Abu Dhabi, UAESaturday 15 August 2020

Drop in remittances raises credit risk in low and middle income economies

Economic stress in source countries will weaken global remittances this year, Moody's says

Global remittances to low and middle income countries reached an all-time high of $554 billion (Dh2.03 trillion) in 2019. The National Archives
Global remittances to low and middle income countries reached an all-time high of $554 billion (Dh2.03 trillion) in 2019. The National Archives

A global drop in remittances by migrant workers due to the coronavirus-induced recession will raise the level of credit risk in countries most dependent on such inflows, according to a new report by Moody’s Investors Service.

“The countries that are most dependent on remittances are largely low and middle income economies, and we expect the decline in remittances will exacerbate the growth slowdown in these countries,” said Christian de Guzman, senior vice president at Moody’s.

Global remittances to low and middle income countries reached a record high of $554 billion (Dh2.03 trillion) in 2019 but are expected to fall by $110bn this year, the Moody’s report said.

The World Bank said in April that it expected remittances to low and middle income countries to fall by about 20 per cent to $445bn this year, the sharpest decline in the sector in recent years. In comparison, remittances fell by about 5 per cent after the global financial crisis in 2009.

The World Bank expects remittances to low and middle income countries to recover and grow by 5.6 per cent to $470bn next year.

The outbreak has tipped the world economy into a recession that is expected to be the worst since the Great Depression, according to the International Monetary Fund. It is set to contract by 4.9 per cent this year.

According to Moody’s, frontier market sovereigns in the Commonwealth of Independent States, Latin America and the Caribbean – countries such as Kyrgyzstan, Tajikistan, El Salvador and Bermuda – are among the most vulnerable to the drop in remittances.

Sources of remittances are highly concentrated, with 25 countries accounting for 85 per cent of outflows, the Moody’s report said. The top 10 remitting countries include many of the largest G20 economies.

According to the Institute of International Finance, the US accounts for most remittances to Latin America while countries in Western Europe are an importance source for remittances for Africa and Eastern Europe. Most workers in the GCC send money to their home countries in Africa and Asia.

The damage done to labour markets in these source countries could continue to weigh on migrant labour for some time, the report said.

We expect the decline in remittances will exacerbate the growth slowdown in low- and middle-income economies

Christian de Guzman, Moody’s

“By affecting household income and consumption, along with current account receipts, a sharp drop in remittances weakens credit profiles through its impact on economic strength and external vulnerability,” said Mr de Guzman.

“While the impact on incomes and economic strength is likely to be more gradual, the hit to current account receipts and weakening of external positions can be abrupt.”

Remittance-receiving countries are largely net oil importers and will benefit from the slump in oil prices since the start of the year.

However, Moody’s said the negative current account impact of a 20 per cent decline in remittances was significant for Kyrgyzstan, Tajikistan and El Salvador.

Updated: July 29, 2020 02:38 AM

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