Debt watchdog says US woes threaten OFW remittances

MANILA, Philippines – A local debt watchdog yesterday said that remittances of overseas Filipino workers (OFWs) might not be able to cushion the impact of the recession in the United States on the Philippine economy for long.

In a forum titled “Global Financial Crisis: Why the worst is still to come for the Philippines,” the Freedom from Debt Coalition (FDC) claimed that OFW remittances are “threatened” by the continuing downturn in the US economy, especially since the bigger concentration of OFWs are in countries largely affected by the worst financial crisis in decades.

FDC trustee Maitet Pascual explained that even while OFW remittances have been a “lifeline” for the survival of the Philippine economy during financial crises, OFWs are now a “vulnerable” sector since they are mostly in the US, the source of the crunch.

Other places Europe and Japan are also reeling from the “global financial flu,” Pascual said.

Such situation, she noted, could possibly weaken remittances into the Philippines and might even result in a massive deportation of OFWs.

She stressed that the “most vulnerable” among the groups of OFWs would be undocumented Filipinos in crisis-hit nations and seamen dependent on trade.

She pointed out that weakening trade would result in lower demand for shipping, and therefore, lower demand for seamen.

“OFW remittance does not translate to investment spending or government spending, and only little on consumer spending,” Pascual said.

“Without OFW remittances, the Philippines will still be incurring negative balances in its current account,” she also said as the export of labor has changed the country’s current account since 2005.

She said the US recession would likely impact strongly on the real economy, such as labor and goods export, rather than in the country’s financial system or debt and borrowing.

She added that the financial crunch could possibly lead to weak demand from major trading partners, which would translate to weakened exports despite a depreciating peso.

She said the service sector appears to have already been affected by the global downturn or recession.

On the country’s financial flows, Pascual said that outflows, in particular, have already begun since last year when the sub-prime mortgage crisis started.

She said that government should not expect portfolio investment or capital to come in any time soon.

As for debt and borrowing, Pascual said that credit rating should be expected to adjust with the increase in the cost of borrowing. 

She added that the perceived risk of lending to the Philippines is “most likely” to increase.

“All of this is happening against the backdrop of falling purchasing power (of people) due to inflation such as higher prices of fuel and global warming, which affects food production, and persistent joblessness,” she said.

“If consumers have dwindling power to spend, and there is weak export, and joblessness, then the trend is really decreasing,” she said.

‘Worse than the 1997 crisis’

Wilson Fortaleza, another FDC trustee, warned the government that the worst is yet to come for the country amid the continuing US recession.

Fortaleza refuted the alleged confidence of the Arroyo government that the Philippines would be insulated from the financial crisis, noting that a similar or even more severe scenario than the 1997 Asian financial crisis is likely to affect the country this time.

He said massive layoffs could be expected with the current global financial crisis affecting both the formal and informal sectors. 

He also agreed with observations that there would be cutbacks in overseas employment, a drop in OFW remittances, and further increase in the country’s inflation rate due to the crunch.

“Formal sector layoffs will tend to occur in the first instance, not only in finance sectors. Ripple-on effects are usually felt initially in construction and small-scale manufacturing. Retail and wholesale services, as well as transport, will also be affected quite quickly by falling consumer demand,” he explained.

“Eventually, medium size and large manufacturing will see its profits and labor forces being affected. And when well-off people and the middle class spend less, tourism, hotel, catering, and the entertainment industry (would) see fewer clients and reduction of their staff will be the natural consequence,” he said.

Citing government data, Fortaleza said that in the 1997 Asian financial crisis, between January and September 1998, a total of 115,478 workers nationwide lost their jobs in 2,276 companies, which reported closures and retrenchments.

He said that the slack in demand was noted as the main reason for the closures.

On the other hand, Fortaleza said that over the period 1997-2000, more than 13,000 workers lost their jobs in the banking sector due mainly to mergers and acquisitions and downsizing/streamlining of operations.

He also pointed out that when the Asian financial crisis hit the Philippines in 1997, inflation was relatively stable at 5.1 percent.  The rate, however, rose sharply to 10.5 percent in 1998.

“A worse scenario can be expected now with the inflation rate (as of August 2008) at 12.5 percent. From past experience, this may double to 25 percent,” he said.

“It should also be considered that there was no food crisis in 1997.  Now we have a severe one. Also, the price of oil in 1997 was only P4 per liter, and now it is between P40-P50 per liter. Exchange rate in 1997 was P27 to $1. Now it is P46 to $1.

“We have been through this (crisis) 10 years ago. And if they were saying that today’s crisis is worse than before, then we should expect that its impact on the Philippines would also be worse. The current crisis is, therefore, expected to bring more distress to investors, who see the value of their stocks fall.”