Global drop in remittances raises growth and external risks in major recipient countries

July, 29, 2020

Moody's Investors Service says in a new report that global remittance transfers by migrant workers are set to drop globally in 2020, raising credit risk in countries most dependent on such inflows.

"The countries that are most dependent on remittances are largely low- and middle-income economies, and we expect the decline in remittance will exacerbate the growth slowdown in these countries," says Christian de Guzman, a Moody's Senior Vice President.

"By affecting household income and consumption, along with current account receipts, a sharp drop in remittances weakens credit profiles through its impact on economic strength and external vulnerability. While the impact on incomes and economic strength is likely to be more gradual, the hit to current account receipts and weakening of external positions can be abrupt," adds de Guzman.

As indicated by their respective external vulnerability indicators (EVI),6 many affected sovereigns such as Tajikistan (293% in 2020), Ukraine (204%), Sri Lanka (201%) and Pakistan (181%)7 already exhibited significant external vulnerability before the coronavirus outbreak. For these sovereigns, lower remittances will exacerbate their already weak external positions.

Moody’s said sources of global remittances are highly concentrated, with 25 countries providing nearly 85% of global migrant remittance outflows, and the top-10 countries including many of the largest G-20 economies. The damage done to labor markets in these source countries, wage subsidies favouring resident employment, and travel restrictions could continue to weigh on migrant labor for some time.

Meanwhile, remittance-receiving countries are largely net oil importers and will benefit from the large drop in oil prices since the start of 2020. Still, in general, the negative current account impact of a 20% decline in remittances dominates and is significant for the Kyrgyz Republic, Tajikistan and El Salvador. For these countries, the fall in the current account balance will be the main channel of credit impact of lower remittances.

Global remittances reached an all-time high of $554 in 2019 but are set to fall by $110 billion this year, well exceeding the $16.2 billion fall recorded in 2009 following the global financial crisis.