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Emerging Markets

Down. But not out

Remittances to Latin America and the Caribbean may have diminished dramatically, but sending money home remains a priority for many

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 2008.

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 IDB’s 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.

Still resilient
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 the IDB.

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 general persist.

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 year’s 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 region’s 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 devalued.

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 families.

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 Kacef.

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.

Policy response

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 it’s better to prepare,” says Lopez of the World Bank.

By March, the World Bank outlook for Central America is for growth of between 1% and 2% in the most populous countries, 0–1% 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.

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