Experts MeetingLatin American Economic Outlook 2010
19 May 2009 – Paris
Remittances and Financial Development
Rolando Avendaño Sebastian Nieto Parra
OECD Development Centre
OECD Development Centre
Core sections:– Remittances and Access to Banking– Remittances and Capital Markets– Conclusions and Policy Implications
Outline: Remittances and Financial Development
OECD Development Centre
1 Remittances and Access to Banking
- Costs (transaction costs, currency costs,…). Latin America vs other regions-Money sending institutions (banking and other sending platforms): empirical facts and
strategies - New instruments: Mobile banking (Distribution networks and Transactions costs)- Remittances and banking development
- Box: Historical comparison for banking development (Latin European countries 1870-1913)
Outline: Remittances and Financial Development
OECD Development Centre
2 Remittances and capital markets
- International experience: Securitizations/ Diaspora bonds- Remittances and capital markets: the case of ratings (risk indicators : debt over exports
and volatility of external flows)- Current economic crisis and remittances- Box: external capital market shocks and remittances (historical experience: Baring
crises and remittances)
Outline: Remittances and Financial Development
OECD Development Centre
Remittances and Access to Banking1
Remittances and Capital Markets2
OECD Development Centre
Domes tic C redit P rovided by B anking S ec tor
0
20
40
60
80
100
120
140
Bra
zil
Gre
nada
Chi
le
Pan
ama
Nic
arag
ua
Bel
ize
Jam
aica
LAC
Bol
ivia
Dom
. R
epub
lic
Cos
ta R
ica
El S
alva
dor
Col
ombi
a
Gua
tem
ala
Mex
ico
Arg
entin
a
Uru
guay
Ven
ezue
la,
RB
Ecu
ador
Per
u
% G
DP
1995 2007
Domes tic C redit to P rivate S ec tor
0
10
20
30
40
50
60
70
80
90
100
Pan
ama
Chi
le
Gre
nada
Bel
ize
Bra
zil
Cos
ta R
ica
El S
alva
dor
Nic
arag
ua
Bol
ivia
LAC
Gua
tem
ala
Col
ombi
a
Dom
. R
epub
lic
Jam
aica
Ecu
ador
Uru
guay
Ven
ezue
la,
RB
Mex
ico
Per
u
Arg
entin
a
% G
DP
1995 2007
Source: World Bank 2008.
Differences in bank concentration across the region
OECD Development Centre
Source: Thorsten Beck, Asli Demirgüç-Kunt and Ross Levine, (2000), "A New Database on Financial Development and Structure," World Bank Economic Review 14, 597-605. Updated November 2008.
Note: Bank concentration defiined as a measure of the degree of concentration in the banking industry, calculated as the fraction of assets held by the three largest commercial banks in each country, averaged over the period 1995-99.
Significant differences in bank concentrationacross the region
OECD Development Centre
A broader range of services:
•Repatriation insurance•Free money-sending•Residence Certificates•Low cost travel plans•Legal advice•Home Loans
Remittances and Banking Access
Strategies:
Bancarización inducida: encouraging bank account creation in receiving country.
•Remesas cuenta a cuenta: From 4% to more than 20% in the last four years.
•Remesas finalistas: Specific destination for remittances (housing, education, etc.)
Two main obstacles: Distribution / Costs
OECD Development Centre
Why mobile technology for remittances?
Mobile technology has a potential in regions with low density of banks and cash machines.
