7/21/2014

OFW Remittances:
Magic Bullet?

Introductiondela Cruz, Valdimir

Nature ofRemittances

Nature ofRemittances Law of Motion
OFW Remittances as a force on
the economy
Impact onhouseholds
financial system

7/21/2014

 a promising economy in the 1950s and 1960s
 a peak of 10.44 percent in 2006

 “sick man of Asia”

 climbed up to USD 21.4 billion in 2012 recently back to “Tiger cub” economy

 6.3 percent increase

Nature ofRemittances

 foreign direct investment (FDI) stood at USD 2.0 billion
 while net official development assistance (ODA) rested at just USD
5.1 million

The Philippine
Economy inflow of dollars are seen as an important source of funds toservice these obligations

 trouble in terms of investment andinfrastructure development phenomena can be best observed with thePhilippine power industry
 government’s poor fiscal situation prevents itfrom supporting the economy by shoring up
infrastructure such as roads and power supply

 poor aspire of working abroad and lifting their kin out of poverty

Total

 30% of the regions are still unbanked and a largerportion still was under banked
 only roughly two out of 10 households in the country
have at least one bank deposit account.

The Philippine
Financial
Sector excluding employer provided insurance, only 1.6
percent are covered by private insurance
 less than 1 percent own some type of investment
instrument aside from an insurance policy
 only 5.5 percent of household expenses are oneducation
 food, rent, transportation and communication costs
together make up 67.7 percent of expenses

The Philippine
Financial
Sector

Account at a formal financial institution (% age 15+)
Account used to receive remittances (% age 15+)
Account used to receive wages (% age 15+)
Loan from a financial institution in the past year (% age 15+)
Loan from a private lender in the past year (% age 15+)
Loan from an employer in the past year (% age 15+)
Loan from family or friends in the past year (% age 15+)
Loan in the past year (% age 15+)
Loan through store credit in the past year (% age 15+)
Mobile phone used to receive money (% age 15+)
Mobile phone used to send money (% age 15+)
Outstanding loan for funerals or weddings (% age 15+)
Outstanding loan for health or emergencies (% age 15+)
Outstanding loan for home construction (% age 15+)
Outstanding loan to pay school fees (% age 15+)
Outstanding loan to purchase a home (% age 15+)
Saved any money in the past year (% age 15+)
Saved at a financial institution in the past year (% age 15+)
Saved for emergencies in the past year (% age 15+)
Saved for future expenses in the past year (% age 15+)
Saved using a savings club in the past year (% age 15+)

26.6
12.2
8.5
10.5
12.7
11.7
39.0
58.1
26.6
12.5
7.3
5.4
28.7
5.8
20.7
3.6
45.5
14.7
36.9
31.8
6.5

Bottom 40%
10.4
4.2
2.4
5.1
10.6
11.6
43.7
58.2
33.1
11.8
6.3
6.5
31.3
5.5
22.9
4.5
32.7
3.0
26.4
22.4
4.3

Top 60%
39.6
18.6
13.3
14.9
14.3
11.9
35.1
58.1
21.4
13.1
8.1
4.5
26.6
6.0
19.0
2.9
55.8
24.1
45.4
39.3
8.3

RuralUrban
19.5
10.7
5.8
9.8
11.5
12.3
44.9
62.5
33.6
16.0
8.2
7.3
32.3
7.2
25.2
4.4
41.9
9.7
33.5
30.0
4.2

37.1
14.5
12.5
11.6
14.5
10.9
30.1
51.5
16.1
7.3
6.0
2.6
23.3
3.6
14.0
2.4
50.9
22.3
42.0
34.5
10.0

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 Fayissa and Nsiah (2010)
 positively impact economic growth of Latin Americancountries relative to external sources of capital such as
foreign aid and foreign direct investment

 Ang (2007)
 remittances functioned as income-insurance policy at themacro level channel remittances into more productive activities thansimple consumption

 link between remittances and entrepreneurship was weak
 Ang, Sugiyarto, and Jha (2009)

What others
have said:

 recipient households had larger family sizes while also
having fewer number of employed members, and had more
extended family members

 Chami, Fullenkamp, and Jahjah (2005)

What others
have said:

 recipient households relied more on investment income andhad higher savings, while non-recipient households reliedmore on entrepreneurial income impact of remittances is maximal in countries with lessdeveloped financial systems

 domestic demand driven growth rebalancing doesn’t seemto be likely

 acted as a substitute for financial services
 found that remittances boost investment in countries with aless developed financial sector

 Aggarawal, Demirguc-Kunt, Peria (2006)

Number of Deployed Overseas Filipino Workers by Type from 2008 to 2012

TYPE remittances have a statistically significant effect on
credit and deposits to GDP

Total
Landbased
New Hires
Rehires
Seabased Bettin and Zazzaro (2009)
 cost-income ratio to measure bank efficiency
 remittances enhance economic growth where banks
are sufficiently efficient Brown, Carmignani, and Fayad (2013)
 strong inverse relationship between remittances andfinancial development
 Gupta, Pattilo, and Wagh (2007)
 found that remittances had a promotional effect onfinancial development

 compensatory nature of remittances Giuliano and Ruiz-Arranz (2009) remittance receivers spend more on education and health

What others
have said: higher amounts of remittances were associated with lowergrowth2008

