Remittances heading downwards Jan 15th 2009 From the Economist Intelligence Unit ViewsWire

Remittances heading downwards Jan 15th 2009 From the Economist Intelligence Unit ViewsWire
Remittances from overseas workers, a financial lifeline for a number of countries, are set to shrink this year
Remittances from overseas workers are a financial lifeline for a number of Latin American and Caribbean countries, and in several cases represent the equivalentof as much as one-fifth or more of GDP. Yet with major world economies and, in particular, the US already in or headed for recession, the flow of remittancesis set to shrink this year. This will leave many countries, especially the smaller Central American economies that have limited means to make up the shortfall,hurting.
The Economist Intelligence Unit expects world GDP to contract by 0.4% in 2009, and for the US economy to shrink by a deeper 2%. The US is home to the largestnumber of foreign migrants from the Latin American region, with 11-12m of these estimated to be undocumented. Most of these, in turn, come from Mexico.
Although Mexico receives the largest amount of remittances in absolute terms, estimated by the World Bank to have been around US$24bn in 2008 (down fromUS$25bn in 2007), other economies are far more dependent on these inflows. Migrant transfers represent nearly 25% of GDP for Honduras, 20% for Haiti, 19%for Jamaica, 18% for El Salvador and 11% for Guatemala (versus just 3% for Mexico—see table).
Remittance inflows to most developing countries already began to slow in 2008. In its Migration and Development Brief, published in November, the WorldBank estimated that remittances last year would total US$283bn, only 7% higher than in 2007. This compares with double-digit growth rates every year since2001. As the global recession deepens in 2009, the impact on remittances will be more pronounced. The bank's core scenario envisages remittances contractingby 0.9%, but it concedes that in the worst case flows could decline by almost 6%.
For Latin America and the Caribbean, remittances totalled an estimated US$61.1bn in 2008, barely 0.1% above the level of the previous year. Contractionis expected this year, with an even deeper shrinkage in inflation-adjusted terms.
Worse before it gets better
Given the sharp deterioration in global economic conditions since the World Bank published its forecast, and the fact that individual countries' balance-of-paymentsdata are only starting to reflect the financial turmoil in October, the odds are increasing that remittance flows in 2009 will be at the weak end of thebank's projections, or worse.
This will have negative implications not only for the balance of payments but also for private consumption in affected countries. In most Central Americanand Caribbean countries, remittances from migrants finance an important share of household consumption in lower-income families, and often in entire communitiesthat have sent a large share of inhabitants to the northern market for jobs.
Many of these jobs, particularly in the beleaguered construction industry in the US—an importance source of employment for migrant workers—have alreadydisappeared. US unemployment is now at 7.2%—the highest level since January 1993. The economy lost 2.6m jobs last year, including 524,000 jobs in Decemberalone. Fifty-nine percent of job losses came during the last quarter. The African-American unemployment rate stood at 11.9%, the Hispanic unemploymentrate at 9.2% and the unemployment rate for whites at 6.6% in December 2008. As the US downturn intensifies, a wider variety of service-sector jobs arelikely to be hit.
The EU economy is also expected to contract next year, with negative implications for demand for imported labour. Many workers from South American countriesseek employment in Europe, particularly in Spain—which has been one of the hardest hit European countries by the global downturn and the bursting of thehousing bubble.
Again, those smaller economies that are most heavily dependent on remittances, both as a source of foreign exchange and to support household incomes, arelikely to be particularly vulnerable to weakening economic conditions in "host" countries such as Spain and the US. It is also worth noting that in manycountries, money transfers from overseas are conducted on a large scale through informal or illegal channels, with the result that official data (normallyfrom a country's central bank) do not always capture the true value of sums remitted.
Domestic factors
It is not only host-country economic growth that affects remittances. Other factors also play a role, most notably changes in exchange rates. In Mexico,remittances fell for four consecutive months from May to August, culminating in a 12.2% year-on-year decline in August. To most eyes, this confirmed thateconomic weakness in the US was feeding through into reduced transfers from Mexican workers. But in the subsequent two months remittances picked up (theyrose by 13% in October). This upturn coincided with a sharp rally in the US dollar against the Mexican peso, which may have encouraged workers to sendadditional money home in order to benefit from a more advantageous exchange rate.
The likely impact of slowing or contracting remittances on a receiving country’s overall economic performance is hard to quantify, in part because of thedifficulty of separating the effects of changes in remittances from those of other macroeconomic variables. Strong rises in remittances are sometimes associatedwith exchange-rate appreciation, but currency strengthening creates difficulties for exporters. Yet in the current economic climate the potential impactof the reverse occurring, and falling remittances causing currencies to depreciate, would not necessarily be welcome—since favourable exchange rates maybe of little consolation to exporters in Latin America if demand in big markets like the US and EU is simply not there.
Moreover, in a number of countries any benefit of exchange-rate depreciation is likely to be outweighed, in the current economic climate, by the negativeimpact of the rising cost of servicing foreign debt.
A simultaneous drop in remittances and exports would pose severe troubles for some governments. Mexico is one country being hit with the double whammy,as it depends on the US market for nearly all of its remittances and 80% of its exports. With export sales declining in line with reduced US import demand,domestic demand would have to drive economic growth. Yet this is likely to be insufficient, and the Economist Intelligence Unit forecasts that Mexico willbe one of a small group of countries in Latin America to actually post negative GDP growth this year.
In the smaller countries, there is a risk that a sharp reduction in remittances could result in rising poverty levels and mounting unemployment—along withan increase in social discontent—as well as the return of large numbers of migrant workers, unable to find work in the US. There is no empirical evidenceas yet in the US of such a reverse migration, although it does appear that dimmer job opportunities (along with an intensified police and border patrolcrackdown on illegals, especially at the border with Mexico) have slowed the entry of new arrivals.
Perversely, the World Bank notes that even if unemployed migrants are forced to return home, this could result in a temporary boost to remittances as theyrepatriate their accumulated savings. But given the host of other economic problems facing Latin American and Caribbean economies as a result of the globalcrunch—from weakening demand for their exports to external-financing difficulties—this would probably prove to be only scant consolation.