Distribution and Coverage across regions
Source: Wireless Intelligence (2008), Beck, Demirguc-Kunt and Martinez Peria (2005)
Demographic bank branchGeographic bank branch
Geographic cash machines
Mobile Phone
OECD Development Centre
Costs and actors in the remittances business model
Transaction Costs in Banks and Money Transfer Operators
Fee
for s
endi
ng U
SD 2
00 (%
)
Source: OECD Development Centre (2009), based on World Bank (2008)
Mobile technology is more likely in countries with a weak presence of Money Transfer Operators; under any banking market structure
OECD Development Centre
Most promising corridors - Japan, France, Canada, The Netherlands
Destination OriginNumber of Money Transfer Operators
Transaction cost (%) for USD 200
Brazil Japan 0 19.71
Dominican Republic The Netherlands 2 17.14Haiti Canada 2 15.14Haiti France 3 11.38Jamaica Canada 4 14.02Peru Japan 6 19.92
Surinam The Netherlands 3 11.23AVERAGE FOR CORRIDORS WITH LOW MTO PRESENCE IN LAC 2.8 15.5AVERAGE FOR CORRIDORS WITH HIGH MTO PRESENCE IN LAC US, Spain, UK 11.6 6.6
Latin America and Caribbean
Source: World Bank (2008)
Different corridors, different mechanisms:The role of the sending country
OECD Development Centre
From mobile payments to mobile banking
In LAC mobile banking is more about households than firm access
• While 9 / 10 people in LAC have a mobile phone line, 70-80 % have no banking access.
• Mobile banking is feasible with a large amount of small deposits
• Mobile phones are enabling to trace a history to access loans when no collateral
• In credit decisions face-to-face contact remains essential
Mobile banking operations are largely available in LAC as an additional distribution channel
Source: Beck, Demirguc-Kunt and Martinez Peria (2005)
OECD Development Centre
Policy recommendations for mobile payments
1. International remittances through mobile technology are lead by..• ..banks with cash out through branches: Spain Ecuador, US Colombia• ..mobile operators for population without bank access: US El Salvador
2. While mobile remittances are estimated to grow, LAC will only benefit • if banks and money transfer operators (financially compliant) make full use of mobile
operators (distributional networks) or • if mobile operators are subject to adequate financial regulation and liquidity is available at
telcos agents’ shops
Outlook: Will LAC’s bank-lead model fully integrate mobile advantages?
OECD Development Centre
Remittances and Access to Banking1
Remittances and Capital Markets2
OECD Development Centre
Total Yield (bp) at Launch
Source: OECD Development Centre (2009), based on Dealogic
Future Flow Securitization (Diversified Payment Rights)
0
200
400
600
800
1000
1200
1400
El S
alv.
Mar
02E
l Sal
v. M
ar02
Bra
zil J
un02
Bra
zil J
un03
Bra
zil A
ug03
Bra
zil A
ug03
Per
u N
ov05
Bra
zil J
an06
Bra
zil F
eb06
Per
u M
ar06
Jam
aica
Mar
06
Bra
zil S
ep06
Per
u A
ug07
Per
u A
ug07
Bra
zil M
ar08
Bra
zil M
ar09
Y ield F uture F low S ec uritiz ation (DP R )Y ield s overeign
Rating at Launch (Sovereign vs DPRs)
Payments on the receivables do not enter before obligations are met
0
5
10
15
20
25
El S
alv.
Mar
02
El S
alv.
Mar
02
Bra
zil J
un02
Bra
zil J
un03
Bra
zil A
ug03
Bra
zil A
ug03
Per
u N
ov05
Bra
zil J
an06
Bra
zil F
eb06
Per
u M
ar06
Jam
aica
Mar
06
Bra
zil S
ep06
Per
u A
ug07
Per
u A
ug07
Bra
zil M
ar08
Bra
zil M
ar09
S &P R ating (L aunc h) S &P s overeign rating
B B B
B +
C C C -
A A -
D
OECD Development CentreSource: OECD Development Centre (2009), based on OECD stats
Diaspora Bonds: A mechanism to tap the migrants’ wealth
0
100000
200000
300000
400000
500000
Isra
el
So
uth
Afr
ica
Ind
iaL
eb
an
on
Sri
La
nk
a
Aru
ba
Be
rmu
da
Arg
en
tin
aV
en
ez
ue
laP
an
am
aB
ah
am
as
Cu
ba
Uru
gu
ay
Ch
ileA
nt&
Ba
rb.
