Estimating the Impact of Selected Macroeconomic Indicators on Remittance Inflows in the Philippines.

• Author: Rivera, John Paolo R.

1. Introduction

   Asymmetries in global labour markets have compelled labour movement across economies (Katz and Stark 1987). Driven by business cycles, socio-economic inequalities, political rationales, environmental crises, demographic changes such as widening wage differentials, lack of job opportunities and pervasiveness of cyclical unemployment (Mandelman and Zlate 2010; Ozel et al. 2017), the labour movement has emerged as a global issue affecting many economies (ILO 2006). As such, it has become the focus of government, media and academia due to its effects on the welfare of affected sectors in sending and receiving nations (Serino 2012).

   According to ILO (2018), migrant workers comprised 59 per cent of the global migrant population in 2017. In 2019, the United Nations Department of Economic and Social Affairs (UNDESA 2019) reported that the number of international migrants globally stands at 272 million (from 51 million in 2010). Furthermore, 3.5 per cent of the global population is made up of international migrants (from 2.8 per cent in 2000). However, the COVID-19 pandemic in 2020 halted cross-border movements disrupting this trend (Banulescu-Bogdan, Benton, and Fratzke 2020).

   Labour migration in the Philippines began when the Middle East economies embarked on massive economic development programmes as a result of rising earnings from oil creating excess demand for foreign workers to construct their infrastructure and industrial projects (Romero 2018). It was seen as a provisional measure to address high unemployment in the country in the 1970s. Eventually, it evolved into an enduring fixture of the local economy affecting Filipinos' socio-economic and cultural make-up (Rivera 2013). Historically, the Philippine Overseas Employment Administration (POEA (1) ) has indicated that approximately 10 per cent of the country's population (14 per cent of the labour force) are permanent residents, temporary workers or irregular migrants abroad, with at least 2 million being deployed to various destinations--with the Middle East, Southeast Asia, the US, the UK, Italy and Canada receiving the highest numbers of Overseas Filipino Workers (OFWs (2) ).

   This generated cash remittances for the economy that enhanced foreign currency reserves, augmented household consumption levels and cushioned the economy during crises; hence, the country has depended a lot on cash remittances from OFWs (Rivera 2013). According to Ochave (2020), the Philippines is one of the largest destinations for migrant workers' remittances. Data from the Bangko Sentral ng Pilipinas (BSP (3) ) showed that remittance inflows in 2019 stood at US$33.467 billion (10 per cent of GDP). Despite the COVID-19 pandemic, remittance inflows in 2021 amounted to US$31.42 billion (approximately 9 per cent of GDP)--still the largest source of foreign exchange inflows.

   In 2022, remittances continue to increase as the world economy gradually opens. In fact, as reported by Royandoyan (2022), remittances coursed through banks in September 2022 increased by 3.8 per cent year-on-year, faster than the 3.2 per cent growth recorded in March 2022. However, in the same period, the Philippine economy has seen record-breaking upticks in inflation rate (6.9 per cent) (Crismundo 2022) and foreign exchange depreciation (US$1.00 = PHP58.99) (Piatos and Valiente 2022). To manage such movements, the monetary authority has become more aggressive in monetary tightening by hiking policy rates by 75 basis points, the largest in nearly twenty-two years, with the objective of tempering inflation (Alegado and Lopez 2022; Ta-asan 2022) and strengthening the exchange rate amidst a more aggressive Federal Reserve policy tightening (Dela Cruz et al. 2022).

   1.1 Motivation and Hypothesis of the Study

   Given the abovementioned movements in Philippine macroeconomic fundamentals alongside the persistence of labour migration and continuously rising remittance inflows, our study attempts to explain the variation in remittance inflows from a macroeconomic standpoint. That is, we aim to show and explain how selected macroeconomic indicators impact remittance inflows. Our selected indicators are: (1) interest rate, (2) inflation rate and (3) exchange rate. We hypothesize that changes in these indicators can trigger remittances if they influence recipient households' purchasing power. Remittance inflows emanate from the altruistic and/or investment motives of OFWs (Tullao Jr. and Cabuay 2016) as macroeconomic fundamentals change for the recipient households to maintain the same level of consumption and/or take advantage of opportunities in growing the value of remittance income.

