IMPACT OF GLOBAL FINANCIAL CRISIS ON MEXICO'S...

$: IMPACT OF GLOBAL FINANCIAL CRISIS ON MEXICO'S …policydialogue.org/files/events/Remittance-Thorne.pdf · 2017. 8. 16. · presentation\Remittances.ppt-20-10 0 10 20 30 40 50 60 70$
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I M P A C T O F G L O B A L F I N A N C I A L C R I S I S O N M E X I C O ' S R E M I T T A N C E S

Alfredo Thorne, Managing Director, Emerging Market Research

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I N I T I A V I T E F O R P O L I C Y D I A L O G U E

S:\GM\Economic Research\Presentations\Mexpresentation\Remittances.ppt

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30Mexico's workerremittances US single-family

housing starts

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Mexico’s worker remittances and US housing starts Mexico’s worker remittances and US housing starts

Source: Banxico and US Census Bureau

At glance, Mexico’s remittances have been hit by US housing decline

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US new one-familyhomes sold

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Mexico’s worker remittances and US new one-family homes sold Mexico’s worker remittances and US new one-family homes sold


The correlation has been tighter with house sales, however

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Number of transactions

Workers' remittances

%oya

Source: Banxico Source: Banxico

Workers’ remittances and number of transactions Workers’ remittances and number of transactions Workers’ remittances and value per transaction Workers’ remittances and value per transaction

But not all that glitters is gold! The data is full of nuances and some of these correlations are spurious

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USD per transaction

%oya

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%oya, unless indicated 1996 2004 2006 2007 Jan-Nov 2008

Total remittances 15.0 22.6 17.1 1.0 -2.6

Remittances per transfer -1.9 1.8 3.1 -0.3 0.7

Number of transactions 17.3 20.3 13.6 1.3 -3.5

Money orders (% of total) 36.0 11.2 5.7 3.6 2.5

Electronic transfers (% of total) 52.6 87.4 92.8 94.8 95.7

US hourly wage per worker 3.3 2.6 1.5 2.7 2.7

Mexico hourly wage per worker 3.5 0.9 4.9 5.7 8.4

US-Mexico hourly wage differential1 9.6 6.4 5.8 5.7 5.6

Memo item:

Total remittances (USD bn, 12m sum) 4.2 16.7 23.7 24.0 23.2*

Workers’ remittance indicatorsWorkers’ remittance indicators

1. Ratio of US and Mexico USD wage per hour in manufacturing. *Total remittances in 2008 using December data forecast.Source: Banxico and INEGI

Most of the boom in remittances has been induced by financial innovations—sharp drop in cost of transfers

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% of total labor force Jul-Aug 2008

Agriculture 15.8

Industrial production 9.6

Construction 13.8

Manufacturing 7.3

Services 3.7

Memo items: share of:

Total labor force 5.1

Total unemployment 5.5

Mexican immigrants’ share in US labor force by sectorMexican immigrants’ share in US labor force by sector

Source: Banxico using US Current Population Survey

Labor markets have been the main link with the US economy

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10Mexico's workerremittances US employment

in construction

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Mexico’s worker remittances and US employment in constructionMexico’s worker remittances and US employment in construction


Anew the correlation between remittances and US employment in construction sector has tightened

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Annual change

Millions, nsa 1Q06 1Q07 1Q08 1Q07 1Q08

All workers 11.09 11.61 10.91 0.51 -0.70

Non-Hispanic 8.43 8.64 8.18 0.21 -0.46

Hispanic 2.67 2.97 2.72 0.30 -0.25

Native born 0.62 0.71 0.69 0.09 -0.03

Foreign born 2.06 2.26 2.04 0.20 -0.22

Mexican born 1.43 1.64 1.49 0.21 -0.15

Arrival: 2000 or later 0.73 0.85 0.78 0.12 -0.07

Employment in US construction industryEmployment in US construction industry

Source: Pew Hispanic Center tabulation of Current Population Survey.

But it is counter-intuitive why US employers have dismissed Mexican workers ahead of the US ones

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Source: Pew Hispanic Center

Annual apprehensions at US-Mexico border Annual apprehensions at US-Mexico border Estimates of US unauthorized immigrants from Mexico Estimates of US unauthorized immigrants from Mexico

There are two structural factors that have contributed to the fall in remittances. First, US immigration policy

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Migrant removal from the US Migrant removal from the US

In fact, there has been a discrimination against illegal Mexico workers

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Note: A removal is “the compulsory and confirmed movement of an inadmissible or deportable alien out of the US based on an order or removal”. Source: Pew Hispanic Center.