Tri
nid
ad
&T
ob
.B
oliv
iaC
os
ta R
ica
Do
min
ica
Ba
rba
do
sG
uy
an
aP
ue
rto
Ric
oP
ara
gu
ay
Be
lize
Ja
ma
ica
Co
lom
bia
Pe
ruG
ren
ad
aB
raz
ilN
ica
rag
ua
Ha
itiD
om
inic
an
Re
pu
blic
Ec
ua
do
rH
on
du
ras
Gu
ate
ma
laS
alv
ad
or
Me
xic
o 05
1015
202530
3540
4550
Tota l Manag em ent and P rofres s ionals (% of tota l occupations ; rhs )
Tota l Manag em ent and P rofes s ionals (Nb, lhs )
Households’ income matter but other factors are crucial (patriotism ,… )
OECD Development Centre
Are Remittances relevant for Rating Agencies?
• Remittances flows are an important source of financing for developing countries. • They act as an instrument to reduce financial vulnerabilities Lessen the probability of current account
reversals and credit risk.
• World Bank: « Remittances can improve a country’s creditworthiness and enhance its access to international capital markets.»
• We study:(i) Role of workers’ remittances in the estimation of sovereign ratings, following the models Credit Rating Agencies (CRAs).
– Solvency ratio (debt/exports)– Volatility of external flows
(ii) Shadow ratings for unrated countries (some with high remittances levels)
Motivation
OECD Development Centre
Why are we interested in ratings?
Source: Authors based on World Bank and OECD data
Sub-Sovereign (% Sovereign and Ceiling)
0
10
20
30
40
50
60
70
rated higher s ame rate rated lower
C ountry C eiling rate S overeign rate
Linked with financial markets (development, spreads) and ceiling rating
Source: OECD Development Centre based on Moody’s, 2009
OECD Development Centre
Traditional Determinants of Sovereign Ratings
Solvency Ratio (Debt/Exports) excluding remittances is a key variable in traditional models
Year Period So
vere
ign
Ra
ting
Inst
itutio
na
l ra
ting
Sp
rea
d
Inco
me
pe
r ca
pita
GD
P g
row
th
Infla
tion
Fis
cal b
ala
nce
Fis
cal B
ala
nce
/GD
P
Ext
ern
al b
ala
nce
Ext
ern
al D
eb
t/G
DP
Ext
ern
al D
eb
t /
Exp
ort
s
De
bt
Se
rvic
e/G
DP
Re
serv
es
Re
serv
es/
GD
P
Cu
rre
nt
Acc
ou
nt
Ba
lan
ce/G
DP
Op
en
ne
ss (
(Exp
ort
s +
Im
po
rts)
/GD
P)
Ra
tios
sho
rt-t
erm
ba
nk/
To
tal c
laim
s
Vo
latil
ity E
xte
rna
l Flo
ws
EM
BI
Dyn
am
ic
De
fau
lt H
isto
ry
De
fau
lt va
riab
le (
diff
. fo
r e
ach
mo
de
l)
Ind
ica
tor
of
Eco
no
mic
De
velo
pm
en
t
Co
rrru
ptio
n I
nd
ex
Du
mm
y E
uro
pe
an
Un
ion
Du
mm
y d
efa
ult
on
bo
nd
s a
nd
ba
k d
eb
t
Sp
rea
d (
lag
)
Cantor and Packer 1996 1995 • • • • • • • • • •
Rowland and Torres 2004 1987-2001 • • • • • • • •
Sutton 2005 2004 • • • • • •
Mora 2006 1986-2001 • • • • • • • • • •
Our model 2009 1993-2006 • • • • • • • • • •
Dependent Variable
Independent Variables
OECD Development Centre
Traditional channel: Solvency Ratio and remittances
Solvency Ratio (Debt/Exports) including and excluding remittances
OECD Development Centre
Remittances are less volatile than other flows:A source for financial stability
Volatility of external flows 92-07 (% of GDP)
0
0.05
0.1
0.15
0.2
0.25
0.3
R emittanc es F DI Inward P ortfolio Inward ODA E xports
Source: OECD Development Centre, based on IFS, 2009.
