Dubai debt crisis: Should Filipinos worry?

MANILA – The Philippines is watching 3 key areas that may take a hit from the ongoing Dubai debt crisis: volume of remittances, foreign exchange rates, and the cost of foreign borrowings sourced from global bond market.

The 3 indicates the Philippines’ possible areas of vulnerability when a global economic or financial event ensues.

Dubai shocked creditors last Wednesday when it asked for a 6-month delay on billions of dollars of debt issued by the flagship firm Dubai World conglomerate and its property subsidiary Nakheel, builder of luxury homes on 3 man-made, palm tree-shaped islands.

The news has rattled global capital and financial markets.

Should we be concerned as well?

Filipinos in Dubai

A major global exporter of labor instead of goods, the Philippines depends on over $16 billion worth of remittances from an army of overseas working Filipinos deployed worldwide.

The ability of rich countries to absorb Filipinos who want to work overseas has been put to test when the host countries’ economies almost skidded to a halt in the aftermath of the subprime mortgage debacle in 2008.

Dubai is host to between 200,000 and 250,000 Filipinos, a fraction of almost 10 million overseas Filipino workers (OFW). Dubai has been highly dependent on foreign labor to pursue glitzy business free zones, financial centers, advanced infrastructure built at breakneck speed.

Dubai, however, is just one of the 7 emirates that compose the United Arab Emirates, which hosts a total of 250,000 to 350,000 OFWs employed in service and construction activities. About 30% are in Abu Dhabi, the political capital, and the rest are in other emirates.

According to the latest data from the Philippine Overseas Employment Agency, the United Arab Emirates was the destination of some 193,810, or 20%, of almost one billion newly hired and re-hired OFW who left the country in 2008.

In the Middle East, the United Arab Emirates is the second top destination of newly hired and re-hired OFWs next to Saudi Arabia. In 2008, 28% or 275,933 OFWs departed for Saudi Arabia.

At the onset of the global financial crisis in 2008, which led to the drying up of credit worldwide, construction activities have already been slowing down in the UAE.

Around the same time, other Middle East destinations, like Qatar, which aims to replicate or even surpass Dubai’s successes, have become more attractive destinations for job-seeking Filipinos. Dubai’s high cost of living, including prohibitive rental rates, reduced the appeal of working in Dubai.

Updated figures on OFW deployment to Dubai for 2009 are not yet available, but another good indicator of the impact of the UAE to the Philippine economy is the trend in the remittances flowing from that part of the world.

Remittances

The money sent home by OFWs to loved ones in the Philippines is a pillar of domestic spending, which in turn fuel growth of real estate, retail, and telecommunications revenues. Through the years, inward remittances have become a more reliable source of dollars than export receipts or direct investments by foreign firms.

Annual remittances from the UAE have been the fifth or sixth highest among different OFW destinations. The UAE accounts for over one-fourth of the total petrodollars coming from the Middle East region.

This year, however, Bangko Sentral ng Pilipinas data showed that January to September remittances from UAE has only reached $471 million—slightly lower than the $474 million sent home in the same period in 2008.

Remittances from Qatar, on the other hand, posted a whopping 44% growth. In the first 9 months this year, money sent home reached $125 million. In 2008, it was only $92 million.

Funds coming from Saudi Arabia, grew a modest 5% in the same period—from $1.05 billion in 2008 to $1.11 billion this year.

In both Qatar and Saudi Arabia, construction activities and allied services have remained robust.

Given this remittance picture, Qatar and Saudi Arabia have already been cushioning the declining remittances from Dubai even before Dubai World’s debts became an issue.

BSP governor Amando Tetangco had previously expressed confidence that the Dubai debt issue “would not have a significant adverse impact on flows to the country in the near term.”

Financial system, foreign exchange

In an interview with ANC’s Business Nightly, University of Asia and the Pacific economics professor Victor Abola noted that the Dubai firms’ debts will hit big global banks.

A Reuters report showed that HSBC, Standard Chartered, Barclays, ABN AMRO, Arab Bank and Citigroup lead the list of foreign banks with the biggest loan exposures in the UAE. However, loans extended by each foreign bank to Dubai World and Nakheel are yet to be determined.

Philippine banks, which lack the scale and capital to compete in multibillion-dollar global deals, have nothing to worry. But just for good measure, Tetangco said the local banks have no direct exposure to Dubai World and Nakheel.

With the local financial system spared, Abola said he does not see a similar contagion as what occurred during the Asian financial crisis in the late 1990’s that “affected countries as a whole.”

However, movements in the global financial system impact on the value of the local currency, which in turn determines the peso equivalent of funds sent home by OFWs to their loved ones at home.

Banco de Oro Unibank chief market strategist Jonathan Ravelas told Business Mirror that the Philippine peso could re-test the P47.50 level against the US dollar after falling 0.2% to P47.205 on Friday.

Ravelas previously forecasted that the peso-dollar exchange rate will be at P47.75 by yearend.

The peso strengthens against the dollar as the Philippines approach the Christmas and New Year holidays. This is one of the seasonal periods of the year when OFWs send more money home as family and relatives, most of them predominantly Christians, celebrate these festive seasons.

However, typhoons that battered the country could have led OFWs to send money home earlier than the usual.

The effect of the Dubai crisis on the peso is yet to be tested as the foreign exchange market deals with possible volatilities.

Global investors are also assessing the possibility of another global systemic crisis arising from the debt problems in Dubai. So far, the announcement of the United Arab Emirates central bank on Sunday to set up an emergency liquidity for commercial banks has somehow calmed the frayed nerves of investors—as of now.

RP foreign debts

Another direct impact of the Dubai debt problems on the Philippines is the higher cost of foreign borrowings.

The Philippines, one of the most active emerging markets global debt issuer, relies on the global bond markets for a portion of its foreign debts.

These debts help plug the national budget deficit, which has widened this year as the global economic slowdown took its toll on tax and customs collections.

Abola said the spread on—or the cost of—the Philippine sovereign bonds, as well as those of other emerging markets could temporarily widen in the wake of the Dubai debt problems.

Last Friday, Philippine sovereign bonds due in 2016 were trading at 115 and 117 basis points.

“The national government may also have to postpone its global bond offering to time it well. [The monetary officials may want to wait until] markets have normalized a bit,” Abola noted. –Lala Rimando, abs-cbnNEWS.com/Newsbreak