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The Impact of Exchange Rate Fluctuations on Remittance Inflows to the Philippines

27 Sep 2023


Making a quick and secure money transfer to Philippines is not a difficult task anymore, but making one with competitive exchange rates is a real challenge. Do you know why an expatriate, especially an overseas Filipino worker, must consider checking exchange rates before sending money home from abroad? Exchange rates are the most critical factor in your remittances since they decide the amount your beneficiaries in the Philippines will receive. This guideline provides you with ample information on the impacts of exchange rate fluctuations and how they affect remittance inflows to the Philippines. 

The Philippines' economic structure is changing due to global trends towards the market and financial integration, policy changes in the country, and changes in global trends. The Philippines' reliance on international remittances is growing, which is one of the most significant effects. Remittances are now developing countries' second-largest source of resources after foreign direct investment, according to the World Bank (FDI). 

Many small developing economies depend on remittances as a reliable source of foreign currency. Remittances have surpassed foreign direct investment, and portfolio investment flows as a source of foreign currency for some people today. Establishing the function of remittances in financial development requires a thorough understanding of how remittances affect the volatility in exchange rates.

How Are Remittance Inflows To The Philippines Important? 

The economies of developing nations depend heavily on capital inflows. Foreign direct investment (FDI), employee remittances, and portfolio investment are the main sources of private capital inflows. The magnitude and composition of the various capital flows have changed significantly over the past ten years, and these flows have increased dramatically.

One of the primary elements of capital flows continues to be the dynamic studies of remittances, which have a prominent place in economic literature and research. These studies cover various topics, from the microeconomic effects on recipient households to the effects on significant macroeconomic variables.

In addition, researchers are interested in its role as a factor in foreign exchange, its effects on welfare, and other issues of its impact on inflation and the real exchange rate (RER). This study aims to provide a detailed examination of the role played by remittances in the dynamics of the real exchange rate in the Philippines, taking into account the significant attention that RER has gained as a policy variable over the years. 

Exchange Rate and Remittances

Research on remittances, especially in developing nations, strongly emphasises the positive macroeconomic effects of these economies. Although such countries are sometimes associated with lower levels of poverty, several financial and economic experts argue that remittances to developing countries lead to an increased pace of growth as well as better well-being and education.  Similarly, when overseas Filipino workers (OFWs) send money to Philippines from abroad, they contribute to the country’s economic progress significantly.

Most developing countries should have countercyclical remittance flows because they supplement household income during times of slow economic growth. Remittance inflows typically increase during times of general economic hardship caused by conflict or natural disasters and then level off as things get better.

There is a growing body of research that supports the development role that remittances play. This is acknowledged at the research level, but it has also attracted the attention of policymakers and significant financial institutions like the World Bank and the International Monetary Fund on the issue of remittances as a tool for development and its potentially detrimental effects (IMF). 

To maximise the potential advantages of remittances to developing countries, there has been an increase in discussion and research. You can look at an overview of the various money transfer options for sending money to the Philippines.

Changes in exchange rates can greatly impact how much money comes into the Philippines from abroad. The following are some ways that exchange rate changes can impact remittance inflows:

The Volatility of Exchange Rates

When exchange rates are erratic, the value of the recipient's country's currency changes quickly, affecting the amount of money the recipient receives. The amount received by the recipient could be lessened if the exchange rate between the sending nation and the Philippines changes unfavourably.

Currency Devaluation

The value of the received remittance is diminished if the currency of the recipient nation depreciates. This might result in fewer remittances being sent to the nation.

Exchange Rate Policies

The recipient country's exchange rate policies may also influence remittance inflows. For instance, remittance inflows may decline if the Philippine central bank decides to devalue the peso. For best exchange rate policies, ACE comes on top of the list. You can also avail of its service while making online money transfers to Philippines

Economic Situation

Economic factors like political unrest, interest rates, and inflation can all impact exchange rate fluctuations. Exchange rates could be impacted by unfavourable economic conditions in the recipient nation, which would reduce remittance inflows.

The resources available to the economy have been greatly increased by remittances, which first go towards meeting consumer demand for goods and services before becoming available for saving by both workers and the corporate sector, which is now making more money because there is a higher effective demand for its products.

Furthermore, the influx of remittances added a sizable amount of liquidity to the economy that the government has struggled to contain. However, interest rates have managed to stay low, thanks to the elimination of exchange rate uncertainty and the rise in liquidity. Aside from keeping inflation at a low level (until the recent cost-push shock of high oil and cereal prices), the ensuing currency appreciation also contributed to this.

Incentives and conditions that affect foreign investment flows do not affect remittance flows in the same ways. The influx of remittances may not be affected by circumstances that could result in net capital outflows. Remittances control exchange rate volatility when other sources of income are declining by maintaining a consistent flow of foreign currency into the dollarized economy.

Bottom Line 

Overall, exchange rate changes may significantly impact remittance inflows to the Philippines. It is crucial to send money through formal channels, which provide better exchange rates and lower transaction costs, to lessen the effects of exchange rate fluctuations. 

Additionally, the recipient nation can implement measures that support a stable exchange rate and encourage economic development. If you want to try the best remittance service provider, make sure you choose ACE’s service to send money to Philippines online

FAQs

What are the main causes of exchange rate fluctuations in relation to the Philippines?

Exchange rate fluctuations in the Philippines primarily arise due to variations in currency values, influenced by factors like inflation rates, differences in interest rates, political stability, economic performance, and speculation. Changes in these factors can cause the value of the Philippine Peso to rise or fall against other currencies, impacting remittance inflows.

How do exchange rate fluctuations impact remittance inflows to the Philippines?

Exchange rate fluctuations can significantly impact remittance inflows to the Philippines. When the Philippine Peso depreciates, recipients generally receive more Peso per unit of foreign currency, increasing the local value of remittances. Conversely, when the Peso appreciates, recipients receive fewer Pesos per unit of foreign currency, reducing the local value of remittances.

Which countries primarily contribute to remittance inflows to the Philippines?

The main contributors to remittance inflows to the Philippines are typically countries with a large population of Overseas Filipino Workers (OFWs), such as the United States, Saudi Arabia, the United Arab Emirates, Canada, and Australia. Variations in the exchange rate between the Philippine Peso and the currencies of these countries can significantly impact the value of remittances received in the Philippines.

How does the impact of exchange rate fluctuations on remittance inflows affect the Philippine economy?

The impact of exchange rate fluctuations on remittance inflows can have broad implications for the Philippine economy. Remittances are a key source of income for many households, and fluctuations can affect consumption, investment, and overall economic growth. When recipients receive more Pesos due to a favourable exchange rate, it can lead to increased spending and investment, boosting economic activity. Conversely, unfavourable exchange rates can constrain spending and investment, hampering economic growth.

What measures can be taken to mitigate the impact of exchange rate fluctuations on remittance inflows to the Philippines?

Mitigating the impact of exchange rate fluctuations can involve both government and individual actions. The government can implement policies to stabilise the exchange rate and facilitate remittance inflows through formal channels, offering more predictable and competitive exchange rates. Meanwhile, remittance recipients can use financial products such as hedging tools to manage the risk associated with exchange rate fluctuations, ensuring a more stable income in local currency.


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