When energy prices fall, consumption stocks in oil-importing economies should do well. Or that's what economic theory says. But ever so often, the prediction falls flat, particularly in emerging and frontier markets. And that's because of a roughly $100-billion-a-year variable that savvy investment managers tend not to overlook: worker remittances.
The Middle East employs some 29 million immigrant workers in everything from construction to retail trade, and of course, oil. Collectively, those workers sent $98 billion back to their home countries in 2014. Such inflows are a big deal for the receiving economies. Remittances from the energy-rich region add up to almost 5 percent of GDP in Pakistan and Lebanon. In Egypt, emigrants send home more than three times the revenue from the Suez Canal, World Bank data show. A big chunk of that comes from the six countries of the Gulf Cooperation Council: Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the United Arab Emirates.
Since even the non-oil output of these economies is lubricated by oil, there's an unmistakable correlation between energy prices and outbound remittances from the region. In the past three years, however, the link has broken down for the Philippines, which counts the Middle East as its second-biggest source of worker remittances after the U.S.
It's a puzzle. Crude has crashed by almost 70 percent in the past year and a half. And yet, the roughly 2.5 million Filipinos in the Middle East, a quarter of the country's 10-million emigrant population, are still sending money home at an annual rate of $5.8 billion, almost 17 percent more than June 2014:
The risk remittances will eventually follow oil prices lower is a looming threat for consumer-focused companies. Property developers are at particular risk because a better family home is almost the first thing immigrant workers save for. Strange then there doesn't seem to be any sense of panic among builders. SM Prime, the country's biggest developer by market value, says it's too early to assess the impact. Ayala Land, the No. 2 real estate company, is still optimistic, and Robinson Land, which sells about 20 to 25 percent of its homes to Filipinos overseas, with the Middle East accounting for 20 percent of international sales, says it's not ``conclusive at this point'' if the slide in oil will affect sales. There's no news yet from marketing partners about overseas Filipinos being sent home, Robinson Land President Frederick Go told Bloomberg News reporter Clarissa Batino on Wednesday.
Investors, though, aren't taking chances. Robinson Land shares have lost a fifth of their value since the end of October, compared with a 7 percent decline in the Philippine Stock Exchange Composite Index.
Are investors being unduly bearish? Maybe not. For one, there's considerable pressure on governments in the Middle East to look for new sources of revenue. Oman is raising the corporate tax rate, and all GCC countries plan to adopt a value-added tax from 2018. It's only a matter of time before the quest to plug widening budget gaps forces these states to revive an old proposal to tax remittances.
Also, research has shown that workers' decision to send money home is at least based in part on their intuitive sense of whether they're getting a good exchange rate. Thanks to their fixed values against the U.S. dollar, the Saudi riyal and the U.A.E dirham are among the world's most overvalued currencies at present on an inflation-adjusted basis, according to Bloomberg data. That might be acting as an incentive for immigrants in the Middle East to send money out. If the currency pegs disappear, those fund flows might end abruptly.
Above all, however, remittances depend on what migrant workers make of their home country's prospects. Philippines, the former ``sick man of Asia," has become one of the region's most promising economies, with stock values doubling since President Benigno Aquino began his six-year term in June 2010. As he prepares to leave, there's considerable uncertainty about whether the country will stick to his reformist agenda or lunge again for populist policies. Low energy prices and high remittances might co-exist for a while, but if the home country's appeal dims, workers will stop showing up at Western Union offices. That's when oil's plunge will truly spill over.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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