Economy to benefit from oil price plunge

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But deployment, remittances could be affected
FALLING global oil prices will benefit the Philippines, which is dependent on imports of crude and petroleum products, but the dollar remittances that support the economy could take a hit.

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Global oversupply has fostered a plunge in oil prices, which have led to volatile stock markets – the Philippines’ has not been spared — and concerns for economies dependent on exports of the commodity.

The World Bank Group, in a report, said prices fell by 47 percent last year and could decline by another 27 percent in 2016. For the Philippines, this development could lead to even stronger consumption – a factor behind the country’s continued growth even as other economies weaken.

The Philippines’ oil import bill, said Deutsche Bank Research economist Diana del Rosario, has fallen to 12 percent of total imports from 20 percent on the back of the global price drop. On average, she said that down the line this has given the Filipino consumer more funds to spend on food, travel and other goods and services.

“We have seen a bigger contribution of these items in private consumption growth more recently,” del Rosario, noting that last year’s stronger growth in private consumption, to 6.2 percent from 5.4 percent, can be partly explained by the collapse in oil prices.

Ironically, consumption could also take a hit as remittance inflows could face headwinds from a prolonged low oil price environment.

Del Rosario explained that oil export-dependent countries like those in the Middle East could experience weaker domestic economic activity, which in turn could manifest in slower demand for overseas workers.

“Accordingly, the Philippines could see a slowdown in the deployment of Filipino workers overseas and consequently, weaker remittance inflows,” she said.

Two Middle East countries—Saudi Arabia and the United Arab Emirates (UAE) — were among the major sources of cash remittances in the first 11 months of 2015 based on latest central bank data.

Funds coursed through banks for the January to November period grew by 3.6 percent to $22.83 billion, mainly coming from Saudi Arabia, the UAE as well as the United States, Singapore, the United Kingdom, Japan, Canada and Hong Kong.

Middle East countries were also among the primary destinations of overseas Filipino workers (OFWs) based on data from the Philippine Overseas Employment Administration (POEA).

The POEA said 771,635 job orders were approved during the period. Of these, 44 percent were for service, production, and professional, technical and related positions in Saudi Arabia, Kuwait, Qatar, Taiwan, and Hong Kong.

While money sent home from the Middle East have so far held up – growing by 25% in November – del Rosario pointed out that overall remittances were also being affected by anti-money laundering efforts implemented by advanced economies.

In particular, she said remittances from the US had fallen by 14 percent since July 2015, while those from the UK fell on average from January to November 2015.

“We see remittances slowing down in the medium-term, but if the Philippine economy manages to sustain growth of at least 5 percent through public sector infrastructure investments that could attract domestic and foreign direct investments, then it may be safe to assume jobs are being generated domestically to mitigate the impact of weaker remittance inflows,” she said.

For his part, Barclays economist Rahul Bajoria also expects a slowdown of remittances from the Middle East given low global oil prices.

“Low oil prices can potentially lead to a bit of a slowdown in remittances from Middle East,” he said.

Nevertheless, Bajoria said slowing remittances from the regioin would not have a material impact on the economy because these inflows only account for only 20 percent of total remittances.

Overall, Bajoria said lower oil prices would be a net positive for the Philippines as it would boost disposable incomes and put less pressure on the country’s current account.

Remittances sent home by overseas Filipino workers (OFWs) have been one of the main contributors to the balance of payments (BOP) surplus.

The country’s BOP position ended in positive territory at a $2.616-billion surplus in 2015, rebounding from a deficit posted in 2014. It was the biggest surplus since 2013’s $5.085 billion.

The Bangko Sentral ng Pilipinas has said the positive BOP stemmed largely from sustained OFW remittances and net inflows of foreign direct investments.

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