• BSP blames ‘derisking’ for fall in remittances

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    Foreign banks’ fears triggered by anti-money laundering, terrorism concerns
    THE derisking strategy of foreign banks is driving the cost of sending money to the Philippine higher, causing a decline in remittances by overseas Filipinos, a central bank official told The Manila Times over the weekend.

    “We are seeing the continuing narrative of derisking, upsetting the otherwise normal flow of remittances,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo said.

    The strategy is mainly driven by the business decisions of foreign correspondent banks in weighing the risks and benefits of dealing with remittance companies, and in the process closing the accounts of several money transfer operators (MTOs), to limit their exposure to possible money laundering channels and other financial crimes.

    Guinigundo said derisking increases the cost of money transfers, because additional costs are incurred in complying with anti-money laundering and counter terrorist financing requirements.

    “In fact even the Arab Monetary Fund, IMF [International Monetary Fund] and The World Bank have documented various cases of derisking in the Middle East jurisdictions,” he said.

    Latest data from the BSP showed a year-on-year drop in personal and cash remittances in July.

    Personal remittances stood at $2.35 billion in July, down 5.4 percent from $2.49 billion year earlier, and were also lower compared with the $2.57 billion in June.

    Personal remittances are transfers in cash or in kind, as well as capital transfers between households.

    In the seven months to July, the rise in personal remittances slowed sharply to 2.9 percent – from 7.4 percent a year earlier – at $16.92 billion from $16.44 billion.

    Cash remittances coursed through banks totaled $2.13 billion in July, down 5.4 percent from $2.25 billion registered in July 2015. In June, cash remittances totaled $2.33 billion.

    In the first seven months of the year, the 3 percent growth rate in cash remittances was slower compared with 7.7 percent in January to July 2015

    Money laundering
    The BSP official explained derisking in the Middle East is related to concerns about money laundering and terrorist financing.

    The Middle East is one of the major sources of overseas Filipino remittances, with 80 percent of total cash remittances coming from Saudi Arabia, the United Arab Emirates (UAE), Qatar and Kuwait.

    Exacerbating the impact of derisking is weak oil prices, which dampens the propensity of Saudi Arabia, UAE and other oil producing markets to overseas workers with jobs, Guinigundo pointed out.

    Providing an optimistic view is IHS Markit Asia-Pacific chief economist Rajiv Biswas, who said that despite the 5.4 percent drop year-on-year, the overall level of remittances in the first seven months of 2016 has remained stable.

    “However there is evidence that several negative factors are impacting on remittances,” he said.

    Biswas noted the derisking of relationships by correspondent banks with remittance firms as part of risk management procedures is making it more difficult for Filipino workers abroad to remit funds home.

    “This derisking process has been underway well before the RCBC case, so is not mainly driven by that event, but reflects a wider international trend among banks globally to tighten up their relationships with other financial firms due to fears about potential money laundering vulnerabilities,” he said.

    RCBC is the Rizal Commercial Banking Corporation, which figure in the money laundering scandal that involved $81 million of stolen funds from the Bagladesh Bank’s account with the Federal Reserve Bank of New York. RCBC was slapped a P1 billion fine by the BSP for ignoring anti-money laundering protocols, the biggest regulatory fine in the history of the Philippine banking industry.

    The IHS Markit economist noted the impact of lower oil and gas prices has weighed on growth in the Middle East oil producing countries – key employment hubs for overseas Filipinos

    “Middle East financial institutions have also been derisking their financial relationships, due to the global pressure on Middle East nations to crack down on illicit financial flows related to terrorism and money laundering,” he added.

    Preliminary data from the Philippine Overseas Employment Administration (POEA) showed the number of newly hired land-based workers dropped 10.3 percent year-on-year to 235,895, while that of sea-based workers fell by 44.4 percent to 134,360.

    “While there is a likelihood that this might continue and affect OFW remittances this year, the more than 18 percent growth in BPO [business process outsourcing]revenues for the first six months of 2016 could, somehow, cushion the soft remittances flows,” Guinigundo said.

    Domestic politics
    Asked if political uncertainties in the country could also be the reason for the decline in remittances, Guinigundo said “it may have some remote impact on investment and output in the long run, but I don’t think this is the reason for the decline in the July remittances.”

    Biswas shares the same view, noting the latest economic data does not show any sign that political uncertainty in the Philippines is having an impact on remittances or economic activity so far.

    He noted the pace of economic growth in the Philippines has been extremely strong in the first half of 2016 at 6.9 percent year-on-year, while latest readings for August from an IHS Markit survey also indicate strong new manufacturing orders.

    Forex rate
    The foreign exchange rate has been cited by an economist for the decline in remittances.

    “I don’t buy any of those ‘sophisticated’ reasons offered by the BSP,” said Economist Dr. Victor Abola of the University of Asia and the Pacific.

    “I think it’s simpler than that. Overseas Filipinos are just smarter than before. I think they are saving for better days when the exchange rate favors them,” he said.

    Data from the Philippine Dealing System showed the peso has weakened to P47.11 to a dollar at the end of July from P46.11:$1 at the start of the month.

    “Political factors don’t count here. The RCBC affair may have some effect if remitting banks have tightened their requirements to ensure compliance with AML [anti-money laundering],” Abola said.

    Positive spillovers
    Singapore-based banking giant DBS said household consumption will continue to support the Philippine economy as long as positive spillovers from remittances persist.

    “We reckon household consumption growth may remain in excess of 6 percent for the coming years,” said DBS economist Gundy Cahyadi.

    Cahyadi noted household consumption has been robust, growing a record-high 7.2 percent year-on-year in the first half of 2016, with non-food consumption leading the overall growth at 7.4 percent.

    He said domestic demand remains strong and will likely continue driving the country’s gross domestic product growth in excess of 6 percent going into 2017.

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