Remittances play vital role in ratings, says S&P

MANILA, Philippines -  Standard and Poor’s (S&P) Global Ratings said remittances play an important role but its impact on sovereign credit rating is “double-edged.” 

In a report, Moritz Kraemer, credit analyst at S&P, said that remittances of nationals residing abroad could play an important role in the stability of sovereign ratings. 

The report said pressure on external finances has typically been a precursor of sovereign stress and default in recent economic history.

 A steady and robust flow of current account receipts could therefore contribute to strengthening creditworthiness and averting a sovereign debt crisis.  

Throughout the great financial crisis and its aftermath, remittances have held remarkably steady in many countries, providing a welcome buffer to current account risks, the report said.  

However, Kraemer said the impact of worker remittances on sovereign credit strength is “double-edged.”  

“Regarded in isolation, we believe that remittances are a positive factor. In a wider context, however, they are the flip-side of a brain drain that in some cases may lead to skill shortages at home and therefore hamper economic and social development,” the credit analyst said.

The report said while the share of nationals residing abroad keeps rising in most emerging economies, in the majority of cases remittances have grown less dynamically, suggesting that the “financial return” on emigration for the source countries is diminishing.  

“Should this negative trend continue, the positive effect of remittances on sovereign creditworthiness may wane over time,” Kraemer said. 

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed remittances from overseas Filipino workers grew 4.4 percent to $6.56 billion in the first quarter from $6.28 billion in the same period last year. 

For this year, remittances are expected to increase by four percent on account of the steady deployment of Filipino workers, greater diversification of country destinations, and shift to higher-skilled types of work. 

Remittances from more than 10 million Filipinos working abroad account for 10 percent of the country’s gross domestic product (GDP). This helps boost private consumption resulting in faster economic growth.

He pointed out remittances of emigrants have been a large and relatively stable current account inflow for many developing economies resulting to stable sovereign ratings. 

Kraemer explained some sovereigns, especially in Asia, are benefitting more from outward emigration than others such as several central and eastern European countries.

According to him, the “return on emigration” appears to have fallen following the global financial crisis when remittances grew more slowly than the emigrant population. 

“Remittances are not going to be an important driver to improve sovereign creditworthiness in the absence of a structural strengthening of the domestic economy,” he said. 

The gross domestic product (GDP) growth of the Philippines accelerated to 6.9 percent in the first quarter from 6.5 percent in the fourth quarter of last year, making it the fastest growing economy in Asia. 

Last April, S&P affirmed the country’s investment grade credit rating at BBB or a notch higher than the minimum score within the investment-grade scale on the back of sound macroeconomic fundamentals.