How is Covid-19 affecting remittance flows into emerging markets?

The onset of a coronavirus-induced global recession has affected both labour markets and financial flows across 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 those countries 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.

On April 22 the World Bank predicted that remittances to low- and middle-income countries would see the sharpest decline in recent history this year, falling by 19.7% to around $445bn, 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 a 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 on April 22.

Given that foreign direct investment flows to emerging markets are expected to fall even further than remittances this year, by around 35%, the proportional reliance of some economies on remittances as sources of foreign currency may be even more prominent.

Mexico: top recipient of US remittances

The US, the world’s largest economy, is also the world’s largest 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, Dominican Republic and Honduras.

While remittance flows into Latin America and the Caribbean grew by 7.4% in 2019 to reach $96bn, the World Bank expects this to fall by 19.3% this year.

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 exported from the US in 2017 – nearly twice the level of the second destination, China. Meanwhile, more updated statistics from Banco de México, the central bank, showed that the country received an all-time high of $36.5bn in remittances last year, the vast majority of which came from its northern neighbour.

As such, remittances are now one of the country’s top sources of foreign income, accounting for more than its oil export revenues, even before the drop in oil prices during March and April this year.

According to the Migration Policy Institute, a Washington DC-based think tank, there were an estimated 11m Mexican-born migrants in the US in 2017, which accounts for the largest foreign-born population in the country at around 25% of all migrants living there.

Given that as many as half are thought to be undocumented, many have not been eligible for the federal stimulus funds given to US households since March. This could cause complications in Mexico since some regions – such as the more rural states of Michoacán, Oaxaca and Zacatecas – depend on remittances for more than 10% of their GDP.

However, given the 20-25% slide in the Mexican peso against the US dollar since late February, the relative value of the remittances will increase for recipients.

Before the outbreak, there had been some positive news regarding costs for some customers, with Spanish bank Santander announcing in November last year that it would waive all fees for remittance transfers.

The decision was applauded by Mexican 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 the 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 EdTech 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 Gulf and Africa: two different cost realities

The UN, through its Sustainable Development Goals (SDGs), aims 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. It is therefore unsurprising that remittance commissions charged by operators in the Gulf are among the lowest, 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 Saudi Arabia’s private sector workforce.

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, only slightly above the UN’s SDG target for 2030.

The country’s remittances market could see costs fall further after UK fintech company TransferWise began operating in the UAE in April.

Its low overheads mean that sending Dh735 to India now incurs a commission cost of 1.71%, just over half the average transfer commission charged by traditional firms. In an already competitive marketplace, TransferWise’s presence and low overheads could cause significant disruption to established institutions’ revenues, especially in light of the predicted fall in remittance volumes in 2020.

Cost of African transfers remains high

In 2019 remittances from African migrants abroad grew by 3.5% to total $70.7bn. On average, they account for 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 last year, Egypt is the highest recipient on the continent 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 among the principle source markets once again.

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 sub-Saharan Africa transfers 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.

Streamlining regulations to reduce these checks would be one way to lower costs for consumers, who typically send small but regular amounts of money.

Moreover, 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.

Technology key to driving down costs

As seen with TransferWise, a technology-centric framework is one additional way to bring down the cost of sending remittances, largely because the physical infrastructure needed to complete the transfer is substantially less than 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. Fintech providers Azimo and TransferWise have brought the cost of transferring £120 ($149) from the UK to Nigeria down to between 4-5%, well within reach of the UN’s 2030 SDG target of 3%.

Considering the stricts regulations required in Africa, technologies that boost transparency – such as blockchain – could also play a role in lowering fees through safer and more efficient transfers.

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 regions such as Eastern Europe or sub-Saharan Africa. Some estimates suggest that they represent up to 75% of the value of formal remittances, although there is little agreement among analysts on the accuracy of these numbers.

Although there is potential for cryptocurrencies to be used for remittances in the future, their current market volatility – particularly in current conditions – combined with their complex nature make this an unlikely prospect in the near term.

Asia’s remittance “hedging” 

Although double-digit falls in remittances are expected across all regions this year, 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 isolated them 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.

Many 'yellow slice' countries in South and South-east Asia illustrate this. Sri Lanka, Thailand, Vietnam, Malaysia and the Philippines all receive their remittances from a wide array of source markets such as the US, Europe, Australia, the Gulf and 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 still 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 have returned home since the start of the outbreak.

Along with India, the Philippines is one of the countries most reliant on remittances in Asia. It received $30.1bn last year, equivalent to around 8.5% of GDP, and inflows have grown annually at around 4% in recent years, according data from ING Bank.

However, in a significant shift, the World Bank – as reported by Bloomberg – now forecasts a 13% decline in remittances to the Philippines this year. 

One silver lining could be that productive, skilled and ambitious workers who have returned from overseas due to the pandemic could help to drive entrepreneurial activity in the recovery phase.