Pacific Money | Economy | Southeast Asia

The COVID-19 Overseas Remittance Crisis That Wasn’t

Overseas remittances generally proved to be more resilient than other types of capital flows into Southeast Asia.

The COVID-19 Overseas Remittance Crisis That Wasn’t
Credit: Flickr/Adam Cohn

In one way or another, every country in Southeast Asia is deeply entangled in a network of global capital flows. Singapore is a major destination for investment, for instance. Thailand depends quite heavily on foreign exchange spent by tourists. Vietnam is becoming an important manufacturing and export hub. And in the Philippines, perhaps the most important financial flow comes in the form of cash remittances from Filipino citizens who work overseas and send some portion of their earnings back home.

In 2019, such remittances in the Philippines totaled $30.1 billion, or approximately 9.3 percent of GDP. This is more than in nearby Vietnam, where remittances reached 6.5 percent of GDP, and considerably more than in Thailand (1.5 percent of GDP) and Indonesia (1 percent of GDP). For emerging markets, these sources of capital flows are particularly important. Global investors tend to punish emerging markets that run current account deficits so any type of inflow that helps to narrow such deficits is generally considered desirable.

COVID-19 made global financial systems seize up in March and April 2020, causing a sudden stop in capital flows all around the world, but especially in emerging markets. There was particular worry that countries depending on overseas remittances – like the Philippines – would experience a sudden and prolonged loss of such flows from their citizens working in other countries. This would have been disastrous for their economies and currencies, choking off a much-needed flow of cash during a world historical economic conflagration and potentially leading to a balance of payment crisis.

But it never happened. By the end of 2020 not only had investment inflows to markets in Southeast Asia picked up again, but overseas remittances never really dropped off in the way that was predicted. In 2020, the Philippines booked $29.9 billion in overseas remittances, only $200 million less than the year before. How to explain the COVID-19 overseas remittance crisis that wasn’t?

In the Philippines, the vast majority of remittances come from citizens working in the United States, Canada, Europe, Japan, Singapore, and oil-rich states like Saudi Arabia and the United Arab Emirates. Thanks to aggressive interventions by governments in most of these countries, economic activity was never paralyzed to the extent that was feared in March and April. Because governments came to the rescue with big fiscal stimulus packages – trillions of dollars in the U.S. alone – it enabled remittance income to continue flowing back home into countries like the Philippines.

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But that is only part of the story, because overseas remittances also remained fairly strong during the Global Financial Crisis, even in Europe where governments pursued fiscal austerity. Remittances are fundamentally different from investment flows in this respect, because they are by their very nature personal. With the click of a button, you can sell a Thai or Indonesian government bond. But the personal relationships between employees and employers creates a deeper connection.

That personal element likely effects the flows themselves: these are personal cash transfers from overseas workers to their friends and family back home. During times of economic crises and uncertainty, it makes sense that overseas workers would save and remit a larger portion of their paychecks than they would during normal times. This is money that goes directly to people in their personal networks who need it, so the incentive to send more cash back home during a time of crisis is actually pretty significant.

This may help explain why overseas remittances proved to be more resilient and less volatile than other forms of capital flows during the pandemic. Remittances are not impersonal investments. They are in fact very personal targeted transfers, and when times are uncertain people working overseas have an incentive to send back even more money than they otherwise would, so long as they are still employed. Given the complex and interconnected nature of global capital networks, this personal aspect of remittances gives them an interesting, and perhaps advantageous, dimension compared to the more fickle and impersonal flows from investment and tourism.