MANILA, NOVEMBER 10, 2008 (STAR) By Des Ferriols - An economist of the Union Bank of Switzerland (UBS) warned the government that the slowdown in the global market next year might result in a $800-million decline in remittances from overseas Filipinos workers between 2008 and 2009 although declining import prices would keep the current account surplus rising, providing support for the peso.

UBS economist Edward Teather said investor concerns about remittance flows into the Philippines have increased, both with the dramatic deterioration in dollar liquidity in Asian markets and de-leveraging flows.

The Zurich-based UBS is a leading global wealth manager, investment bank and securities firm that operates in over 50 countries.

Teather said these concerns were heightened by the slowdown in remittance growth from 25 percent in July to just 10 percent year-on-year in August.

"We take a look at Philippines remittance flows in an international context," Teather said. "Given our projection of the worst global growth environment since the early 1980s, it is quite easy to see how Philippines remittance flows could see some declines in 2009."

He said UBS' models indicate an $800-million decline in remittances between 2008 and 2009 although this would be more than offset by the partial reversal of the estimated $5.6-billion loss to the trade balance from the higher value of energy and other commodity imports between 2007 and 2008.

"Indeed, we look for the current account surplus to rise in 2009, despite slower export growth and lower remittances, because of weaker import growth," Teather said.

He said the improvement in the current account that UBS foresaw should be a plus for the value of the peso.

"However, as we noted earlier capital flows may matter more for the currency in the near term."

Even taking into account likely data inaccuracies, Teather said the Philippines was one of the largest recipient economies for remittances in the world in terms of dollar value (after India, China and Mexico).

He said countries react differently to economic slowdowns, depending on country's specific factors that determine the deployment of workers abroad.

"As such, it seems reasonable to expect some, but not a drastic, decline in US dollar remittances into the Philippines. And the above data suggest remittances do not have to decline because global growth is weak," Teather said. "To be cautious, we have assumed a five percent decline in 2009 in our projections for Philippine remittances in our forecasts."

He said a decline in remittances represents a loss of income for the Philippine economy.

He explained that the existence of a current account surplus meant that not all-aggregate income in the Philippines was being spent on consumption and investment and that some was being saved.

"Given the remitter has already made the decision not to spend the income on him or herself, remittance flows might be more likely to be saved than income from employment in the Philippines," Teather explained.

Moreover, Teather said the reduction in consumption would be partly felt by imported goods rather than domestic production. This was the money sent home for basic expenses which would still be spent on food, education and shelter. Money that would usually be spent on imported consumer products would be reduced or eliminated.

But Teather said the decline in remittances that would result from an inability to find jobs overseas should mean lower investment and consumption growth than would otherwise be the case.

"And because only a fraction of a dollar of remittances is spent on imports, lower remittances would also have to mean a reduced current account balance in isolation," he said.

Chief News Editor: Sol Jose Vanzi

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