Experts Meeting Latin American Economic Outlook 2010 19 May 2009 – Paris Remittances and Financial...

Experts MeetingLatin American Economic Outlook 2010

19 May 2009 – Paris

Remittances and Financial Development

Rolando Avendaño Sebastian Nieto Parra

OECD Development Centre


Core sections:– Remittances and Access to Banking– Remittances and Capital Markets– Conclusions and Policy Implications

Outline: Remittances and Financial Development


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)



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)



Remittances and Access to Banking1

Remittances and Capital Markets2


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


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


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


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


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


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


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)


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?


Remittances and Access to Banking1

Remittances and Capital Markets2


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 ,… )


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


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


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


Traditional channel: Solvency Ratio and remittances

Solvency Ratio (Debt/Exports) including and excluding remittances


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.


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)(_


Our model and Counterfactual Analysis

tiittititi wrowsVolatExtFlwrtioSolvencyRaiablesrcontrolvaRating ,,3,210, __

Predicted model:

Counterfactual model:

Three estimations:•Observed•Predicted•Counterfactual

tiittititi owsVolatExtFltioSolvencyRaiablesrcontrolvaRating ,,3,210,



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)




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)


Rating agencies do not have an unique modelModel for High-Remittance Receptors: Defining a threshold


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


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


Interactive of Solvency ratio(Threshold*Solvency ratio)

Significance and sign of the key variables (remittances matter)

S&P’s Moody’s Fitch



-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


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


• 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


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.


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..."


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


Experts Meeting Latin American Economic Outlook 2010 19 May 2009 – Paris Remittances and Financial...

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