Remittance resurgence no treat for sickly emerging economies
Larger-than-expected money transfers from migrants overseas own provided a tonic for many sickly economies through the coronavirus crisis, however the outlook for such flows remains fraught with uncertainty even while vaccines will be rolled out.
Mexico, El Salvador, Kenya, Pakistan, Bangladesh, Philippines and Sri Lanka are among those making the most of resurgent flows lately, helping them narrow current account gaps, stabilise currencies and meet any overseas debt payments.
Such countries have led a surprise recovery in remittances in the next half of 2020, as the slowdown in flows amid the pandemic proved less serious than initially feared.
Migrants possess cushioned the pandemic's economic blow, drawing down savings to help out families back and sending more money via official channels instead of in person, while profiting from usage of state support, including cash handouts, in host countries such as the United States.
While vaccinations should help financial activity to return to normal, the risk of mounting job losses as government support unwinds mean such flows, a source of FX revenue and gross domestic product for most emerging countries, may falter in 2021.
Unemployment in wealthy G20 countries, home to a sizeable proportion of migrants, is likely to reach 10 per cent by the finish of 2020 and remain above levels at the end of 2019 next year, the OECD has forecast.
"Countries like Pakistan, Bangladesh and Philippines, which receive about 9 % or 10 per cent of GDP from remittances, own a window of opportunity to invest these flows into productive regions of the economy to help their recoveries because at some time this window may close because persons may lose their careers or opt to go back again to their house countries," said Emre Akcakmak, portfolio manager at East Capital, a specialist in emerging and frontier markets.
Record flows to Pakistan have helped it accumulate a $1.2 billion current account surplus at the same time when it is paying back a $3 billion loan to Saudi Arabia.
Strong remittances and subdued imports should help Sri Lanka to service its July Eurobond maturity, said Tellimer economist Patrick Curran. Beset with surging debt and collapsing tourism revenues, the island nation has been assessed at growing threat of default by rating agencies.
Mexico's currency depreciation possesses helped put the united states on course because of its greatest current account surplus in more than 30 years, Goldman Sachs estimates.
Remittances happen to be relatively stable compared with other financial flows. That includes overseas direct investment, which remittances overtook in 2019. Meanwhile portfolio flows, established to surge within the last quarter of 2020 with their highest because the first quarter of 2013, are inclined to sharp reversals because they did during the taper tantrum.
However the outlook is uncertain.
The World Bank in October revised its 2020 estimated drop in flows to low- and middle-income countries to 7 per cent from 19.7 % previously, but predicted an additional 7.5 % dip next year. That is clearly a deeper and longer downturn than during the global financial meltdown, when flows shrank 4.9 % in 2009 2009, before rebounding 11.8 % a year later.
For the very first time in recent history, the stock of international migrants is likely to fall in 2020. Those staying in host countries deal with an uncertain future.
In the United States, in a reversal of pre-pandemic trends, the unemployment rate for immigrants was now 2 percentage items greater than the rate for natives, according to the OECD.
"We will be expecting a strong recovery in global growth as vaccination is normally rolled out and we commence to visit a normalisation in economical activity.
This should support global remittances," said Farouk Soussa, senior economist at Goldman Sachs.
"However, we think there have been a number of one-off factors which may have held up remittances this season, and these might not exactly come into play next year."
The Gulf, accounting for about 40 % of total outward remittances, may see a push to displace foreign employees with locals in 2021, Soussa said.
That be bad news for countries that rely on transfers from the Gulf, such as Bangladesh, Philippines, Egypt and Lebanon. Lebanon's financial meltdown and dwindling economy suggest remittances are seen rising to greater than a third of GDP in 2020.
One hope can be a recovery in exports and tourism, the other big money maker and hard currency source for emerging economies. Yet as the vaccine rollout should help, the outlook can be uncertain.
