The Philippines plunged deep into recession in the second quarter as Covid-19 took a fatal toll on the economy. And yet the 16.5% plunge in growth wasn’t the worst figure to come out of Manila this week. That would be the 19.3% free-fall in cash remittances recorded in May.
The interplay between these two numbers explains why investors are right to doubt President Rodrigo Duterte’s spin about better times ahead. There aren’t, as Covid-19 fallout pops the nation’s biggest economic bubble: the industry of exporting workers.
The word bubble here has two inferences. The first is to the conventional wisdom in Manila that overseas Filipino workers, or OFWs are they’re affectionately called, are the nation’s secret weapon.
It holds that record US$33.5 billion of cash sent home in 2019 from Hong Kong, Dubai and Los Angeles is a key source of strength that supports local consumption and property markets, fills government coffers and reduces poverty.
It’s really a long-term addiction, a crutch that enables government after government to neglect job creation at home. Anytime Gloria Arroyo, president from 2001 to 2010, traveled abroad, her first meeting was with immigration officials to secure more work visas for Filipinos.
So did President Joseph Estrada before her, and, for the most part, Benigno Aquino after her. Though Aquino reputedly aspired to break the cycle during his 2010-2016 tenure, the outward migration of talent continued apace.
These workers are often touted as returning heroes, with VIP lanes at Philippine airports. Governments, of course, would do more to honor them with millions of good-paying jobs at home. Yet, in 2016, President Rodrigo Duterte pivoted to sending more workers abroad and making it official: humans are the Philippines’ main export commodity.
Duterte is working to create an OFW agency, a cabinet level department to facilitate the outflows. He also is launching an Overseas Filipino Bank. When Duterte travels abroad, meantime, holding rallies with OFWs are among the first events planned. This remittance-generating diaspora has become a key Duterte voting block to be wooed and rewarded.
The other bubble — the extent to which economic growth is too reliant on this exporting-people dynamic — has run into the Covid-19 wall. As hotels, restaurants, cruise ships and construction sites go idle around the globe, Manila’s secret weapon is morphing into a not-so-mysterious cash shortfall.
Duterte’s team suddenly has one fewer growth stabilizer. In 2019, remittances accounted for roughly 10% of gross domestic product (GDP). As these flows evaporate, investors and rating agencies alike will grow increasingly concerned about Manila’s current-account deficit and the peso’s stability.
In June, goods exports plunged 13.3%, while imports fell 24.5%. Such data point both to “weak global demand and a stalling domestic economy,” says Nicholas Mapa at Dutch bank ING. “Remittances,” he added, “aren’t expected to recover anytime soon with the global economy likely in recession, adding more heat to an already precarious situation for Philippine domestic growth prospects.”
Those prospects could darken further as the year progresses and Covid-19 lockdowns persist around the globe. And the Philippines, it’s important to remember, is hardly alone.
In a new report, Asian Development Bank (ADB) flagged a likely $108.6 billion drop in remittances this year as the pandemic devastates jobs and incomes everywhere. Asia could see roughly a fifth of its normal remittance inflows, representing a $54.3 billion drop.
“The Covid-19 pandemic is expected to hit remittances hard in Asia and the Pacific,” ADB warns, making specific mention of risks to Nepal and the Philippines.
So-called “Covid-19 nationalism” is becoming an uncertain dynamic of its own. As Fitch Ratings warned in May, governments from Singapore to the US are sharply reducing visas for imported workers.
It lists the Philippines along with those nations with “large, relatively poor populations” where “government support is likely to be inadequate to preserve and guarantee jobs for the vast numbers that are employed in the informal sector.”
It’s time the Philippine government did its job and created more vibrant and innovative domestic manufacturing and service industries. That would give 10% of the population — and the much larger orbit of families relying on remittances — options to work gainfully closer to home.
The remittance growth model had huge drawbacks well before the coronavirus appeared. In a December report, US-based global payments company UniTeller found that OFW remittance flows average more than 2.5 times what recipients in the Philippines are making. And yet poor financial planning means all too many families run out of cash in short order.
Even so, this financial support still takes the onus off one Philippine government after another to build a more dynamic economy. There’s been all too little progress in raising the nation’s game as an export power. This failure explains why one of Asia’s fastest-growth economies swung so rapidly from China-like 7% plus GDP growth to recession.
Hence the ills of Manila’s decades-long addiction to millions of workers wiring salaries home.
Remittances “have become a key source of foreign earnings for economies that cannot compete in export markets,” says analyst Vincent Tsui of Gavekal Research. “Cutting them could spur a spiral of poverty and protest that ends with debt defaults that suck in well-managed emerging markets.”
The Philippines, of course, has rarely ranked among well-managed economies. This descriptor fit for a time during Aquino’s six-year presidency. His team repaired the national balance sheet by going after graft and tax evasion to boost government revenues.
Moves to increase accountability and transparency cheered global investors and scored Manila its first-ever investment-grade ratings.
Since taking over four-plus years ago, Duterte mostly rested on Aquino’s laurels. Yes, he accelerated infrastructure upgrades. Duterte’s $180 billion “Build, Build, Build” program promises to construct hardware — roads, bridges, ports and power grids — needed to compete in Southeast Asia.
Yet he’s invested little in economic software — education, training and regulatory tweaks to support a startup boom. Spending more on the latter would help the Philippines keep more of its best and brightest at home, not toiling around the globe in ways that deplete the nation’s talent.