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FINANCE:
Expat Remittances
Bail Out Struggling Banks
Ulysses de la Torre
NEW YORK, (IPS) - Migrant
workers and their families are
not the only ones gaining from
lower costs and better data
collection in the growing
industry of transferring money
across borders.
Banks in developing countries
that receive money transfers --
commonly referred to as
”remittances” -- have also
benefited by being able to
borrow money more cheaply as a
result, though the process
demands unusually high reserve
requirements.
The trend has evolved to the
point that the first banks to
use remittances for this purpose
-- mostly Mexican -- have
graduated to less cumbersome
ways of borrowing money, leaving
the market to smaller countries
with fewer options for raising
money.
In its most recent report, Fitch
Ratings Agency, a leading credit
specialist, noted that while
Latin America's outlook is
positive, international
borrowing ”will be challenged to
grow,” adding that Brazil's
strongest banks have already
reached their borrowing capacity
and that further growth in the
region lies in Central America
and the Caribbean.
”We see a drop in Mexican
cross-border deals in general,”
Fitch analyst Jennifer Conner
told IPS. She added that
Mexico's investment grade status
and its burgeoning domestic
financial markets have now
exempted it from this form of
last-ditch financing.
In two illustrative examples
from recent years -- the
2000-2001 Peruvian political
crisis and the run-up to
Brazil's 2002 presidential
election -- plummeting investor
confidence in political and
economic stability prompted
experts across the financial
world to slash each country's
credit rating, thereby shutting
off access to international
capital markets.
Banks in both countries
responded with what was at that
point the only option left for
borrowing money abroad. Banco
Crédito del Peru raised 100
million dollars and Banco do
Brasil raised 450 million
dollars by pledging future
remittances as collateral for
borrowing money.
Shortly after Banco do Brasil,
four other Brazilian banks
followed suit, and together
raised more than two billion
dollars that year, followed by
1.78 billion dollars in 2003 and
more than one billion dollars in
2004.
”Securitising remittances,” as
the process is called, was first
executed by Mexican banks during
the 1994-95 peso crisis, and has
since become an increasingly
attractive way for financial
institutions in Latin America to
remain operable, particularly in
times of economic and political
uncertainty.
Globally, between 1994 and 2000,
El Salvador, Mexico and Turkey
raised a total of 2.3 billion
dollars through
remittance-backed bonds. Since
2000, Brazil, El Salvador,
Kazakhstan, Mexico, Peru and
Turkey raised more than 10
billion dollars, largely backed
by future remittances.
The strengthening of Mexico's
domestic markets has evolved in
large part from the regulatory,
tax and legal changes required
by issuing remittance-backed
debt during the 1990s --
approximately the same point at
which many Asian countries now
find themselves. ”Basically the
problem is the regulatory
framework for securitisation in
most of these countries,” said
William Willms, principal
investment officer at the Asian
Development Bank in Manila.
”For instance, here in the
Philippines, the law has been
passed, but the so-called
implementation for regulations
on securitisation has not been
issued yet, point one,” he said.
”Point two, the law does not
foresee future revenue. In
China, you have a trust law in
place which has been in the past
used for something you might
want to call securitisation, but
is not really securitisation.”
Willms added that India,
Malaysia and Thailand face
similar obstacles.
In the past two years, domestic
market debt in Latin America has
been equal to or even slightly
more than international debt.
This removes one of the leading
factors that many believe has
led to so many financial crises
in the region during the past
decade, a phenomenon that
economists refer to as ”original
sin.”
Briefly, the theory argues that
excessive borrowing in a foreign
currency (U.S. dollars, for
example) makes banks
disproportionately vulnerable to
movements in foreign exchange
and interest rates to the point
that financial instability
becomes inevitable.
Nathaniel Jackson, a structured
finance analyst at the
Inter-American Development Bank,
said that third-party credit
guarantors that provide a form
of insurance against default,
such as the IDB's Multilateral
Investment Fund, are acutely
aware of the implications of
helping Latin American banks
borrow in dollars.
”Part of the reason why emerging
markets have gotten in trouble
is because they have borrowed so
heavily in a currency which they
have no control over,” he told
IPS.
One of the IDB's primary
considerations in assessing
which banks it will guarantee is
how the banks will use the money
raised.
”We're extremely cognizant of
the end borrower and their
source of where they're going to
repay the cash in dollars. So
that's why we grill the
financial institutions that
we're lending to, and say,
'Where are you going to place
this money? Who's your client
base? Tell us, we want to see
where they're getting their
money.' We don't want it going
to Juan the campesino who's
earning in Soles and have him
exposed to a devaluation,”
Jackson said.
As much as data collection on
remittances has improved,
estimating the potential market
in remittance-backed bonds is a
complicated task for a number of
reasons. Varying levels of
remittances channeled through
banks and the remittance
reserves demanded by foreign
investors make it nearly
impossible to generalise this
market across the developing
world.
”It really depends on the
country,” said Manuel Orozco,
director of remittances and
rural development at the
Inter-American Dialogue in
Washington. ”In some places, 50
percent of remittances are
received by banks, but that
doesn't mean that people who
receive remittances have a
banking relationship, it only
means that the bank is a payer
of remittances.”
”In the case of Mexico, 70
percent or more of remittances
are handled by banks, as is the
case in El Salvador. In
Guatemala it's 40 percent, in
Jamaica it's less than 30
percent.”
What several experts do agree on
however, is that unlike oil and
agricultural commodities, whose
prices fluctuate at the whims of
the world economy, or credit
card receivables and airline
ticket sales (subject to the ebb
and flow of the tourism
industry), remittances have
demonstrated a level of
stability thus far immune to
other macroeconomic forces.
As remittances become an
increasingly frequent component
in the broader discourses of
third world development and
globalisation, several issues
have arisen. How to best harness
the potential of remittances is
an obvious one, but from a more
market-oriented perspective, how
migration and development trends
influence the future direction
of remittances as a business
remains an open question.
”You got an explosion of
remittances coming out of the
United States, Europe and
Japan,” said Sergio Bendixen,
president of Bendixen and
Associates, a Florida-based
public opinion polling firm
specialising in Latin American
issues.
”The challenge for the countries
where senders live is how to
make sure that flow continues
uninterrupted because it is
helping to develop the economies
of third world countries,” he
said.
”The challenge to governments in
the recipient countries is how
to begin to channel that money
away from consumption and into
economic development.”
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