US embassy cable - 05MANILA4639

UNCLAS SECTION 01 OF 03 MANILA 004639 
 
SIPDIS 
 
STATE FOR EAP/EP, EB/IFD, E 
STATE ALSO PASS FED RESERVE SAN FRANCISCO - CURRAN 
STATE ALSO PASS EXIM, OPIC, AND USTR 
STATE ALSO PASS USAID FOR AA/ANE and AA/G 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, PGOV, RP 
SUBJECT: Prospering from the Remittance Gusher 
 
REF:  04 Manila 5555 
 
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SUMMARY 
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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. 
 
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Dear OFW: Please Send Money 
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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. 
 
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How Well Are the Funds Used? 
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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 
proportions: 
 
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. 
 
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Benefits to Nation and Individual 
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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. 
 
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Remittance Downsides 
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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. 
 
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Compounding the Benefits 
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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. 
 
Johnson