OFWs: More than just remittances

First of two parts
(Ric Saludo’s colleague Bill Huang contributed this guest column.)

WITH the successful auction of Overseas Filipino Worker (OFW) bonds in April— $416 million in three-year and five-year bonds with dollar and euro denominations—the government has taken an important first step in mobilizing OFW remittances for investment. And in the nick of time: remittance growth have slowed from double-digit rates, making it even more imperative to put the greenback inflows to better use than just buying apparel, appliances and a place to live for the family back home.

The remittance bonanza is fading. In April, the Bangko Sentral ng Pilipinas (BSP) reported remittances reaching $6.21 billion for the year to date, putting 2011 on track to do no better than 2010’s full-year total of $18.8 billion. The BSP itself projects 7% growth this year, less than last year’s 8.1%, citing Middle East unrest and Japan’s post-tsunami downturn. Philippine banks, for their part, expect no better than 5%-6%. Those figures pale against the 15% annual average increase in remittances in the past couple of decades.

Remittances also face pressure from a stronger peso. Even if they continue to grow, less pesos for OFW dollars cuts their boost for the economy. According to “http://www.exchange-rates.org” www.exchange-rates.org, the peso has appreciated over 6% against the dollar in the last 12 months. If the dollar exchange rate hits ?41 by December, as one major international bank predicts, the peso value of remittances could decline even if they match last year’s growth in dollar terms.

That could deal a blow to the economy’s consumption-fueled growth. In data from a February UNCTAD meeting on development and remittances, money flows to the country in 1975-2008 totaled an estimated $130 billion — about 12% or just over one-eighth of gross domestic product (GDP). For many years now, the World Bank report on remittances has placed the Philippines as the fourth-largest recipient, behind only populous India and China, and US neighbor Mexico. With such reliance on remittances, an OFW cash crunch would significantly dampen the economy.

The Philippines must face the challenge of remittance dependence. Other countries have done so, and we can learn from them. The world is realizing that more can be done with overseas remittances than just bumping up household disposable income. Indeed, if Filipinos are to finally find well-paying, quality jobs at home, we need to invest more in infrastructure, enterprises, education, and other growth-boosting, job-creating economic factors. And part of that needed capital should come from Filipinos abroad.

On the heels of the first OFW bond auction, BSP Governor Amando Tetangco was out in the field urging OFW families to invest. But if there is a need for financial literacy to be fostered among OFWs and their families, perhaps the government can build up its own capital raising ideas by reviewing what other countries have been doing.

In their March 2009 study Maximizing the Value of Remittances for Economic Development, Michael Comstock, Marco Iannone and Romi Bhatia list several ways to engage remittances on a macro-economic level, including what they call ‘diaspora bonds’ for a country’s nationals living or working abroad, to finance development projects back home. The study cites the government of Israel’s diaspora bonds, which raised over $1.5 billion in 2003 alone, and have funded development for decades.

The study also discusses the use of future-flow securitization to raise external financing. In 2001, based on projected yen remittances from Brazilian workers in Japan, Banco do Brasil issued $300 million in bonds at better-than-usual rates and terms for sovereign loans. Turkey, Mexico, Panama, and El Salvador have reportedly adopted this mode of remittance-backed financing.

In short, bonds can tap immigrant communities, not just overseas contract workers, and they can capitalize not just current remittance flows, but future ones too.

Meanwhile, Beyond Remittances, a July 2004 study from Washington think tank Migration Policy Institute (MPI), discussed official government initiatives to engage diaspora communities from China, India, the Philippines, and Mexico, among others, in the development of their countries of origin.

While the government of the People’s Republic of China has always sought to foster a sense of ethnic identity among overseas Chinese communities of emigrants and their descendants. In the last 30 years, with the country’s economic liberalization, it’s also been promoting the economic dimension of their relationship, but with emphasis on foreign direct investment and trade rather than remittances.

The MPI study estimates that about half of the $48 billion in FDIs going to China in 2002 came from its diaspora, adding that overseas Chinese also influence strongly the volume of bilateral trade between China and their adopted countries. Overseas Chinese capitalized on their linguistic, cultural, social, and personal ties with their motherland.
(The column concludes on Monday.) –RICARDO SALUDO, Manila Times

Bill Huang (M.A. Financial Economics, Fordham) is senior editor at the Center for Strategy, Enterprise & Intelligence (bill.huang@censeisolutions.com), which publishes The CenSEI Report providing analytic research of major national and global issues. ric.saludo@censeisolutions.com