The new remittance men

HONG KONG - For longtime watchers of the Philippines, recent events seem eerily familiar. The nation's President is embroiled in scandals and thousands have taken to the streets in protest.

Investors could be excused for wondering if it's 1986 or 2001 again in Manila - disastrous periods for Philippine markets. And given recent moves in debt yields and the currency, investors are becoming more concerned by the day.

Things grew even more uncertain after the Philippine Supreme Court suspended a tax change at the centre of President Gloria Arroyo's plan to fix the nation's finances, adding to her problems as the opposition calls for her to resign over allegations of vote rigging and illegal gambling.

Interest payments swallow a third of Government spending, feeding concerns the Philippines will become the Argentina of Asia by defaulting on debt.

Traders are weighing the odds of a meltdown. Given the close connections of east Asia's economies, it also isn't a shock that investors are wondering how it would affect the region. Might a crisis in Asia's 13th-biggest economy whip up 1997-like turmoil in this region?

No and for two reasons:

* The Philippine economy is much smaller than that of Thailand, the epicentre of the Asian crisis. Investors have also become savvier about viewing Asian economies independently, something few did prior to 1997. * Cindie Munoz and the millions of Filipinas like her who work overseas. Munoz, a 29-year-old maid here in Hong Kong, is among the 10 per cent of her nation's population living abroad for want of a decent job at home. Maids like her send home the bulk of their salary. Munoz supports her three children, her husband and six members of their extended families.

"I don't live away from home because I like it," says Munoz, a native of Manila. "I do it for my family, so they can live a better life. That's why we all do it."

The hard currency she and millions of others ship home props up one of Asia's most fragile and geopolitically important economies. That helps keep the Philippines afloat and avoid market volatility that might affect the rest of Asia.

"While the Philippines is not alone in this regard, the scale of Philippine remittance income is unusually large for such a relatively large economy," says IMF economist Vikram Haksar.

The Philippines is the third-biggest recipient of remittances behind Mexico and India. Yet data shows that as of this time last year, annual remittances were three times larger than all the foreign direct investment the Philippines receives.

Aside from exports of goods and services, remittance is "by some margin" the largest source of foreign currency for the nation, an IMF study found.

It sustains local demand for restaurant meals, motorbikes and cinema tickets as exports slump and debt payments force the Government to limit spending.

That's badly needed in a nation where a third of the population lives on less than US60c (90c) a day and unemployment is higher than 11 per cent.

Take it from Jose Sio, chief financial officer of SM Investments, owner of the nation's biggest shopping centre and retail companies: "The economy is being pulled by the remittances of the overseas workers, especially in the provinces".

The central bank has credited recent increases in remittances to Filipinos getting better-paying jobs abroad as well as improvements in wire-transfer services provided by banks and other companies. Remittances are sure to come up as a key strength of the economy with Government officials in Manila.

In many ways, though, it's really the opposite. The Philippines isn't creating enough jobs for its swelling population, driving one in 10 people to seek them in Frankfurt, Hong Kong, Kuwait, Riyadh, Singapore, Tokyo or elsewhere. Surveys show that one in five Filipinos still at home would work overseas if immigration laws allowed.

All this creates a potential brain drain with economic implications. So many young, hard-working Filipinos moving overseas could deplete the nation's labour pool over time. It also raises the risk that the Government feels less pressure to help create decent jobs and higher living standards at home.

Employment growth isn't keeping pace with population growth. And the Catholic Church, a powerful entity in the Philippines, effectively quashes any discussion of population control, meaning the problem will continue.

The good news is that Filipinos working overseas are shielding their economy - and, perhaps, Asia - from turmoil. The bad news is that the arrangement may merely be delaying a crash in an economy that can hardly afford it.

- BLOOMBERG