Spotlight: The Philippines (The Monito Briefing Issue #11)

Hello! This week, we're continuing our 'Spotlight' series by turning our focus to the Philippines and the evolving role of remittances in its economy.

Industry Highlights

Before we get going, here are some of the major headlines from the past two weeks:

• The People's Bank of China (PBOC) has announced it will look into testing its new e-CNY digital currency for cross-border payments as part of a broader bid to challenge the dominance of the USD settlement system.
• After recent anti-government protests in Cuba, the US government has reaffirmed its tight restrictions on Cuba-bound remittances despite easing policy on COVID-19 vaccines.
• According to a recent World Bank analysis, remittance flows to South Asia reached record highs in 2020, driven by factors such as better statistics collection, tax incentives, and savings repatriation.
• UK and European fintechs enjoyed a big week last week after Revolut raised its valuation to US$33 billion, N26 announced talks for new funding to raise its own valuation to US$10 billion, and Monzo hinted at gearing up for a potential IPO.

The Philippines — A Middle Road in WB Forecasts

It's been many months since central bank data around the world began hinting at the fact that the bleak remittance forecasts made by the World Bank in the wake of the COVID-19 outbreak had, in fact, largely missed their mark.

This was especially true in Latin America, the Caribbean, and South Asia, which saw year-on-year remittance inflow growth exceeding 5% in 2020. Still, some countries, especially those in Sub-Saharan Africa, saw negative year-on-year growth in 2020.

In the Philippines — Asia's third-largest remittance receiver after India and China — the situation was somewhere in the middle. Total inward remittances for 2020 came to US$34.9 billion over the course of the year, down just 0.7% from their all-time high of US$35.2 billion in 2019 but still up 3% from the previous all-time high of US$33.8 billion set the year before.

Adjusted for 2021 US dollars, the trend appears to reflect a minor blimp on an otherwise steady upward trajectory in the volume of inflows since the early 2000s:

When taken as a percentage of GDP, inward remittances to the Philippines suggest a similar story through a different lens. After remittances as part of the broader Philippines economy rocketed in importance between the seventies and mid-2000s, their size as a percentage of GDP slumped before plateauing at around 9% during the early-2010s — a trend that remains in effect today: 

Intriguingly, despite the Philippines' economy shrinking by a record 9.6% year-over-year in 2020, remittances as a percentage of GDP and an absolute inflow number held steady, the latter of which likely being buoyed by the relative decline. (This is particularly noteworthy given that some 420 thousand Filipino migrant workers were repatriated during the pandemic, spurring fears that inflows would decline sharply as a result.)

Cash Pay-Out Dominance and PHP Strength

Broader trends in remittance inflows to the Philippines suggest a robust remittance market driven by large numbers of Overseas Filipino (OF) communities abroad. Zooming in, however, the following two trends are likely to be decisive in the short run:

Cash remains the pay-out king

Cash-based remittances have historically been the driver of remittance inflows to the Philippines. In 2020, for example, cash remittances from Filipinos working internationally came to $29.9 billion ($4.5 billion of which came from the US alone). This figure constituted around 85.7% of total remittance inflows in 2020.

Preliminary data from the Bangko Sentral ng Pilipinas for 2021 suggests that cash remittances to the Philippines have retained a consistent share of total inflow volumes despite a 13% YoY surge in inflows in the month of May — the fourth consecutive month of growth for Philippines-bound remittances.

The popularity of cash as a pay-out method, however, is not mirrored everywhere. By looking at clickouts on Monito.com since the beginning of the year, cash was chosen as a pay-out method on only around half (47.9%) of transfers, despite a majority of sending countries having high access to digital financial services (e.g. the US, Canada, Japan, Australia, Singapore, and Germany.)

Cash is typically paid out in Philippine pesos through local cash networks such as banks and pawnshops that are affiliated with global money transfer operators.

Remittance impact on the PHP

While the PHP remains the backbone of cash-based remittances to the Philippines, according to Ateneo De Manila University economics professor Alvin Ang, the currency's recent strength may have prompted overseas Filipinos to send money in US dollars instead. Furthermore, combined with the movement of foreign savings into the Philippines, this creates new pressure on the PHP and boosts remittance numbers over the short run, Ang explained to Nikkei in February.

While a strong peso carries advantages, the impact on domestic consumption resulting from inflows is difficult to determine. According to Nicholas Mapa, senior economist for ING Bank Manilla, remittance inflows in 2021 will likely boost the value of the Philippine peso on forex markets as they cover the country's trade deficit in the short run. However, the bank forecasts that the PHP-equivalent of remittances will fall by 3.6%, a development that will leave the impact of remittances on domestic consumption tricky to spot.

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