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