Ten Million Reasons Why Cheap Oil Might Hurt The Philippines

Oil Prices: Is There Investor Cognitive Dissonance?
  • As much as 40% of remittances from Middle East: Credit Suisse
  • Cheap crude will be a net negative, says ex-budget secretary

Cheap oil should be a good thing for a country like the Philippines that imports almost all of its fuel, but there are 10 million reasons why that may not be the case.

That’s how many Filipinos work overseas, many of them on rigs, tankers and as domestic help or construction workers in oil-producing nations in the Middle East. Together they sent home $22.8 billion in the first 11 months of 2015, around 10 percent of gross domestic product. The potential for a slowdown in remittances is being closely monitored, the central bank said last week.

A prolonged period of oil at less than $30 a barrel could create an economic headache for the successor to President Benigno Aquino, who steps down in June, and may further weaken the peso, which has fallen the most in Southeast Asia this year. The negative impact on remittances and less revenue from fuel taxes will outweigh the positive effects, according to Benjamin Diokno, the country’s budget secretary from 1998 to 2001.

“We’re heavily dependent on overseas Filipino workers,” said Diokno, who is now an economics professor at the University of the Philippines in Manila. “Some of them are coming home also in part due to war, which only magnifies the problem.”

More Widespread

The share of remittances coming from the Middle East could be as high as 40 percent, compared with 23 percent in the official data, according to a Jan. 27 research note by Michael Wan, a Credit Suisse Group AG analyst in Singapore. Remittance growth slowed to 3.6 percent in dollar terms last year through November, from 5.8 percent in 2014, central bank data show. Volumes have held up reasonably well so far, said Wan.

That could change as the impact of a 29 percent drop in Brent crude over the past six months forces Saudi Arabia to cut generous subsidies to its citizens, while the United Arab Emirates’ Etihad Rail suspended a major rail project this week after firing almost a third of its workforce. Brent recovered to around $35 on Monday after falling to a 12-year low of $27.10 a barrel on Jan. 20.

“Before, when the trouble would be concentrated in one of the countries in the Middle East and North Africa, the workers could just simply move to a neighboring country and find employment,” central bank Governor Amando Tetangco said Jan. 25. “Now the trouble is more widespread.”

The Department of Labor is monitoring the situation in the Middle East in the light of the possible retrenchment of Filipino workers there, although has yet to see any major job losses, Communications Secretary Sonny Coloma said in a statement on Monday. The department “is prepared to assist workers that may be affected in securing alternative employment and livelihood opportunities,” he said.

Job Losses

As well as declining oil prices, a more general slowdown in global trade is affecting the job prospects of Filipino seamen. Many drillers and oil-service companies have suspended operations and shipping companies are also hurting, said Nelson Ramirez, the president of United Filipino Seafarers.

“I have talked to one of the biggest crew suppliers of offshore vessels,” he said in Manila. “They have many laid-up ships. There will be more job losses.”

That could take a toll on the Philippines’ current-account surplus,which narrowed to $5.6 billion in the nine months through September from $6.8 billion in the year-earlier period, according to the central bank. Gross domestic product, already rising the fastest among Southeast Asia’s major economies at a 5.8 percent pace in 2015, will increase 6 percent this year, a Bloomberg survey shows.

While there’s already a slowdown in remittance growth from the Middle East, the current account will remain in surplus, said Joey Cuyegkeng, an economist at ING Groep NV in Manila. He forecast the peso, which dropped 7.5 percent over the past 12 months, will fall another 2.3 percent by the end of the year.

External risks are on the rise, but the Philippines has enough buffers in place including $80.6 billion of foreign-exchange reserves and growing revenue from its business-process outsourcing industry, said Paulo Magpale, treasurer at BDO Private Bank Inc. in Manila.

Bigger Cutbacks

“We won’t be shaken easily during bad times,” said Magpale, who forecast the peso will strengthen 1.4 percent by the end of the year. The peso fell 0.1 percent to 47.68 a dollar as of 12:25 p.m. in Manila on Monday, according to Bankers Association of the Philippines. The currency has dropped 1.1 percent this year.

Slowing remittance growth is unlikely to have a major impact on Philippine GDP, according to Credit Suisse’s Wan, who is forecasting expansion of 6.2 percent this year. Weaker private consumption usually leads to expatriate Filipinos sending more money home to help families through tough times and savings on fuel costs will spur domestic spending, he said.

“The real test might be yet to come,” said Wan. ”If oil prices continue to head lower, we could see bigger cutbacks by Middle East governments, which will weigh on remittance prospects.”

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