Remittances and Development:Contributions to the future agenda

Javier Santiso

Chief Economist / Deputy Director

OECD Development Centre

Latin American Economic Outlook Conference

Close to Home:The Development Impact of Remittances in Latin

AmericaParis 13th February 2007

222

Remittances have are not only been steadily increasing in most countries, but are less volatile

than other flows

Ecuador

0200400600800

10001200140016001800

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Millions

of U

$

Workers' RemittancesForeign Direct InvestmentODA

Dominican Republic

0

500

1000

1500

2000

2500

3000

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Millions

of U

$

Workers' RemittancesForeign Direct InvestmentODA

El Salvador

0

500

1000

1500

2000

2500

3000

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Millions

of U

$

Workers' RemittancesForeign Direct InvestmentODA

Mexico

0

5000

10000

15000

20000

25000

30000

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Millions

of U

$

Workers' RemittancesForeign Direct InvestmentODA

Source: International Financial Statistics (IMF), Datastream and OECD. 2007.

Remittances, ODA and FDI flows, selected countries

333

Remittances and Financial development II

Remittances and transaction costsI

Remittances and ratingsIII

444

Transaction costs for remittances have been steadily declining at varying pace

Early 1990s, the cost of sending remittances was about 15% of the amount sent

In 2004, the average cost to send US$200 was down to 7.6%

Cost of sending average remittance (as % of value)

0

5

10

15

Mexico El Salvador Guatemala Jamaica DominicanRepublic

Cuba

%

Source: Orozco (2004)

555

Competition is the key to reducing costs

Competition and prices, US-LAC corridor

0

2

4

6

8

10

12

Mexico El Salvador Guatemala Jamaica

04000800012000160002000024000

US

$ M

illio

n

Average cost (%) Number of major firms Remittances received (2005, right axis)

Source: OECD Development Centre, based on Orozco (2004) and IMF BOP data

666

Remittances and transaction costsI

Remittances and Financial development II

Remittances and ratingsIII

777

0

20

40

60

80

100

120

140

160

180

200

Chile

Bra

zil

Colo

mbia

Mex

ico

Mal

aysi

a

Kore

a

USA

Spai

n

Fran

ce

%

Private credit/ GDP

Stock market capit./ GDP

There is room in Latin America’s financial system for further developments

0

20

40

60

80

100

120

Chile

Bra

zil

Colo

mbia

Mexic

o

Mala

ysia

Kore

a

USA

Spain

France

%

Financial strength index

Private bonds/ GDP

Source: OECD Development Centre, 2007.Based on: Betancour, C. De Gregorio, J. Jara A. “Improving the Banking System: The Chilean Experience”. BIS Papers. No. 28, 2006.

Financial Development by region

Financial Strength Index based on Moody’s index of financial system strength, based on a numerical scale assigned to weighted average bank ratings by country.

LAC LAC

888

Latin America has persistently indented to boost internal savings rates with minor

success...

Source: OECD Development Centre, 2007.

Based on Global Development Finance, The World Bank, 2005. FIAP, 2005.

Pension Assets under managementEvolution of Regional Saving Rates

5

10

15

20

25

30

35

40

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Net

nati

on

al

savi

ngs

(% o

f G

DP

)

East Asia & Pacific Latin America & Caribbean

South Asia World

0

10

20

30

40

50

60

70

80

Chile Bolivia Brasil SalvadorUruguayArgentina Peru

% o

f G

DP

999

…making the region dependent on foreign capital

Regional average

Source: OECD Development Centre, 2006.

Based on Global Development Finance, The World Bank, 2005.

Net National savings by country ( average 1996-2006)

0

5

10

15

20

25

30

35

40

Venezuela Chile Mexico Peru Brazil Argentina Colombia

Net

na

tio

na

l sa

vin

gs

(%

of

GN

I)

.

0

5

10

15

20

25

30

35

40

Singapore China Malaysia Thailand Indonesia IndiaN

et

nati

on

al

savi

ngs

(% o

f G

NI)

.

101010

Remittances in Latin America are more formalised than elsewhere but remain mostly

cash-to-cashShare of informal remittances

(% )

0

20

40

60

80

100

Dom

inic

an

Republic

Guate

mala

El S

alv

ador

Arm

enia

Mold

ova

Bangla

desh

Uganda

Remittance mechanisms (US-LAC corridor, shares)

1 %4 %4 %

86 %

0

20

40

60

80

100

Cashpick-up

Homedelivery

Accountdeposit

ATM

Source: Freund and Spatafora (2005) Source: Orozco (2004)

111111

Can banks go beyond the frontier and increase intermediation?

Banks are new entrants in this field: In 2003 the largest 4 banks in the US-Mexico corridor had 3% of the market

But financial inclusion is a challenge in both sides of the frontier.

Proportion of households with bank deposits

0%

20%

40%

60%

80%

Nicara

gua

Haiti

Boliv

ia

El Salva

dor

Jamaica

Non-recipients Recipients

Remittance senders without bank accounts in the U.S.(by origin)

0%

20%

40%

60%

Nicaragua ElSalvador

Jamaica Bolivia

121212

Remittances and Financial development I

Remittances and transaction costsII

Remittances and ratingsIII

131313

Credit worthiness and higher access to capital can be reached through remittances…

Source: OECD Development Centre, 2006.

Based on: “Economic Implications of Remittances and Migration”. World Bank, 2006.

Improvement in Debt Ratios through Remittances Flows

0

50

100

150

200

250

Brazil Peru Ecuador Colombia Mexico ElSalvador

DominicanRepublic

Debt / Exports

Debt/ (Exports + Remittances)

141414

…which could have a positive effect on sovereign credit ratings

Source: OECD Development Centre, 2007.

Based on: Rowland, P. “Determinants of Spread, Credit Ratings and Creditworthiness for Emerging Market Sovereign Debt: A Follow-Up Study Using Pooled Data Analysis”. 2005, and Ratha, D. Leveraging Remittances for International Capital Market Access, World Bank WP, 2006.

Explanatory Variable Rating Moody's Rating S&PConstant 3.408 -0.524

(1.38) (-0.22)

GDP per capita 1.027 1.458(4.04) (6.05)

GDP growth rate 0.130 0.171(1.54) (2.13)

Inflation rate -0.630 -0.591(-2.70) (-2.67)

Fiscal balance / GDP 0.049 0.097(0.82) (1.71)

Current account balance / GDP 0.006 0.001(0.54) (0.05)

External debt / Exports -0.015 -0.011(-5.36) (-4.24)

Developed country (dummy) 2.957 2.595(4.18) (3.86)

Default since 1970 (dummy) -1.463 -2.622(-2.10) (-3.96)

No. observations 49 49Adjusted R2 0.905 0.926Standard error 1.325 1.257

Note: T-statistics are in parentheses. Parameters estimates that aresignificant at the 5% are indicated in bold.

Dependent Variable

Determinants of Sovereign Credit Ratings

CountryRemittances (% of GDP)

Exports (as % of GDP)

External debt (% of GDP)

Rating excluding

remittances

Rating including

remittances

Haiti 52 12 28 CCC B-Nicaragua 11 26 11 CCC+ B-El Salvador 15 18 46 BB+ BBB-

Mexico 3 19 18 BBB BBB+

Potential improvement of Sovereign Ratings on selected countries

151515

Key challenges

The key to reducing transaction costs is competitive and contestable markets

Intermediating remittances to bolster their positive effect on financial development

Taking remittances into account for sovereign ratings to reduce capital costs for Latin American countries and companies