OECD Development Centre
Capital flows volatility is reduced by remittances: an externality for sovereign ratings?
Source: OECD Development Centre, based on IFS, 2009.
N
i
N
jitjtitjtititit XXCovwwXVarwflowsexternalVar
1,,,,,
2,, ),(2)(_
OECD Development Centre
Our model and Counterfactual Analysis
tiittititi wrowsVolatExtFlwrtioSolvencyRaiablesrcontrolvaRating ,,3,210, __
Predicted model:
Counterfactual model:
Three estimations:•Observed•Predicted•Counterfactual
tiittititi owsVolatExtFltioSolvencyRaiablesrcontrolvaRating ,,3,210,
OECD Development Centre
Our model and Counterfactual Analysis
4
6
8
10
12
14
16
Chi
le
Mex
ico
Arg
entin
a
Ecu
ador
Dom
. R
ep.
Gua
tem
ala
El S
alv.
Obs erved P redic ted C ounterfac tual
A
B B B +
B B B -
B B
B +
B -
C C C
0
0.2
0.4
0.6
0.8
Chi
le
Mex
ico
Arg
entin
a
Ecu
ador
Dom
. R
ep.
Gua
tem
ala
El S
alv.
Source: OECD Development Centre, based on Avendano, Gaillard and Nieto-Parra (2009)
Results: Standard and Poor’s estimations
Observed, Predicted, Counterfactual Counterfactual – Predicted(Rating gain: 1=one notch)
OECD Development Centre
Our model and Counterfactual Analysis
Source: OECD Development Centre, based on Avendano, Gaillard and Nieto-Parra (2009)
4
6
8
10
12
14
16
Chi
le
Mex
ico
Arg
entin
a
Dom
. Rep
.
Ecu
ador
Gua
tem
ala
Hon
dura
s
Nic
arag
ua
El S
alv.
Obs erved P redic ted C ounterfac tual
A
B B B +
B B B -
B B
B +
B -
C C C
0
0.1
0.2
0.3
0.4
0.5
0.6
Chi
le
Mex
ico
Arg
entin
a
Dom
. Rep
.
Ecu
ador
Gua
tem
ala
Hon
dura
s
Nic
arag
ua
El S
alv.
Results: Moody’s estimations
Observed, Predicted, Counterfactual Counterfactual – Predicted(Rating gain: 1=one notch)
OECD Development Centre
Rating agencies do not have an unique modelModel for High-Remittance Receptors: Defining a threshold
Source: OECD Development Centre, based on Avendano, Gaillard and Nieto-Parra (2009)
tiittiti
titititi
ThresholdFlowsVolThreshold
SolvencyThresholdflowsVolSolvencyrvacontrolRating
,,6,5
,4,3,210,
.
..
