Wow. September OFW Remittances Suffer Worst Shrinkage Since 2003! More Signs of US dollar Shorts

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?

Quote of the Day: Why Saudi Arabia May Become The Mideast’s Newest Hotspot

Writes historian Eric Margolis at the Lew Rockwell.com

Saudi Arabia and the Gulf states have been de facto US-British-French protectorates since the end of World War II. They sell the western powers oil at rock bottom prices and buy fabulous amounts of arms from these powers in exchange for the west protecting the ruling families.

As Libya’s late Muammar Kadaffi once told me, “the Saudis and Gulf emirates are very rich families paying the west for protection and living behind high walls.”

Kadaffi’s overthrow and murder were aided by the western powers, notably France, and the oil sheiks. Kadaffi constantly denounced the Saudis and their Gulf neighbors as robbers, traitors to the Arab cause, and puppets of the west.

Many Arabs and Iranians agreed with Kadaffi. While Islam commands all Muslims to share their wealth with the needy and aid fellow Muslims in distress, the Saudis spent untold billions on casinos, palaces, and European hookers while millions of Muslims starved. The Saudis spent even more billions for western high-tech arms they cannot use.

During the dreadful war in Bosnia, 1992-1995, the Saudis, who arrogate to themselves the title of ‘Defenders of Islam” and its holy places, averted their eyes as hundreds of thousands of Bosnians were massacred, raped, driven from their homes by Serbs, and mosques were blown up.

The Saudi dynasty has clung to power through lavish social spending and cutting off the heads of dissidents, who are routinely framed with charges of drug dealing. The Saudis have one of the world’s worst human rights records.

Saudi’s royals are afraid of their own military, so keep it feeble and inept aside from the air force. They rely on the National Guard, a Bedouin tribal forces also known as the White Army. In the past, Pakistan was paid to keep 40,000 troops in Saudi to protect the royal family. These soldiers are long gone, but the Saudis are pressing impoverished Pakistan to return its military contingent.

The US-backed and supplied Saudi war against dirt-poor Yemen has shown its military to be incompetent and heedless of civilian casualties. The Saudis run the risk of becoming stuck in a protracted guerilla war in Yemen’s wild mountains. The US, Britain, and France maintain discreet military bases in the kingdom and Gulf coast. The US Fifth Fleet is based in Bahrain, where a pro-democracy uprising was recently crushed by rented Pakistani police and troops. Reports say 30,000 Pakistani troops may be stationed in Kuwait, the United Arab Emirates, and Qatar.

Earlier this month, the Saudis and Egypt’s military junta announced they would build a bridge across the narrow Strait of Tiran (leading to the Red Sea) to Egypt’s Sinai Peninsula. The clear purpose of a large bridge in this remote, desolate region is to facilitate the passage of Egyptian troops and armor into Saudi Arabia to protect the Saudis. Egypt now relies on Saudi cash to stay afloat.

But Saudi Arabia’s seemingly endless supply of money is now threatened by the precipitous drop in world oil prices. Riyadh just announced it will seek $10 billion in loans from abroad to offset a budget shortfall. This is unprecedented and leads many to wonder if the days of free-spending Saudis are over. Add rumors of a bitter power-struggle in the 6,000-member royal family and growing internal dissent and uber-reactionary Saudi Arabia may become the Mideast’s newest hotspot.

Two things, if this becomes true, which could part of what I have been discussing, then what should happen to Philippine OFWs?

Next, as for Saudi's public arbitrary/summary execution of the political opposition under the cover of drug dealing, will this resonate with the political climate in the Philippines under a new potential populist 'strong man rule' regime?

Updated to add: there goes the bug which automatically shrinks font to the smallest--again! Sorry for this

Charts of the Day: Middle East Exports Totally Collapsed in the Past 18 Months!

Fast and furious rally in emerging market currencies and stocks eh?

The above represents Bloomberg's Africa/Middle East's BGCC 200 Index.

Well, Gavekal Capital presents a stunning deck of charts with their accompanying explanation on the shocking crash of Middle East exports over the past 18 months (bold mine)

The value of exports out of Africa and the Mideast, according to CPB World Trade Monitor, have absolutely collapsed over the past 18 months. In USD terms, the value of exports (volume * price) have fallen by over 59% since July 2014. This is greater than the the peak to trough fall during the Asian Financial Crisis (43%), the 2000 Tech Bust (29%) or during the Global Financial Crisis (51%). Also keep in mind that the latest data is only through January 2016 so the peak to trough decline could still be accelerating lower. If we decompose the value index into the volume index and price index we see that volume has only declined by about 3% while the price index is down over 61%.

This latest free fall has had a major impact on the CAGR for Africa and Mideast export value going back to 1991 (when the data series begins). Prior to this decline, the CAGR since 1991 was 8%. The last 18 months has brought the CAGR since 1991 below 4%! We can only imagine that that this will have significant adverse effects for government budgets in this part of the world.

It shows also why collapsing exports has incited a stampede to the US dollar, e.g. January spike in Saudi riyal's forward rates.

It also hints that whatever equity gains accrued over the past two months have likely signified as a massive dead cats' bounce than a recovery.

Finally, this likewise provide clues as to what may likely happen to Philippines OFW remittances