Relying on remittances

As we have seen in the last few weeks, an ailing US economy can really hurt Asia, and that includes us. The Philippine stock market has lost 50 percent in value this year and is headed for its worst performance ever. The peso, on the other hand, has declined 19 percent, its worst showing since the Estrada impeachment trial of 2000.

It is against this backdrop that the Philippines and the rest of Asia now should worry about the future. The region is largely dependent on exports, which accounts for anywhere between 40 and 60 percent of respective gross domestic products. Ours is two-fifths of GDP, which in itself, already isn’t a small number.

In the aftermath of this financial market turmoil, the decoupling theory still seems to have some advocates. They still believe that the whole world could be decoupled – or unaffected – from the US housing mortgage problems.

Notwithstanding citizen Joe’s inability to pay for the second house he bought on credit and the real estate speculation that has wiped out some of the biggest names in Wall Street, these loyal decouplers ignore the changes affecting a Europe that is going into recession, or even the stuttering of mighty Japan and the emerging economies of China and India.

Subscribers to the decoupling theory believe that Asian economies had already accumulated enough strength to withstand any financial upheavals emanating from the world’s biggest economy.

In fact, decouplers argue that the combined China and India volumes already account for about 20 percent of global trade, similar to what the US currently accounts for.

Even when the subprime crisis started last year, decouplers cheered the apparent immunity of Asian stock markets and currencies. But lately, cracks are starting to show in this solid belief.

Believing in resiliency

In the Philippines, there are those also who continue to believe that the local economy will remain resilient, and have even come out to predict that remittances will continue to grow even if the US and Europe sinks into recession, never mind if more than half of remittances come from the US

These decouplers argue that the majority of Filipinos in the US are nurses and I.T. experts who should be recession-proof. Whether or not they have actual data to back it up, and whether the two sectors are actually immune to slumping growth remain to be seen.

Decouplers also bring to the discussion how the booming Middle East economies will pick up the slack for cooling demand elsewhere. True there was petrodollar bonanza up until the first half of the year as crude oil surged close to $150 a barrel.

But this is no longer the case in recent days, with crude oil prices already dropping to near $60-levels and the possibility of a $200-barrel of oil quickly dissipating along with most of the world’s wealth and asset values.

Let’s hope that these decouplers are proven right. Otherwise, we could just wake up one morning confronted with insurmountable problems resulting from returning overseas Filipino workers and sharply diminishing remittances.

Remittances move the economy

Remittances, accounting for about 10 percent of GDP, aren’t reflected in the books as domestic income but since they’ve fueled domestic spending in the last couple of years, they’re seen as essential components to the stability of the country. Private consumption accounts for two-thirds of the local economy.

OFW families buying homes, cars and gadgets have fueled much of the boom that we’ve seen in the last two to three years as remittances continued to rise to record levels each year.

Dropping remittance levels

Lately, some officials of the central bank have begun to concede that 2008 may see the last of the all-time remittance highs – at least until after the US economy gets back to its feet.

Luckily, because of the extra heavy flow of dollars to the country earlier this year, remittances will still post a growth of 12 percent by yearend even assuming a flat growth between September and December. We’ve seen year-on-year growth slow down to 10 percent in August from 25 percent in July.

So the chances of remittances actually dropping for the first time in years is very, very likely because deployment is slowing down and job cuts is a very big possibility later next year as the US and Europe continue to roil from the worst financial crisis in eight decades.

As remittances and exports drop, the peso will probably weaken back to the 50-level. With less dollar inflow, the country’s balance of payments may swing to a deficit and the foreign exchange reserves may contract from record highs.

Moving on

If it’s any consolation, we’ve been in this situation before. It is now for our economic leaders in government and private sector to accept realities and plan for this eventuality. For one, laying out decent reintegration measures for our overseas workers who would definitely be affected by the global slump should be initiated.

Giving words of unrealistic assurances to gain political points would lead to disillusionment and more drastic social and political backlash. At this time, the country needs concrete actions to move on in the aftermath of this global crisis.

Collegiate Champions League update

The 2008 Philippine Collegiate Championship games presented by SMART, PLDT, FilOil Flying V and KFC start today up to November 6 the zonal phase of the competition at the Makati Coliseum. Admission is free and the games will feature three regional champions and nine qualifiers from Metro-Manila leagues competing for two slots in the FilOil Flying V “Sweet 16” Final Challenge of the 2008 Philippine Collegiate Championship.

The teams are divided into four groups, namely: Group A – Mapua Cardinals, NCAA fourth placer ; Lyceum-Batangas and University of Luzon (Pangasinan-Pampanga) champion; Group B – Arellano University Chiefs; St. Louis University (Ilocos-Baguio) champion; and UST Growling Tigers; Group C – Lyceum-Manila Pirates; Don Bosco-Mandaluyong, NCAA-South champion; and University of Nueva Caceres, (Quezon/Bicol) champion; and Group D – UE Warriors, UAAP fourth placer; EAC Generals and St Clare Saints.

Students are also invited to log in at www.CollegiateChampionsLeague.net and submit your choices of teams that will advance to the FilOil Flying V “Sweet 16” Final Challenge. Those with most number of correct choices will receive surprise gifts from the sponsors.

For more details about the biggest collegiate basketball event for the year presented by SMART, PLDT, FilOil Flying V and KFC visit the official website, www.CollegiateChampionsLeague.net and www.gameface.ph, internet media partner of PCCL.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.