-3
-2
-1
0
1
2
3
4
1 2 3
Low er bound Upper bound coefficient
Threshold variable (remittances/GDP > 5%)
-0.02
-0.015
-0.01
-0.005
0
0.005
S&P's Moody's Fitch
Low er bound Upper bound coefficient
Solvency ratio(Debt over exports and remittances)
-0.03
-0.025
-0.02
-0.015
-0.01
-0.005
0
0.005
0.01
0.015
S&P's Moody's Fitch
Low er bound Upper bound coefficient
Interactive of Solvency ratio(Threshold*Solvency ratio)
Significance and sign of the key variables (remittances matter)
S&P’s Moody’s Fitch
OECD Development Centre
Source: OECD Development Centre, based on Avendano, Gaillard and Nieto-Parra (2009)
-500
-400
-300
-200
-100
0
100
S&P's Moody's Fitch
Low er bound Upper bound coeff icient
Volatility of External Flows (% of GDP)
-200
0
200
400
600
800
S&P's Moody's Fitch
Low er bound Upper bound coefficient
Interactive of Volatility External Flows (Threshold*Vol.External Flows)
Rating agencies do not have an unique modelModel for High-Remittance Receptors: Defining a threshold
Indirect effect (premium): Reduce negative impact of volatility ext. flows
A+A
A-BBB+
BBBBBB-BB+
BBBB-B+
BB-
CCC+CCC
CCC-
A+A
A-BBB+
BBBBBB-BB+
BBBB-B+
BB-
CCC+CCC
CCC-
A1A2A3
Baa1Baa2Baa3
Ba1Ba2Ba3
B1B2B3
Caa1Caa2Caa3
A1A2A3
Baa1Baa2Baa3
Ba1Ba2Ba3
B1B2B3
Caa1Caa2Caa3
A+A
A-BBB+
BBBBBB-BB+
BBBB-B+
BB-
CCC+CCC
CCC-
A+A
A-BBB+
BBBBBB-BB+
BBBB-B+
BB-
CCC+CCC
CCC-
Source: Authors calculation. OECD Development Centre 2009.
S&P Moody’s Fitch
Shadow ratings for Selected Countries
OECD Development Centre
• This paper also provides “shadow” ratings for countries which are not rated by the three main CRAs, in particular some Central American and Caribbean countries, where relative remittances flows are higher.
Information and Portfolio Allocation. Public-Private Partnership
• The impact of including remittances in the solvency ratio (debt over exports) and the volatility of external flows is relatively modest.
Remittance flows cannot, as a whole, enable low and medium income countries to improve their creditworthiness significantly. Remittances should be accompanied by policy measures related to the solvency of the country and the stability of external flows.
Conclusions and Policy Lessons
OECD Development Centre
Conclusions and Policy Lessons
• Specification for high-remittance receptors: The direct effect on ratings (the dummy variable remittances over GDP is not significant) is reduced. There may be an indirect, positive impact on ratings through a premium (captured with the interactive dummy and the variable volatility of external flows).
Results consistent with previous research (e.g. Roubini and Manasse, 2005) showing that there is not a unique model to rate countries and not all variables have the same impact for a sovereign rating.
OECD Development Centre
Role of remittances in rating agencies’ methodology
• “ (…) Fitch will nonetheless take account of the volatility and potential vulnerability of such receipts – such as remittances – to domestic and external shocks. " Fitch Ratings, “Sovereign Rating Methodology", October 12, 2007
• “Remittances, equivalent to more than a tenth of domestic output and a major driver of consumption, are expected to drop 5 to 10 percent this year as a slowing global economy puts pressure on wages of Filipino workers abroad.” “Moody's: Slowing remittances hurt RP”, Manila Bulletin, February 14, 2009
• “The revision of the outlook on Mexico to negative reflects our assessment of the deterioration in its fiscal and external positions.....Our projections are for Mexico's external debt (net of liquid assets) to reach more than 40% of current account receipts by 2010 versus the 'BBB' median of 28%". Standard and Poor’s, 12 May 2009.
• Standard and Poor's lowered El Salvador's credit rating to "BB" from "BB+": "The weak performance in 2009 is due to falling
consumption, investments, and exports as a result of a significant pass-through from the global recession. Remittances from the United States fell by 8 percent in the first two months of the year..."
OECD Development Centre
Source: Based on data from Esteves and Khoudour-Castéras (2010).
Financial crises and remittances before Word War I
Do Remittances Prevent Financial Disturbances?Lessons from the Gold Standard Period
Thank you!
19 May 2009 – Paris
Remittances and Financial Development
Rolando Avendaño Sebastian Nieto Parra
OECD Development Centre