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Ratios of US and Mexico USD wage per hour, 12mma

US-Mexico wage per hour differential in manufacturing US-Mexico wage per hour differential in manufacturing

Source :INEGI

Second, US-MX changes in labor markets. Workers compensation for Mexico workers has fallen…

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Ratio of US and Mexico USD unit labor cost indices, 12mma

Source: INEGI

US-Mexico ULC differential in manufacturingUS-Mexico ULC differential in manufacturing US-Mexico productivity differential in manufacturingUS-Mexico productivity differential in manufacturing

…and productivity differentials have narrowed. This may have made less attractive for workers to migrate

Source: INEGI

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Ratio of US and Mexico unit labor cost indices, 12mma

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Remittances’ sensitivity to US house and labor market variables Remittances’ sensitivity to US house and labor market variables

Adding all this into a VAR model

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Transactions US homes sold Home prices US

productivity

US hourly

salary

US

employment

MX

employment

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salary

MX

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%point change

Note: These are the long-term coefficients of the regression and indicate the effect of a 1% change in each variable on the rate of growth of remittances. Coefficient shown with zero value were not statistically significant.

Source: JPMorgan

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Months after the initial shock

%, unless indicated 1 2 3 4 5 6 7 8 9 10

Workers’ remittances 100 91 87 82 79 76 73 69 66 62

Existing single-family homes sold 0 3 3 3 3 4 5 6 8 10

Transaction of worker’s remittances 0 1 4 5 6 6 6 7 7 7

US salary per hour 0 0 1 1 2 3 4 4 5 5

US productivity 0 0 0 0 0 1 1 1 2 2

Mexico salary per hour 0 1 1 1 1 2 2 2 2 2

Mexico productivity 0 1 1 2 3 3 3 3 3 3

US employment in construction 0 2 3 3 3 3 3 4 4 4

Mexico employment in construction 0 0 0 0 0 0 0 0 0 0

Price of existing homes sold 0 0 0 1 2 2 3 4 5 6

Total variance 100 100 100 100 100 100 100 100 100 100

Variance decompositionVariance decomposition

Source: JPMorgan

Variance decomposition

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Months after initial shock

+/- 2 standard deviations

Impulse response from number of transactions shockImpulse response from number of transactions shock

Source: JPMorgan

Impulse responses. Financial innovation has been a critical determinant.

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Months after initial shockSource: JPMorgan Source: JPMorgan

Impulse response from existing single family-homes sold shock

Impulse response from existing single family-homes sold shock

Impulse response from US employment in construction shock

Impulse response from US employment in construction shock

Housing market has influenced remittances through demand and labor markets

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Impulse response from Mexico productivity shockImpulse response from Mexico productivity shock Impulse response from US productivity shockImpulse response from US productivity shock

But long term—labor markets are the key determinant.

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Impulse response from Mexico salary per hour shockImpulse response from Mexico salary per hour shock Impulse response from US salary per hour shockImpulse response from US salary per hour shock

Both productivity and wage differentials

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Real multilateral exchange rate

Source: Banxico Source: Banxico and INEGI

Mexico’s worker remittances and real exchange rateMexico’s worker remittances and real exchange rate Workers’ remittances and private consumptionWorkers’ remittances and private consumption

Contrary to what has been argued, the effect of remittances on the currency and private consumption has been limited

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Private consumption

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Effect of exchange rate and remittances on private consumptionEffect of exchange rate and remittances on private consumption

Source: JPMorgan

Effect on private consumption

%oya change in remittances (USD)

0% 5% 10% 15%

0% 0.0 -0.15 -0.30 -0.45

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20% 0.60 0.45 0.30 0.15

Nom

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oya)

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GDP per capita, MXN, thousand

Remittances as % of GDP

Mexico City

Michoacan

Nuevo Leon

Zacatecas

Oaxaca

Campeche

AguascalientesChihuahua

Tabasco

Guanajuato

Chiapas

Workers’ remittances by states and GDP per capitaWorkers’ remittances by states and GDP per capita

Source: INEGI

The main impact has been regional--Migrants have been low income workers and the drop in remittances has impoverished even more low income families

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IMPACT OF GLOBAL FINANCIAL CRISIS ON MEXICO'S...

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