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Lower Remittances to Affect Credit Ratings of Many Countries in the Asia Pacific Region

Diep Nguyen
BizLIVE -

Dual shocks from the coronavirus pandemic and subsequent impact on the oil market are having a considerable effect on migrant workers and remittance flows.

Lower Remittances to Affect Credit Ratings of Many Countries in the Asia Pacific Region
Fitch Ratings examines remittance flows in the first half of 2020 and prospects for the coming quarters in five countries in the Asia region – Pakistan (B-/Stable), Bangladesh (BB-/Stable), Sri Lanka (B- /Negative), India (BBB-/Negative) and the Philippines (BBB/Stable).
These countries are reliant on remittances and have timely data.
Recent Trends and Outlook
The pandemic and oil price shock have driven sharp economic contractions and fiscal deteriorations worldwide, including in the Gulf – a major source of remittances for the APAC region. Migrant workers are likely to bear the brunt of job losses, and the sectors in which they work are likely to be particularly affected.
For instance, construction pipelines are being reduced due to spending cuts and the hospitality sector is struggling from the collapse in global tourism. The World Bank and Asian Development Bank (ADB) have forecast declines in remittance inflows of about 20% in 2020 for the APAC region.
Remittances appear to have recovered after declining in April and May. In Pakistan and Bangladesh remittances were resilient in 2Q20 but weaker in Sri Lanka and the Philippines. Anecdotal evidence points to temporary factors for the increase in recorded remittances in the recent period. These include migrant workers transferring their full savings in preparation to return home, the impact of lockdown restrictions on transferring funds and a shift to formal remittance channels.
Fitch does not expect the resilience in remittances to be sustained and forecasts a decline during the second half of the year as the temporary support factors fade. Our forecasts are slightly more modest than the World Bank and ADB estimates, with a decline of about 12% across the region.
Potential Ratings Implications
Declining remittances may affect sovereign ratings through external finances and economic growth. Remittances are a key source of foreign currency receipts for Bangladesh (6.0% of GDP), Pakistan (7.9%), Sri Lanka (8.0%), the Philippines (8.4%) and India (2.9%). As a result, lower remittances will most likely widen current account deficits, contributing to higher external financing needs.
The fall in remittances is likely to compound the already severe impact of the COVID-19 shock on economic growth. Vulnerable households reliant on remittance income will most likely reduce consumption and require higher social transfers.
Lower remittance flows could also have a second-order impact on public finances through lower revenue collection from weaker consumption and higher social spending to support remittancedependent households as well as returning migrant workers.

DIEP NGUYEN