Like the recent commodities boom, the upward surge in
remittances came to a sudden halt late last year. After years
of unbridled growth, remittance flows to Latin America declined
for the first time this decade in the fourth quarter of
This year, remittances to the region will contract for the
first time since measurement began a decline that will
end a decade of sharp growth that has boosted developing
economies throughout the region.
This is bad news for millions of people in our region who
depend on these flows to make ends meet, IDB president
Luis Alberto Moreno said earlier this month.
For years, Latin America and the Caribbean have experienced a
boom in remittances. The modest payments sent home by migrant
workers doubled in eight years, from $30.9 billion in 2000 to a
whopping $69.2 billion in 2008. According to the IDB, Mexico
received the most money from its citizens abroad, with $25.14
billion for the year. It was followed by Brazil, at $7.2
billion; Colombia, $4.8 billion; Guatemala, $4.3 billion; El
Salvador, $3.8 billion; the Dominican Republic, $3.1 billion;
and Peru, $3 billion.
But remittances to Caribbean countries slid 6% in the fourth
quarter of 2008 and those in Central America were down 4%
compared to the same period a year earlier. Worst hit was the
Andean region, where an 18% rise in the first quarter became a
12% plunge in the fourth.
The sharp drop in cross-border payments will prove a nasty
shock to the region, as flows have proved critical for millions
of families not to mention national economies on whom
they depend. Poor people across Latin America and the Caribbean
rely on the cash to maintain their purchasing power and finance
purchases of food, fuel and basic services like electricity and
health care. Remittances also help sustain the current account
of nations and prop up the value of local currencies.
There is now a symmetrical shock affecting both sending
and receiving at the same time in the same way, Robert
Meins, remittances specialist at the IDBs Multilateral
Investment Fund, tells Emerging Markets.
Unemployment is rising in both developed countries that have
been a magnet for migrant workers and in developing countries
that expel migrants, causing drops in consumption and
investment among the low-income families on both ends of the
remittance transfer transaction. Hostility and tightened
enforcement aimed at migrants in many US states are also making
it harder for many foreign workers to find employment.
Yet even in times of recession, remittances are
proving surprisingly resilient compared to other types of
capital flows. Private-sector inflows to Latin American
economies came to a halt in the final quarter of 2008 with
sizeable net outflows in October and November. According to the
Institute of International Finance, net private capital flows
declined to $28.4 billion for the year from $99 billion in
2007; they are continuing to decline this year. Meanwhile net
foreign direct investment contracted by 3.9% in 2008 from a
record high of $65.7 billion in 2007.
I expect a more substantial drop [in private capital
flows] than that of remittances because firms in the US and
elsewhere are having trouble financing their investment
domestically, which makes foreign investment even less
likely, says Ernesto Stein, economist for Central America at
Remittances, according to the World Bank, are less dependent on
the growth prospects of receiving countries than other kinds of
flows, which seek profitable investment opportunities. Migrants
will tend to remit money even when their incomes fall.
Moreover, as the sums are typically small, the payments home in
Flows of overseas development assistance (ODA) are not
significant in Latin America generally because most nations in
the region are middle-income countries and therefore aid has
been reduced in recent years to concentrate the funds in
needier, low-income countries in Africa and Asia.
Even the reduced flow of remittances is expected to top this
years peak levels of multilateral funding. Multilateral
banks like the IDB, World Bank, Andean Development Corporation
(CAF) and Fund of Latin American Reserves (FLAR) are ramping up
their funding to make credit available for trade lines and bank
lending for the private sector and finance government spending.
This year, flows to Latin America and the Caribbean from the
three regional banks increase by $9.3 billion in a special
liquidity line, and normal programme lending could reach a
record high of $30 billion. World Bank lending will increase to
$13 billion this fiscal year.
But regular remittances may decline if people, having lost
their jobs, return home in large numbers.
Nowhere in Latin America will the impact of a drop in
remittances be felt more than in Central America. The
regions economies are pegged to the US dollar through
trade and exports, and the vast majority of their migrants head
north, so the US crisis gnaws away at the economies. The
Central America Free Trade Agreement (Cafta), approved in July
2005, does not act as a buffer in the current crisis. The
level of concentration in exports in the United States is very
high and is an element that points to a certain
vulnerability, says Osvaldo Kacef, director of the
economic development division at the UN Economic Commission for
Latin America in Santiago, Chile.
Central America is also the region that receives the highest
proportion of remittances. Honduras leads with the highest
dependence on remittances, which account for 20% of the
national output; in El Salvador the cash stream is 17% of gross
domestic product (GDP); in Nicaragua it is 15% of GDP; and in
Guatemala the transfers total 12% of GDP.
The fall in remittances for this year is hard to predict, but
the cash transfers to Central America are likely to remain flat
or show negative growth this year, Humberto Lopez, World Bank
lead economist for Central America, tells Emerging Markets.
It will depend significantly on what happens in the US
economy, says Lopez.
In Guatemala, flows in January 2009 fell by 8% from the year
before. If the United States economy stabilizes, transfers
could recover across Central America.
The impact of remittances at the macroeconomic level varies
with the foreign exchange regime. In countries like Mexico or
Brazil, with a floating currency regime, hard currency flows
have appreciated as local currencies have lost value.
Countries that are less pegged to the dollar witnessed two new
behaviours in remittance flows in the last 12 months. The three
leaders among receiving countries Mexico, Brazil and
Colombia saw the number of dollars received by
remittances drop sharply, but the purchasing power of the cash
transfers increased because their local currencies
In Mexico in December 2008, dollars sent to Mexican families
fell by 12%, but the number of pesos received rose by 12%.
Similarly, the devaluations of the Brazilian real and the
Colombian peso increased the purchasing power of receiving
But in dollarized economies such as El Salvador and Panama, an
increase in the amount of dollars in circulation can boost
consumer demand, stoking inflationary pressures and in
the extreme harming competitiveness if the local
inflation rate is higher than that in the US, notes
Remittances can have paradoxical effects, Kacef notes:
There is a sort of vicious circle with remittances: the
flows force the exchange rate up, lowering competitiveness for
exports, which causes job creation to drop, which fuels
migration and causes remittances to increase.
On the other hand, remittances to a dollarized country make
imports more affordable, facilitate the repayment of
dollar-denominated loans and can improve the current account
balance, says Meins of the IDB.
Central American finance officials are ahead of their
counterparts elsewhere in the region in tackling the fallout of
the global financial crisis, a key dimension of which
for them has been the long expected drop in remittances.
In anticipation of the crisis when people were still
optimistic, they had the wisdom to say, this comes to us and
its better to prepare, says Lopez of the World
By March, the World Bank outlook for Central America is for
growth of between 1% and 2% in the most populous countries,
01% in Costa Rica and 3% in Panama. These forecasts are
being revised regularly downwards.
Central American authorities took measures to strengthen their
monitoring of financial and economic variables and created
contingency plans for public investment. This is new in
Latin America in dealing with a crisis, says Lopez.