Deteriorating C/A positions are beginning to raise concerns over currency performance in some emerging markets. Lockdowns have triggered an unprecedented decline in exports and depressed demand will mean only a partial recovery in trade once economies reopen. Reliance on remittance inflows to offset trade deficits leaves several EM economies decidedly vulnerable, most notably the Philippines, Mexico and India.
Remittances Exceed FDI in Many Countries
Remittances inflows reached a record high of $554bn last year and overtook FDI as the main source of external financing in EM. COVID-related job losses and border closures are expected to cause huge disruption to these flows with migrant workers particularly vulnerable during a crisis.
India was the world’s largest recipient of remittance inflows last year with overseas workers sending $83bn back home. China ($68bn), Mexico ($39bn) and the Philippines ($35bn) were the next largest recipients. But of course, as a share of GDP the ranking is very different with small countries (such as Tonga and Haiti) at the top. And even for the larger economies the importance on remittances as a financing item depends on the structure of the C/A.
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Deteriorating C/A positions are beginning to raise concerns over currency performance in some emerging markets. Lockdowns have triggered an unprecedented decline in exports and depressed demand will mean only a partial recovery in trade once economies reopen. Reliance on remittance inflows to offset trade deficits leaves several EM economies decidedly vulnerable, most notably the Philippines, Mexico and India.
Remittances Exceed FDI in Many Countries
Remittances inflows reached a record high of $554bn last year and overtook FDI as the main source of external financing in EM. COVID-related job losses and border closures are expected to cause huge disruption to these flows with migrant workers particularly vulnerable during a crisis.
India was the world’s largest recipient of remittance inflows last year with overseas workers sending $83bn back home. China ($68bn), Mexico ($39bn) and the Philippines ($35bn) were the next largest recipients. But of course, as a share of GDP the ranking is very different with small countries (such as Tonga and Haiti) at the top. And even for the larger economies the importance on remittances as a financing item depends on the structure of the C/A.
Philippines, Mexico and India Look Vulnerable to Declining Remittances
Two countries where remittance inflows covered 40-50% of the trade deficit last year are India and the Philippines (Table 1). Mexico ran a small trade surplus with remittance inflows instead offsetting the deficit on primary income. Without these remittance inflows, C/A deficits in these three countries have the potential to gap wider at a time when portfolio inflows have witnessed unprecedented declines. As FDI is also likely to dry up as firms reassess the new economic reality, these currencies look particularly vulnerable.
Note: India here is calendar year
The World Bank expects a 20% decline in global remittance flows this year, in what it describes as the largest decline in recent history. Remittances are expected to recover by 5.6% in 2021, but whether or not migrant workers return home or remain in host countries until employment prospects improve will be an important factor in the pace of any bounce back. Moreover, the past counter-cyclical relationship between remittances and growth in home countries is no longer expected to hold given the global impact of COVID.
As these receipts are primarily used to support local consumption, this will have a knock-on effect on growth. As well as the three countries we mention above, Vietnam, Colombia, Thailand and Indonesia all have material inflows (Chart 1). Vietnam and Thailand have C/A surpluses, leaving currencies less exposed to weakening remittances. Stripping out remittance inflows from Colombia’s C/A would, however, push the deficit to close to 6% of GDP.
Note: WB data on migrant remittance inflows do not match exactly with BoP data
Recent data already points to significant slowdown. The latest data in Mexico and the Philippines show YoY declines in remittance inflows and the largest fall in several years (Chart 2). Smoothing through some of the volatility in the data shows a clear deceleration in Mexico since last year, likely reflecting the heightened tensions with the US over migrants. Remittance growth in the Philippines has also gradually trended lower over the past few years.
Continued PHP Outperformance Unlikely
YTD performance of remittance currencies has been a very mixed bag. MXN is by far the worst, down 15%, while CLP is not too far behind at almost 13%. Asia has performed much better with INR losing just over 6% and PHP up by just over 1% and overall leaves no relationship between remittances and FX performance so far this year. Nevertheless, this outperformance of PHP is at odds with the huge reliance on remittances, and we expect remittance and C/A data to attract increasing attention in the coming months. It is hard to see how PHP could appreciate further with continued YoY falls in remittances unless import compression is on such a scale that the trade deficit narrows sharply.
Falling Remittances Could Also Hurt Healthcare
Aside from global risk factors, another explanation for the better performance of Asian remittance currencies versus Latam is COVID. Latam has seen almost half of all new daily deaths from COVID over the past seven days despite having less than 10% of the world’s population. Brazil is the main driver with the second highest number of COVID deaths globally, but Mexico, Colombia and Chile are also recording sharply rising cases and deaths. Declining remittance inflows have the potential to make this worse as healthcare costs (and education) are other common uses of remittance proceeds alongside basis consumption.
India has also been hit hard from COVID with the fourth-highest case numbers globally, albeit with per capita numbers lower given its large population. Lower remittances could nevertheless make this worse, and combined with the RBI preference for a weaker rupee we expect the gap between Latam and Asia remittance currency performance to close.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)