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Latin America will face an unprecedented fall in remittances this year, according to a World Bank report launched today. The expected 19.3% reduction will be greater than the 12.3% drop during the global financial crisis of 2009.

This is major news for Mexico, that received $38.5 billion in remittances in 2019, and for Haiti, where money transfers from its nationals living abroad represented 37% of GDP. It is also crucial for other receiving countries such as Brazil, Honduras, El Salvador, Jamaica, Nicaragua, Guatemala, Dominica, Colombia, Peru, Guyana, Dominican Republic, and St Vincent and the Grenadines.

The fall in remittances will be yet another force to fuel the economic recession in Latin America. The World Bank’s Chief Economist for Latin America, Martín Rama, completed the grim picture: scores of informal workers losing their income to lockdowns, formal workers being laid off and firms going out of business, especially in services and tourism. This, he said, coincides with a fall in exports, foreign direct investment, and short-term capital flows. “Capital has fled the region like never before. More than during the financial crisis.”

Edgardo Torres-Caballero, managing director Americas at Berlin-based fintech Mambu, said that technology to lower the cost of remittances is readily available.

Remittances are key for many countries

($ billion, 2019)

Source: The World Bank

 

Crucial in some other countries

 

Source: The World Bank

 

Migrant unemployment

  • The drop in remittances to Latin America will be sharp since Spain, Italy, and the United States, three major remittance-source countries, were severely affected by the pandemic. Ecuador and Colombia, highly dependent on them will suffer the most, but Bolivia, Ecuador and Peru will also be touched by high unemployment in these countries after the pandemic.
  • “The unemployment rate for foreign-born workers is especially high in Italy and Spain, which have been hit hard by the coronavirus,” the World Bank said.
  • “Migrant workers tend to be particularly vulnerable, more than native-born workers, to losses of employment and wages during an economic crisis in their host country. During the global financial crisis, the average unemployment rate for foreign-born workers in the EU-28 countries rose from 11.1 percent in 2007 to 16.4 percent in 2009, significantly higher than the increase among native-born workers,” the report reads.
  • “Even a decade later, in 2018, the unemployment rate remained high for foreign-born workers, while it had fallen below the pre-crisis rate for native-born workers”.

The latest on unemployment in source countries

  • Per the report, “the impact of social distancing guidelines and stay-at-home orders had severely impacted jobs in retail, hospitality, and services, in which a large percentage of Latin American migrants were employed.”
  • “The latest U.S. data on total nonfarm payroll employment reported a sharp decline of 701,000 individuals, reflecting the impact of COVID-19 during the first two weeks of March 2020. About two-thirds of the drop was reported in leisure and hospitality, mainly in venues serving food and alcoholic beverages. These sectors are typically the largest nonfarm employers of Mexican and Central American migrants.”
  • “Spain lost more than 800,000 jobs in March, led by the services sector, followed by the construction and agriculture sectors. More unemployment is expected in developed and developing countries for April and the coming months.”

Remittance costs are still too high

  • “The average cost of sending $200 to LAC was 5.97 percent in 2020 Q1, according to the Remittance Prices Worldwide database. In 2019 Q4 the average cost of sending $200 from the United States, where most LAC migrants reside, was below the global average of 6.8 percent but well above the SDG target of 3 percent. The cost of sending money to LAC has stayed stagnant over the past few years.”
  • There seems to be room for competition to lower costs in the future. “I see that the most modern technology, that is in the cloud and based on composable banking, will help financial services providers optimize their operations and reduce the total cost of operating their platform, which ultimately will end up positively affecting the cost for their customers,” said Edgardo Torres-Caballero, managing director Americas at German fintech Mambu. His company partnered yesterday with TransferWise, a European firm that transfers across borders $4.3 billion per month for 7 its million customers.
  • Competition and reduced costs on small international transactions could come sooner than expected. “We enable our customers to launch fast to market financial services offerings in a fully digital channel experience, which helps them let go of costly physical branches, legacy systems, and manual operations,” Torres-Caballero said.
  • The entry of low-cost institutions might soon break the 9% commission paid to send money from Canada to the Caribbean countries and from Japan to Brazil.

A direct blow to consumer spending

Latin Trade reported in November that remittances were the main reason behind a staggering surge in consumer spending in the region. The increase strangely occurred when employment was stagnant.

  • Today’s World Bank report confirms the hypothesis. It shows that migrants sent home an unprecedented $96 billion in 2019. That figure is 29% greater than the $74.5 billion sent on average between 2009 and 2018.
  • “Brazil, Guatemala, and Honduras saw a rise in remittances of more than 12 percent in 2019. Colombia, Ecuador, Nicaragua, and Panama saw an increase of more than 6 percent,” the report stated.
  • A greater remittance volume and local currency devaluation supported consumption and at the same time, discouraged salaried work in some receiving countries.
  • The drop in remittances will surely hit local consumption.

See the full report here

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