20092010

2011

2012

1,236,013 1,422,586 1,470,826 1,687,831 1,802,031
974,399 1,092,162 1,123,676 1,318,727 1,435,166
376,973
349,715
341,966
437,720
458,575
597,426
742,447
781,710881,007
976,591
261,614330,424
347,150
369,104
366,865

Number of Deployed Landbased Overseas Filipino Workers by Top Ten Occupational Categories, New Hires (2008-2012)

Research:OFW Profile

OCCUPATIONAL CATEGORYAll Occupational Categories - Total
Household Service Workers
Nurses Professional
Waiters, Bartenders and Related Workers
Caregivers and Caretakers
Wiremen and Electrical Workers
Plumbers and Pipe Fitters
Welders and Flame-Cutters
Laborers/Helpers General
Charworkers, Cleaners and Related Workers
Cooks and Related Workers
Other Occupational Categories

2008

2009

2010

2011

2012

376,973
50,082
11,495
13,911
10,109
8,893
9,664
6,777
9,711
11,6205,791
238,920

349,715
71,55713,014
11,977
9,228
9,752
7,722
5,910
8,099
10,056
5,028
197,372

341,966
96,58312,082
8,789
9,293
8,606
8,407
5,059
7,833
12,133
4,399
168,782

437,720
142,689
17,236
12,238
10,101
9,826
9,177
8,026
7,010
6,847
5,287
209,283

458,575
155,83115,655
14,892
10,575
10,493
9,987
9,657
9,128
8,213
6,344
207,800

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Percentage of Households with Savings (PH)Q1
Overall

Research:
AverageHouseholds

Q2

2013
Q3

2014
Q1

Q4

24.5 22.4

24.5

26.2

Less than P10,000

14.8 12.9

1415

17.8

P10,000-P29,999

33.2 28.9

31.6

36.9

38.2

P30,000 and over

57.1

68.5

67.3

60.8

62.1

Percentage of income allocated to savings (PH) 2014 Q1

6%

7%

6%

Less than 5%27%

5% to 9%28.9

Research:
AverageHouseholds

10% to 14%
15% to 19%

24%
30%

20% to 24%25% and over

Percentage of OFW Households by Type of Use of Remittances
0102030

4050

Food

Education

Medical Expenses

Research:
AverageHouseholds

Research:
Remittance
Recipients

Debt Payments

Savings

Consumer Durables

House (Rent)

Investment

Motor Vehicle

Others

2009

2014

60

70

80

90

100

7/21/2014

 Financial Development = Remittances + Foreign Direct investment + Exchange
Rate + Interest Rate
Change in X variable Financial Development variables : deposits to GDP – utilization, scale of bank utilization with respect to theeconomy;
 bank assets to GDP – magnitude, size of the banking industry with respect tothe economyRegression

 Explanatory variables: OFW remittances – main topic of interest; acts like direct cash injection into
the economy from an external source. Positive correlation is expected intheory; given large infusion of cash, recipients must have some left over fromconsumption and would normally be expected to enter the financial system
via deposits. Also, as incomes increase, people are expected to be involved in
the financial system through savings or investments.
 FDI – foreign direct investments also lead to more funds in the system; again
we assume that private enterprise would utilize the resource productively or
would push up demand for a better financial system thus leading to higher
financial development
 Exchange rate (USD) – increases in the exchange rate would lead to
additional savings as goods become more expensive and consumers would
spend less Interest rate – higher interest rates should lead to an increase in deposits as
people choose to take advantage. Bank assets should also increase as banks
would need to channel the increased liability (deposits) productively.

Effect on Growth of rate of utilization

growth of 1% increase in remittances Positive growth in both remittances and FDI cause bankutilization to accelerate.
growth of 1% increase in FDI
exchange rate depreciation

As the Peso depreciates, utilization also accelerates

deposit rates

Deposit rate hikes also cause utilization to accelerate.

growth of lending rates

Lending rate hikes also cause utilization to accelerate.

Regression
Change in X variable

Effect on Growth of banking sector

growth of 1% increase in remittances Positive growth in remittances and FDI cause bank sector
size to shrink
growth of 1% increase in FDI
exchange rate depreciation

As the Peso appreciates, the banking sector grows

deposit rates

Deposit rate hikes cause the banking sector to growgrowth of lending rates

Lending rate hikes also cause growth in the banking sector

 remittances are not a magic bullet
 have localized impacts by providing much needed income to the poor even outside the financial sector, if properly harnessed, this resource could provide
additional funding to sectors that need access to it, acting as another reservoir of funds.
 entrepreneurial activity and investment in capital goods would yield dividends.
 if the financial sector was at a more developed and high functioning state households could participate and boost the total resources available to the system
 GOODJOBConclusion

 greater financial inclusion
 via several financial literacy and financial advocacy campaigns is encouraging.
 development of micro enterprises
 grow into small and medium enterprises

FIN
THANK YOU
ありがとうございます BUT
 national government must match this with complimentary programs
 funding has been half of the issue, the other half has been the encouragement ofinvestment and the efficient execution of projects that would stimulate the economy.
 remittances can only do so much development of key sectors such as manufacturing is critical to achieve success

謝謝“GIVE A MAN A FISH AND YOU FEED HIM FOR A
DAY, TEACH A MAN TO FISH AND YOU FEEDHIM FOR A LIFETIME”