Triple-funding whammy stalks emerging markets

In terms of the spread of Covid-19 and lives lost, Africa has so far fared better than most with around 147,000 reported cases and 4222 deaths in a population of 1.2 billion. All the same, Africa and other emerging markets may still end up with the worst economic pain as flows of money and investment are halted.

Remittances, foreign direct investment and portfolio flows have all been hit since the pandemic took hold, creating a triple-funding whammy and increasing the likelihood of sovereign defaults. With remittances, the downturn is especially painful as last year they overtook foreign direct investment as the largest source of capital inflows to low and middle income countries.

But as the advanced countries lock down, migrants are usually the first to find themselves out of work. They are both unable to send money home or to return home themselves.

Citibank just issued a report saying that global remittances could fall by $100bn in 2020 in the worst-case scenario, while the World Bank made a similar type of forecast in April. This would amount to a 20% fall from $554bn last year to $445bn in 2020.

On average, remittances account for nearly 9% of GDP in poorer countries but in some cases, such as the Pacific island of Tonga which is largely virus free, Haiti and South Sudan, the figure is more than 30%. In six more countries – Kyrgyz Republic, Tajikistan, Nepal, Montenegro, Honduras and Lesotho – the figure is between 20% and 30%.

Banks in emerging markets are under pressure as a result of the Covid-19 crisis, with S&P reporting that one third of the banks it rates have a negative outlook due to deteriorating asset quality, heavy dependence on external funding and the prospects of increased political or social tensions.

In truth banks have not tended to be the main purveyors of migrant remittance money with fintech and other providers proving more agile in handling lots of small transactions. Yet in spite of the fintech revolution in the remittance business, the average cost to senders (of the money that is still flowing) is still a high 6.79% of the remitted cash, according to the World Bank.

Maybe this would be a good time for banks to dust off their ‘improving remittance service’ plans and come up with something more competitive that both saves migrants money and makes them money. As economies pick up in 2021, banks could find this to be a flourishing new business.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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