throne, which not only has deepened the fissure in Saudi’s ruling family, it has raised geopolitical uncertainty in the Middle East. MBS also reportedly plotted to expel Qatar from the Sunni Arab community, as well as, had been instrumental in the resignation of Lebanon’s prime minister. Lebanese Prime Minister Saad Hariri, who flew to Riyadh by orders of MBS, appears to be under house arrest
Moreover, with the erstwhile ruling party imposing labor protectionism, the Saudi Arabian Amnesty Program signifies a partial validation of my prediction.
Escalating troubles in the region has sent and will send OFWs packing home.
Third, September’s decline has not been the first.
Though, the significant contractions in September’s personal (-7.0%) and cash (-8.3%) remittances represent the largest since 2003!
September’s contraction signifies the ninth monthly decline since the last quarter of 2014!
In short, the rising incidences of monthly contractions paved way for the September’s huge deficit
Dabbling with statistics could have also been a factor. In the hope to see a vigorous year last half performance, the BSP could have frontloaded the remittance statistics early in the year. Unfortunately, such expectations failed to materialize.
The sharp September decline has weighed on the year-to-date performance for personal and cash remittances. First, 2017’s 9-month showing has reinforced the downtrend which began in 2014. Next, the rate of change in personal remittances has almost equaled last year and was barely higher than the post-Lehman bankruptcy in 2009. Last, cash remittances growth rate dropped below 2009!
Here’s the rub. Because remittances represent income in support of final demand, such material deceleration entails of a weaker topline for consumer business sales/nominal GDP.
With decreased consumer spending amidst the race to build capacity, how will this gap be filled? By more credit financed domestic consumption? Or increased balance sheet leveraging?
And if credit growth will not be sufficient, how will this affect the supply side?
Remember, expectations of a linear path of consumer spending growth has pillared this frantic race to build supply
So will there be waves of new vacancies/idle resources? Will the 24/7 retail segment be the first casualty?
Next, given the shortfalls from OFW remittances, what will be the sources of the nation’s US dollar requirements?
BPO Investments have reportedly been down. [Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling September 24, 2017]
How will the present trade deficits, which have been partly anchored on build, build and build, get financed? Or where will the golden age of infrastructure get its financing?
Who will do the borrowing for these? The private sector, the government or both?
With the domestic supply of US dollars seemingly under pressure, how should this affect the USD peso exchange rate?
And curiously, the peso rallied strongly yesterday (US dollar posted weakness in the Asia)
Pretty interesting developments, don’t you think?
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