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3 March 2010

Philippines: Remittances hurt manufacturing, exports

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Money sent home by Filipino workers abroad has been a boon for the economy, but has also had a negative indirect impact on manufacturing and exports, the Business World reported, quoting a study by an economist from the University of the Philippines (UP) showed.

The study, titled "The Macroeconomic Impact of Remittances in the Philippines," by UP economist Cayetano W. Paderanga, Jr., cited that the steady inflow of dollars remittances strengthens the peso, making labor and production costs here more expensive than those of competing neighbors in the region.

Hence, while a strong peso fortifies the country’s external payment position and international reserves, providing a cushion against sudden external shocks, it also erodes the competitiveness of the Philippines in terms of exports and its position as an investment location, especially for manufacturing.

"The downside of an appreciating currency is the decline in the country’s cost competitiveness... Asian neighbors viewed as more cost-competitive in wages and other inputs are better havens for investment," the paper said.

"As the domestic currency strengthened, the competitive position of domestic production in the Philippines suffered," it added, noting that investments here have dropped even as remittances continue to climb.

Paderanga, chairman of the Institute for Development and Econometric Analysis Inc., added that while local savings have increased with the rise in remittances, these have not been mobilised to fund local development priorities.

Despite the recession that gripped developed economies last year, some of which hosted Filipino workers, remittances grew by 5.61 percent to $17.35 billion, equivalent to about a tenth of economic output.

This year, the central bank expects these flows to grow by 6 percent on the back of the global economic recovery.

In a telephone interview last Sunday, Sergio R. Ortiz-Luis, Jr., president of the Philippine Exporters Confederation, Inc., agreed with the study’s observations.

"Even exporters are saying that their dollar earnings have become negative for them, as the peso appreciates with remittances... It’s cheaper for us to import rather than manufacture," he said.

He conceded, however, the benefits of remittances. "We have already factored that (remittances’ negative indirect impact)... It’s a problem, but not something you can’t help... The good it gives is much more important than the (problem caused by) the peso appreciation," he said.

"What we want avoided are foreign borrowings of the government and policies that favor a stronger peso rather than a competitive exchange rate," University of Santo Tomas economics professor Alvin P. Ang said. If left unchecked, these can have long-term implications, he added.


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