Hot spots: Philippines.(hot spots)

With the homebound remittances of expatriates providing strong support, the Central Bank having cut interest rates and the government pumping up state spending on infrastructure, the economy, overall, is performing at its best in over two decades. Clearly, the harsh medicine the government applied two years ago is paying off.

The Philippine peso has been showing considerable exchange market strength this year and has so far risen by nearly 15% against the (globally weak) U.S. dollar. This has made it increasingly difficult for exporters to dollar-based markets to stay competitive, and there has also been some (price-unrelated) slippage in U.S. demand for some of the fancier electronics, as the housing recession in the Philippines' largest foreign market weighed on purchases of such things as disk drives and cellphone chips.

Overall, export growth slowed to 1.6% in the third quarter of 2007, from 4.2% in the preceding three months. In a country where sales abroad make up about 40% of gross domestic product, this obviously had an impact on economic growth, which could become harsher if the U.S. economy went into recession. At that, domestic consumption and investment have become more important drivers for the Philippine economy than exports, and there are other factors that have been helping to keep activity brisk, with the GDP gain for July-September reported at 6.6%, after 7.5% in April-June. Bangko Sentral ng Pilipinas cut interest rates three times in 2007. The government has been stepping up its outlays on infrastructure and there has been a sizeable increase in the remittances of Filipino expatriates living and working abroad.

The Philippines has long been an exporter of labor and currently more than 10 million Filipinos are employed abroad, mostly in the United States, but increasingly also in Europe, the Middle East and East Asia. Their homebound remittances were up 15% in the first three quarters of this year over the like 2006 span, to $10.5 billion, and this has done much to support household spending and investment in the Philippines.

To an extent, to be sure, the numbers are misleading in that the dollar increase in remittances in January-September almost exactly matched the peso's rise against the greenback over the same period. In other words, measured in pesos, the volume of the remittances stayed largely unchanged. In time this trend, if it continues, could pose problems for the Philippines. After all, in the various local currencies, the wages of expatriate workers have not increased much, and the salaries tend to be low to begin with--in places like the United Arab Emirates, for instance, the equivalent of about $250 a month for hotel workers and $300 for laborers.

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This does not leave much room for increases in remittances to compensate for lower dollar values. Moreover, in an ironically perverse effect, higher remittances help ...