OFW remittances at risk as Mideast war drags on

THE PHILIPPINES could see a drop in cash sent home by overseas workers if the Middle East conflict persists, global debt watcher Moody’s Ratings said.

The country’s “Baa2 stable” rating places it among higher-rated sovereigns, which Moody’s Ratings said generally have stronger financial and institutional buffers, although prolonged disruptions could pose risks to the country’s external and fiscal position.

In a report titled “Middle East shock will test sovereigns with limited credit buffers,” the debt watcher said a key risk is the potential impact on overseas Filipino workers (OFWs) stationed in the region.

“A prolonged conflict would reduce incomes and employment prospects from migrant workers in the Middle East, dampening remittance inflows to… the Philippines (Baa2 stable), among other sources of foreign labor,” it said.

Latest central bank data showed that Filipinos abroad sent home a total of $3.02 billion in January, up 3.5% from $2.918 billion a year ago but down 14.3% from the record-high $3.522 billion in December.

Of the total, 17.1% or $516.512 million came from the Middle East.

Around 2.4 million Filipinos are based in the Middle East, with most in the United Arab Emirates, Saudi Arabia, Qatar, and Kuwait, according to government data.

The Philippines is also exposed to higher energy costs as a net importer of oil and gas.

Moody’s Ratings said supply disruptions and higher energy prices are key transmission channels of the conflict, which could affect inflation, fiscal balances, and external accounts.

While higher-rated sovereigns such as the Philippines have stronger buffers, Moody’s Ratings said a “sustained increase in energy and fertilizer prices” could “constrain fiscal and monetary flexibility.”

The agency added that the overall credit impact will depend on the duration and severity of disruptions to global trade and energy markets, as well as governments’ ability to respond through policy measures.

Moody’s Ratings also noted that Asia-Pacific is among the regions most exposed to supply disruptions.

“Apart from the Middle East, Asia-Pacific is the region most vulnerable to negative credit effects from the conflict, with more than half of its sovereigns having moderate exposure,” it said.

Separately, Fitch Ratings said the Philippines remains vulnerable to energy shocks given its reliance on imported oil.

“For the Philippines, this shock basically comes on top of already quite significant domestic pressures,” Fitch Ratings Head of APAC Sovereigns Thomas Rookmaaker said during a webinar on Thursday.

He said governance-related issues last year, including a flood control corruption scandal, weighed on investment and economic growth.

“So, growth dropped quite significantly in the second half of last year as a result of governance issues, a corruption scandal which the government tries to tackle, which in itself is a good thing, but it does lead to a large drop in public capex (capital expenditure) with a significant impact on growth,” Mr. Rookmaaker said.

He also cited the country’s dependence on Middle East oil imports.

“Now, the Philippines is also not in a great position when it comes to the impact of the war in Iran with basically importing virtually all of its oil from the Middle East,” he said. “And I think they have roughly 15 days or so of oil reserves, which is not bad compared to others, but it’s not great either.”

Local pump prices have increased in recent weeks following the escalation of the conflict, with fuel retailers implementing hikes of as much as P52.30 per liter for gasoline, P100.05 per liter for diesel, and P82.40 per liter for kerosene.

The Department of Energy has warned that oil prices could remain elevated even if the conflict de-escalates, as energy infrastructure in the Middle East has been affected by the attacks.

Fitch earlier said that “more ingrained and structural” growth risks from the Middle East war could weigh on the country’s credit profile.

Mr. Rookmaaker also noted that high debt levels and slow fiscal consolidation could pose challenges to the Philippines’ medium-term growth.

“The question is to what extent they will be able to keep growth up, which is important in a solidating context, especially over the medium term because of the debt dynamics,” he said. “So, the fiscal consolidation in the Philippines is happening, but it is rather slow. So, the debt is still relatively high.”

“The sovereign needs growth basically to keep the debt-to-GDP ratio gradually declining,” he added.

At end-February, the government’s outstanding debt rose to a record P18.16 trillion, up 0.14% from P18.13 trillion at end-January, latest Treasury data showed.

The National Government expects its outstanding debt to reach P19.06 trillion this year, with P13.28 trillion in domestic debt and P5.78 trillion in external debt. — Katherine K. Chan