Momentum in the Philippines, Asia's second-fastest growing economy, may dwindle in coming months as Citigroup warns of a potential slowdown in a key growth driver: remittances.
Remittances from overseas Filipino workers (OFWs) make up nearly 10 percent of Philippine gross domestic product (GDP) and hit an all-time record high of $26.9 billion in December.
But weakness in "third currencies," or major currencies excluding the greenback, such as the Japanese yen, Australian dollar or euro, could restrain future remittance growth, warned Jun Trinidad, economist at Citigroup, in a recent report.
Those "third currencies" have all weakened sharply against a broad range of currencies in recent months, including the Philippine peso, making for a tough foreign exchange trade for OFWs in those countries, Trinidad noted, adding that those currencies are expected to weaken even further ahead.
"Since prospects for JPY, EUR and other third currencies are expected to weaken substantially against the U.S. dollar by more than the Philippine peso, a portion of remittances, particularly from OFW earnings in non-USD currencies, faces material downside risk," Trinidad explained.
Over the past three months, the peso strengthened nearly 12 percent against the Aussie, 10 percent against the euro and 4 percent against the yen. Citigroup estimates that a 1 percent appreciation of the peso against the yen potentially lowers remittances from Japan by 1.6 percent, while a 1 percent rise against the euro decreases remittances from Europe by 1.3 percent.
"Remittances from Europe (three-year average share of 16 percent of total) and Japan (three- year average share of 4.2 percent) are vulnerable to currency risk since these flows are converted to U.S. dollars through banking channels," Trinidad said.