   1.2 Research Problem and Objectives

   As such, we pose the question: how do macroeconomic indicators influence remittance inflows? In addressing this, we set the following objectives:

1. To rationalize how macroeconomic indicators can impact remittance inflows;

2. To estimate the impact of macroeconomic indicators on remittance inflow; and

3. To craft recommendations on designing relevant macroeconomic policies that will manage remittances in light of the response to macroeconomic indicators.

   1.3 Significance

   While most macroeconomic approaches to analysing remittance inflows take the remittance variable as exogenous (i.e., the effect of remittances on macroeconomic variables), in this study, we take remittances as endogenous. We consider the macroeconomic approach by representing changes in the remittancerecipient economy using interest rate, inflation rate and exchange rate as the primary indicators. Our empirical analysis can aid decision-makers in crafting relevant policy frameworks to manage remittances effectively.

   This study is organized as follows. We first conduct a review of scholarly studies to establish a priori expectations on the impact of our selected macroeconomic indicators on remittance inflows. Then, we discuss our methodology and empirical findings to validate our hypothesis, address our research problem and achieve our research objectives. Finally, we formulate key implications, conclusions and recommendations for policymakers and future studies.

2. Literature Review

   2.1 Migration and Remittances

   The drivers of international labour migration (ILO 2006; Mandelman and Zlate 2010; Ozel et al. 2017) can be explained from three perspectives (Cortez 2010)--a macroeconomic response and adjustment mechanism to development asymmetries in sending and receiving economies; a response to wage gaps between economies; and a household decision to maximize income and minimize economic risks. Because of labour market imbalances, labour-deficient economies have liberalized immigration policies to accommodate migrant workers.

   Remittances generated by labour migration contribute to the stability of an economy's currency, foreign exchange position, goods market and money market (Ochave 2020). As remittances grow larger than official development assistance (ODA) and foreign direct investment (FDI), they become a financial development tool (Barne and Pirlea 2019; Sobiech 2019).

   Remittances are primarily used for purchasing non-tradeable goods. This leads to currency appreciation (Faini 1994; Dakila and Claveria 2007) that reduces export competitiveness (Dutch disease) (Burgess and Haksar 2005). Hence, remittances may produce contradictory effects on policy objectives such as price stability and export competitiveness. This warrants governments to mitigate remittances' adverse effects on the economy.

   Remittances also represent a key portion of OFWs' earnings transferred to their dependent households, which are disbursed through financial institutions and then recorded in the balance of payments. According to the Asian Development Bank (ADB 2018), the bulk of the remittances sent to recipient economies in Southeast Asia were spent on consumption rather than investments. In other words, remittances support recipient households by augmenting incomes, fuelling consumption and enhancing welfare (Ducanes 2015).

   2.2 Response of Remittances to Macroeconomic Shocks

   In addressing our first research objective, we refer to scholarly literature to rationalize how macroeconomic indicators influence remittance inflows. Most extant studies have designated remittances as an explanatory variable for various macroeconomic indicators such as inflation (Amuedo-Dorantes and Pozo 2004; Bourdet and Falck 2006; Caceres and Saca 2006; Narayan, Narayan, and Mishra 2011; Bayangos 2012; Jansen, Vacaflores, and Naufal 2012; Khan and Islam 2013; Roy and Rahman 2014; Khurshid et al. 2016), interest rate (Caceres and Saca 2006; Jansen, Vacaflores, and Naufal 2012) and exchange rate (Chami, Fullenkamp, and Jahjah 2003; Amuedo-Dorantes and Pozo 2004; Loser et al. 2006; Bayangos 2012; Jansen, Vacaflores, and Naufal 2012). Here, we can see that literature on remittances affecting the macroeconomy is established albeit with varying results for different research locales. However, few studies have taken the route of incorporating formal econometric estimates in probing the impact of macroeconomic indicators on remittances (Dakila and Claveria 2007).

   For inflation, Bayangos (2012) suggested bidirectional causality between remittances and inflation. However, the impact of inflation on remittances was not estimated. To bridge this gap, Rivera and Tullao Jr. (2020) employed Vector Autoregression (VAR) and found some evidence of an increase in inflation in remittance-recipient economies prompting migrant workers to send more to their families for the purposes of consumption smoothening and maintaining their standard of living.

   For interest rate, Quinn (2005) generated empirical evidence showing that migrants are found to remit more (and save less) when the household's rate of return on savings rises (or the migrant's return falls). Likewise, Hassan and Holmes (2018) found that, for a panel of economies, the long-run responsiveness of remittances to changes in real...