Tuesday, August 25, 2009

Remittance flows during the recession

When the Hudson Institute’s Center for Global Prosperity came to press in May with its annual Index of Global Philanthropy and Remittances, it was optimistic regarding the recession’s impact on philanthropic and remittance flows to developing countries. While the data in the Index focused on 2007 giving to the developing world (the most recent data available at the time), the Index and the Center did make some predictions regarding the recession’s impact on giving and remittance flows for 2009.

With respect to remittances, the Center predicted that this flow would remain the lifeline to developing countries. At the time, the World Bank’s most recent estimates suggested that remittances would decline by 5-9% in 2009. Dilip Ratha at the WB then changed that prediction to 7-10% in July. Nevertheless, even the high margin of 10% still seems feeble compared to the devastation caused by failures in financial institutions and the recession’s effects on exports and capital flows. Although the Center’s estimates are supported by the World Bank, during the launch of the Index, CGP was often addressed with concerns during presentations and talks regarding its relatively positive outlook regarding remittances. While time will prove the true change in remittance flows, most recent 2009 data show mixed results that vary by country, but continue to support the notion that remittances are a relatively stable financial flow during hard economic times.

In Latin America, a region where remittances were expected to be most affected by the financial crisis abroad, the decrease in remittance flows has indeed occurred, but modestly. In Guatemala, Banco de Guatemala has reported $1.59 billion in remittances from January to May of this year, which is a $0.17 billion decrease from this time last year. For those who prefer percentages, that’s a 10% decline if you round up, falling in line with the WB estimates. Similar trends are observed in other LAC nations. In Honduras, the Central Bank of Honduras (BCH) expects a 0% growth in remittances for 2009, compared to an 8%-9% growth observed in 2008. However, this prediction is a decline in growth, not a decline in flows. In the Philippines, a country where remittances make up at least 10% of its GDP, Bangko Sentral ng Philipinas (BSP) reported increasing remittance as compared to the same time last year. Granted the reported increase was only 2% for the month of April with an estimated 0% growth for 2009, compared to 13.7% growth for 2008. However, these flows continued to increase in June, and were up by 3.3% from the year before, reaching $1.5 billion. According to the BSP, the continuing migration of new Filipinos out of the country is offsetting the effects of the job loss of the current migrants abroad.

While still noting a decline in 2009 remittance flows, the most recent Migration Brief from the WB predicts a rebound in remittances to positive growth in 2010. One of the contributing variables to this rebound is the recent recovery in the construction sector in the US, which caused the greatest loss in migrant employment.

So what can be expected during the rest of 2009 and 2010?

Previous research has mainly focused on remittance inflows with respect to the receiving nation’s economic situation, and limited literature exists regarding the impact of the sending nation’s economic downturn on remittance flows. Most recently, the Overseas Development Institute (ODI) in London produced a paper titled
The Global Financial Crisis and Remittances, which includes a comprehensive literature review on remittances and economic indicators as well as an analysis of the past economic crisis on remittance outflows and inflows.

The ODI paper analyzed past systemic banking crises on remittance outflows and inflows, and made predictions for the current financial crisis. Their results, while slightly more negative than the World Bank’s predictions, nevertheless suggest that remittances will continue to be the more resilient financial flow to developing countries during the economic downturn. According to ODI, based on remittance outflow estimates, remittances could drop between 8% and 22% in 2009. Based on inflow data and analysis, the predicted decrease is only 5-8%. Unsurprisingly, this analysis predicts that nations in Latin America and East Asia and the Pacific will have the largest decrease in flows, while regions less reliant on flows from high income countries will remain resilient. Encouragingly, this paper reports that during previous financial crises, decreases in remittance flows were short lived, with flows quickly returning to pre-crisis levels. The current data has already demonstrated a similar trend.

Thus, both the previous analysis and the most recent predictions support the idea that remittances will remain relatively resilient. In the international development sphere, this news is both encouraging and calming, especially in light of the recession’s impact on decreased demand for exports from developing countries.

-Yulya Spantchak

Research Associate

Center for Global Prosperity

1 comment:

  1. I really like the way you have explained the whole article. It is very informative.
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