wikileaks ico  Home papers ico  Cables mirror and Afghan War Diary privacy policy Privacy
2005-09-28 08:15:00
Embassy Manila
Cable title:  

Prospering from the Remittance Gusher

pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
						UNCLAS SECTION 01 OF 03 MANILA 004639 



E.O. 12958: N/A
SUBJECT: Prospering from the Remittance Gusher

REF: 04 Manila 5555


1. Overseas Filipino Worker (OFW) remittances grew by
22% for the first seven months of 2005, and should
approach $10 billion for the year, equal to 10% of GDP.
Two-thirds of remitters from the U.S. use the banking
system while others go through informal channels.
Surveys show recipients apply most funds to food,
housing, and education though consumption of domestic
goods can have a beneficial multiplier effect.
Remittances are a major source of foreign exchange for
the country, supporting the balance of payments and
international currency reserves. The exodus of OFWs,
particularly in white-collar jobs, is creating labor
shortages in key sectors, such as health care and
engineering. End Summary.


Dear OFW: Please Send Money


2. The Philippines is the third largest recipient of
remitted funds in the world, behind only India and
Mexico, in part because it has the highest rate of out-
migration relative to population of any country in East
or South Asia. About 9% of the population, one-quarter
of the labor force, live and work overseas. The number
of OFWs is growing by 2500 each day, or 800,000 annually.
OFW remittance flows through banks continue to climb.
According to the Bangko Sentral ng Pilipinas (BSP - the
Central Bank), remittances grew by 10% to $7.58 billion
in 2003, and by almost 13% to $8.55 billion in 2004,
equivalent to 10% of GDP. For January through July 2005,
the Philippines received $5.8 billion, 22% more than
during the first seven months of 2004, and could receive
$10 billion by year-end.

3. The high number of Filipino seamen account for almost
20% of remittances coursed through banks. On a regional
basis, the Americas accounts for almost 60% of remittance
flows, while Europe and the Middle East each accounted
for about 15%, and Asia 11%. According to the World
Bank, 53% of Philippine remittances were sourced from the
U.S. in 2003. The data are skewed, however, because
banks record the final transmission source, not where
funds originated, and many funds are routed through
correspondent banks in the U.S. In addition, the Asian
Development Bank calculates that 24% of OFWs remit funds
outside the banking system, so total remittances may
actually exceed $12-$13 billion for 2005.


How Well Are the Funds Used?


4. In a September 14 presentation, University of the
Philippines Professor Cid Terosa said that in a survey of
41,000 households receiving money from overseas, 67% of

OFWs remit funds through banks, 28% use informal channels
or bring the money home themselves, and 5% use agencies
or friends. Seventy-five percent of the beneficiaries of
OFW bank remittances withdraw 60-100% of these funds and
42% withdraw all 100%. A large proportion of the
official remittances are channeled through Western Union,
which uses Philippine banks, institutions, and even
pawnshops throughout the country as conduits for funds.
Terosa said households receiving OFW remittances obtain
33% of all their income from these remittances. The
households spend the remittances in the following

Daily or regular expenses - 50%
Education - 21%
Savings and investment - 16%
Durable assets, housing - 10%
Pension, insurance - 3%

5. Terosa concluded that Philippine households have an
84% propensity to consume, leaving only 16% for savings
and investment. If accurate, this rate is below the
overall Philippine savings rate of 21%, which is far
below the savings rate of other Asian countries (ranging
from 28% for Vietnam to 48% for Singapore). A similar
household survey conducted by the ADB found that food,
education, and rent receive the highest use of funds.
One banker who attended the seminar disputed this
finding, however, noting that families spend a far
greater percentage of their household income on land and
house purchases, which could be considered investments.
An Amcham member pointed out that education is itself an
investment. One attendee noted that consumption
expenditures are worthwhile if they are for basic
necessities and not imported luxury goods. Categories
missing from the breakdown include transportation and
utility payments, which likely consume portions of the
remitted funds.

6. The economic impact of remittances is likely to
depend on whether households consume or invest. Although
investing in productive activity is the best use of
funds, even consumption generates positive multiplier
effects, especially in the rural areas where remittances
buy mainly domestic goods. A report on remittances
financed by the Asian Development Bank concluded that
investment decisions by recipients are often faulty,
leading them to place money in small-scale enterprises
that eventually fail or have little impact on
productivity. Even those who save the money in big urban
banks are not helping finance development in their home
districts. In response, Local Government Units (LGU) are
starting to apply resources to both attracting OFW
remittances and helping recipients apply those funds
productively. In Bohol, for example, the provincial
government organized an investment seminar for 300 OFWs
and then facilitated a match-making service to link the
OFWs up to a particular project.


Benefits to Nation and Individual


7. Remittances are a major source of foreign exchange,
in recent years exceeding foreign direct investment
inflows by 30-50 times. As such, remittances provide
crucial support to the Philippines' balance of payments
(BOP) and a significant contributor to its foreign
currency reserves. From 2000-2004, for example, while
remittances grew from $6 billion to over $8 billion, the
country's BOP level fluctuated between a deficit of $500
million and a surplus of $660 million and reserves
averaged $16 billion.

8. Given the important role remittances play in
supporting the Philippine economy, there is frequent
speculation whether an economic crisis or political
trouble would reduce the inflow of funds. An IMF study
concluded that remittances play a stabilizing role and
reduce the chance of a financial contraction during
political strife or economic downturns. Remittances
supported household expenditures and offset the sharp
falloff in capital inflows during the Asian crisis, for
example. Remittances may actually increase during times
of economic hardship as OFWs try to help their families
meet emergency needs and remitters take advantage of a
depreciated peso. A crisis outside the Philippines that
reduces the employment level of OFWs, however, would be
painful on recipient families and hurt the country's
balance of payment.


Remittance Downsides


9. Twenty years ago, OFWs comprised mainly workers in
the construction and manufacturing sectors. Today, there
are fewer jobs in these sectors and more opportunities
for domestic employees and seafarers. According to
several surveys, a greater number of white-collar workers
are choosing jobs overseas. Skilled professionals now
account for over one-third of all OFWs, creating a brain
drain and labor shortages in key sectors, including
health care, education, engineering, and even specialized
professions such as air traffic control (ref b-c). The
higher pay levels are one important reason remittance
flows have increased substantially in recent years. In
addition, IMF studies have shown no evidence that
remittances lead to lower growth because of exported
labor or by discouraging work among recipients.
Overlooked in the good news about OFW remittance flows,
however, is that many OFWs are deciding not to return,
abandoning plans to retire in the Philippines. Many are
reportedly disenchanted with the bureaucracy and unstable
political situation. It is not encouraging that in a
survey conducted by the University of the Philippines,
93% of young adults would choose to live overseas if
given the chance.


Compounding the Benefits


10. To capture the full range of benefits from OFW
financial flows, the GRP and development partners are
looking at ways to reduce the cost of transferring money
overseas and increase the flow of remittances through the
formal banking system. As one measure, the GRP passed
legislation in 2003 allowing dual citizenship and
granting voting rights to OFWs. Immigration officials
even channel OFWs into a special lane at the
international airport to expedite their re-entry.
Government oversight committees have held several
hearings in recent months to examine ways of reducing the
cost of transmitting funds to the Philippines. New
services that allow money transfers through cellular
phone networks are further cutting down on the time and
expense involved in sending money and making payments.
These technologies also allow greater integration of the
rural banking system in the remittance business.