The onset of a Covid-19-induced global recession has affected both labour markets and financial flows around the world. At the confluence of these two are remittances, which have increasingly been among the top contributors to GDP in many emerging markets over recent decades. The issue is particularly pertinent for the countries located in the so-called “yellow slice” of the global economic pie – the group of high-potential economies that make up Oxford Business Group’s emerging markets portfolio.
In late April 2020 the World Bank predicted that remittances to low- and middle-income countries would see the sharpest decline in recent history, falling by 19.7% to around $445bn for 2020, compared to $554bn in 2019. The fall is expected to disproportionately affect emerging economies, which are the greatest recipients of these inflows and whose citizens rely on them to varying extents for basic income.
“Remittances are a vital source of income for developing countries. The ongoing economic recession caused by Covid-19 is taking a severe toll on the ability to send money home and makes it all the more vital that we shorten the time to recovery for advanced economies,” David Malpass, president of the World Bank Group, said in a statement released in late April 2020. Given that foreign direct investment flows to emerging markets are expected to fall even further than remittances in 2020, by around 35%, the proportional reliance of some economies on remittances as sources of foreign currency may be even more prominent.
Lion's Share for Mexico
The US is the world’s largest economy as well as the top exporter of remittances. According to data from Pew Research, five of the top-10 recipients of US remittances are in Latin America and the Caribbean: Mexico, Guatemala, El Salvador, the Dominican Republic and Honduras. While remittance flows to Latin America and the Caribbean grew by 7.4% in 2019 to reach $96bn, the World Bank expects this to fall by 19.3% in 2020. Given its border with the US and large diaspora in the country, Mexico unsurprisingly accounts for the most remittances from the US.
According to Pew’s figures, the country received more than $30bn of the $148bn sent from the US in 2017 – nearly twice the level of the second-largest destination, China. More recent statistics from Banco de México, the country’s central bank, showed that Mexico received an all-time high of $36.5bn in remittances in 2019, the vast majority of which was sent from its northern neighbour.
Before the outbreak, there had been some positive news regarding costs for some customers, with Spanish bank Santander announcing in November 2019 that it would waive all fees for remittance transfers. The decision was applauded by Mexico’s President Andrés Manuel López Obrador, who has since urged other institutions to follow suit. However, some experts have called for US-originated remittances to be channelled into more productive areas of the economy.
“If and when remittances regain their pre-Covid-19 levels, Mexico would have a second challenge: to translate remittances into development via financial education and financial inclusion,” Aída Chávez, co-CEO of Mexican education technology company HolaCode, told OBG. “Today nearly 60% of remittances are directed to general consumption, such as food, clothing and debt payments, and not to investment or savings.”
The UN, through its Sustainable Development Goals (SDGs), is aiming to decrease the average cost of sending a cash transfer. As of early 2020, the global average stood at 6.8% of the transaction value; the UN is targeting a reduction to 3% by 2030. Costs tend to vary based on market competition, and it is therefore unsurprising that remittance commissions charged by operators in the Gulf are among the lowest worldwide, given that immigrants represent high proportions of their populations: more than 80% of residents in the UAE are foreign-born, as is over 80% of the private sector workforce in Saudi Arabia.
While remittances usually flow from developed economies to emerging economies, many Gulf nations are the exception to this trend. In fact, Saudi Arabia and the UAE are the largest exporters of remittances worldwide after the US. The UAE is already one of the cheapest countries in the world to send money from. The average commission charged on a transfer of Dh735 ($200) to India was 3.04% as of February 2020, only slightly above the UN’s SDG target for 2030.
High Cost in Africa
In 2019 remittances from African migrants abroad grew by 3.5% to total $70.7bn. On average, they account for approximately 2.5% of the region’s GDP; however, for some smaller countries like Senegal, remittances make up around 10% of GDP. Having benefitted from $26.8bn in remittances in 2019, Egypt is the largest recipient Africa-wide in nominal terms. This mainly comes from Arab countries, the US and the UK. Nigeria is second, having received $23.8bn in 2019, with the UK and the US also among the country’s principle source markets.
In contrast to the UAE, sub-Saharan Africa has the world’s highest average transfer cost for remittances, at 9%. While still high, these costs have fallen significantly since 2008, when the average commission charged for transfers from sub-Saharan Africa was 15%. They have, however, been reasonably stagnant since 2014, when the rate was 10%. A major reason for these high charges is strict regulations that require money transfer operators to undertake checks to verify that the money is not destined for, or being used in, illicit practices.
Increased competition in Africa would likely drive down prices. Across the continent many national post offices – one of the few places to collect remittances for those without internet access – have exclusivity agreements with certain operators, which result in near monopolies for many clients.
A technology-centric framework could also help to bring down the cost of sending remittances, largely because the physical infrastructure needed to complete the transfer is substantially less intensive than for other methods, such as in-person transfers via outlets like Western Union.
Nigeria is one country in which a relatively high level of digital penetration has heralded the arrival of digital remittance providers, which is reflected in its lower prices compared to the rest of the region. Financial technology providers Azimo and TransferWise have brought the cost of transferring £120 from the UK to Nigeria down to between 4% and 5%, well within reach of the UN’s 2030 SDG target of 3%.
As a result of falling commission charges, senders may be more willing to reduce their use of informal channels to send money. Such practices, which include friends, relatives or even the person themselves transferring the remittances physically, are particularly high in Eastern Europe and sub-Saharan Africa. Some estimates suggest they represent up to 75% of the value of formal remittances, although there is little agreement among analysts on the accuracy of these numbers.
While there is potential for cryptocurrencies to be used for remittances in the future, their current market volatility, combined with their complex nature, make their use an unlikely prospect in the near term.
Remittance Hedging in Asia
Although double-digit falls in remittances are expected across all regions in 2020, the East Asia and Pacific region could be somewhat cushioned by the dispersal of overseas workers across a wide variety of labour markets. Diasporas from Asian countries have historically been less concentrated in one region and tend to be spread out globally, which to a certain extent has kept them isolated from global economic downturns in the past. This phenomenon has been described as a “natural hedge” by Nicholas Mapa, senior economist at ING Bank in the Philippines. A number of OBG’s “yellow slice” countries in South and South-east Asia illustrate this. Sri Lanka, Thailand, Vietnam, Malaysia and the Philippines all receive remittances from a wide array of source markets, including the US, Europe, Australia and the Gulf, as well as elsewhere in the Asia-Pacific region.
Nevertheless, with most of the world’s largest export markets for remittances forecast to head into recession this year, the impact is likely to be significant on Asia’s emerging markets. Not only will inflows be impacted, but some migrant workers will return home due to the lack of employment opportunities, which could subsequently increase unemployment figures. For example, an estimated 16,000 Filipinos had returned home by April 2020 due to the outbreak. Along with India, the Philippines is among the countries most reliant on remittances in Asia. It received approximately $30.1bn in 2019, equivalent to around 8.5% of GDP, and inflows have grown by around 4% annually in recent years, according data from ING Bank.
However, in a significant shift, the World Bank expects to see a 13% decline in remittances to the Philippines in 2020. One silver lining could be that productive, skilled and ambitious workers who have returned from overseas due to the pandemic could help to drive local entrepreneurial activity in the recovery phase.
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