Yield Curve From a Month Ago and the Impact of Remittances on Global Capital Flows

WSJ – Daily Shot: Fed Funds Futures Curve 8/28/19

For perspective.

FT – Remittances: the hidden engine of globalization – Federica Cocco, Jonathan Wheatley, Jane Pong, David Blood, and Aendrew Rininsland 8/27/19

…An estimated 270m migrants around the world who will send a combined $689bn back home this year, the World Bank estimates. That figure marks a landmark moment: this year remittances will overtake foreign direct investment as the biggest inflow of foreign capital to developing countries.

Remittances were once viewed by many economists as a secondary issue for developing economies behind FDI and equity investments. Yet because of their sheer volume and  consistent and resilient nature, these flows are now “the most important game in town when it comes to financing development”, says Dilip Ratha, head of the World Bank’s global knowledge partnership on migration and development.

The number of people in the world who live outside the country of their birth has risen from 153m in 1990 to 270m last year according to the World Bank, swelling global remittance payments from a trickle to a flood. As migration has increased, these financial snail-trails have become one of the defining trends of the past quarter-century of globalization – the private, informal, personal face of global capital flows.

For many developing economies, it is a lifeline.

“In times of economic downturn, natural disaster or political crisis, private capital tends to leave and even official aid is hard to administer,” says Mr Ratha. “Remittances are the first form of help to arrive, and they keep rising.”

Remittance inflows help boost countries’ balance of payments and therefore their credit ratings, lowering the borrowing costs of governments, companies and households. In the Philippines, for example, this year’s remittances inflows of $34bn will help reduce what would otherwise be a current account deficit of more than 10% of gross domestic product to a deficit of just 1.5% of GDP.

But remittances have economic downsides too. By helping to subsidize low incomes at home they provide a cushion against the impact of slow growth, which eases pressure on governments to reform their policies.

And, by channeling capital into consumer spending, remittances boost imports – which, some economists say, holds back the development of domestic manufacturing.

Remittances are also one of the key transmission mechanisms of global economic stress. People move in search of opportunities, so emigration rises when an economy is doing badly. When their host country is doing well and migrants prosper, they send more money home – a counter-cyclical boost to the struggling economy at home.

But when host countries hit hard times, the shock is transmitted back to migrants’ families in the form of lower remittances. This can export the slowdown to the recipient country, fueling economic instability on a global scale.

One example is the recent fall in oil prices. It was a blow not only to oil producing countries but also to families across south-east Asia and elsewhere who have breadwinners working in the Gulf.

It proved to be a structural shock for Lebanon, a small economy in which families and the banking system are heavily dependent on inflows from the diaspora.

“We’ve been watching Lebanon closely because remittances have really declined in the past decade, by almost 12% of GDP,” says Frank Gill of S&P Global, one of the big three rating agencies. “This is a key source of funding for the public sector and it’s a major worry for a rating agency, for obvious reasons.”

In May S&P lowered its outlook for Lebanon’s sovereign rating to negative, citing slowing inflows from non-residents as a threat to the country’s fiscal stability.

Although remittances have become one of the chief characteristics of the current era of globalization, political shifts including the rise of populism raise the question of whether their economic importance will prove short-lived.

The backlash against globalization is growing and anti-immigration sentiment is rising in many developed countries. So it is possible that both migration and the capital flows that it drives could begin to ebb.

But the World Bank expects 550m people to join the work forces of low and middle-income countries between now and 2030. And the gaping income disparity between developed and low-income countries – $43,000 a year per capita in the former, and $800 a year in the latter – is set to persist.

That means job opportunities abroad will continue to look attractive.

And the push from poor countries will be met by a pull from rich ones.

“The western world is ageing, and it’s going to be increasingly reliant on imported labor,” says S&P’s Mr Gill. “I don’t see why that isn’t going to continue.”

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