Low remittances bad for 5 Apac nations' ratings

Five countries in the Asia-Pacific (Apac) region will have to face sovereign rating downgrades due to the impact of lower remittance inflows from migrant workers employed in the Gulf region, Fitch Ratings has warned.

Fitch expects remittance flows to decline by 12 per cent in the second half of 2020, as many of the temporary effects supporting remittance flows dissipate. Tens of thousands of migrant workers have returned to their home countries and travel restrictions have limited the flows of new workers.

The GCC, hit by dual shocks from the coronavirus pandemic and the subsequent impact on the oil market, is an important source of remittance flows, particularly for countries in South Asia. The region accounts for roughly half of remittance inflows in Bangladesh (58 per cent), Pakistan (54 per cent), Sri Lanka (45 per cent) and India (51 per cent).

Fitch forecasts a considerable contraction in growth in Gulf countries by an average of 5.6 per cent in 2020, down from 0.4 per cent last year, as a result of both the pandemic and oil price shock. Growth is forecast to rebound to an average of 2.6 per cent in 2021, but rehiring of foreign workers may be gradual. Fiscal deficits are forecast to widen sharply, to an average of 14.1 per cent of GDP in 2020 from 2.6 per cent last year, as lower oil prices drag down revenue.

The ratings agency said the deterioration in remittance inflows is likely to widen current account deficits, contributing to higher external financing needs of Apac nations. Remittances have helped keep current account deficits contained by offsetting large trade deficits. Indeed, without remittances the Philippines, Pakistan, Sri Lanka, and Bangladesh would all have large current account deficits of between seven per cent and 10 per cent of GDP, said the ratings agency.

Adeeb Ahamed, managing director, LuLu Financial holdings, said the Apac region has done a good job of taking early precautionary measures and sensitising its citizens to the health crisis. "Although the closure of travel led to a dip in travel and tourism from Apac countries, which affected the Middle East's forex prospects, remittances have maintained course, buoyed by several supplementary factors."

"Innovation in digital technologies has allowed the sector to rebound faster; especially as payment options such as cash collection at branches have seen fewer takers due to restrictions on outdoor movement and staggered branch timings at the collection points in Apac countries. This has helped onboard traditional customers to formal banking channels, and will further spur innovation on the digital payments front," said Ahamed.

"We expect flows to weaken in the coming quarters, even though recent amounts have been surprisingly robust in some countries due to temporary factors. Declining remittances in economies that are dependent on them may affect sovereign ratings through pressures on external finances and economic growth," Fitch analysts Jeremy Zook and Sagarika Chandra wrote.

Demand for migrant labour has provided an important and stable source of foreign-currency remittance flows for a number of Apac sovereigns, including Bangladesh (six per cent of GDP), Pakistan (7.9 per cent), Sri Lanka (eight per cent) and the Philippines (8.4 per cent).

India is the largest recipient of remittances globally but they account for a small share of GDP at 2.9 per cent.

Asia Pacific, which accounts for a third of the global migrant workforce, is likely to face remittance losses of $31.4-54.3 billion due to the coronavirus pandemic, the Asian Development Bank (ADB) said in a report. Last year, migrant workers sent $256 billion to their families in the Asia-Pacific region, according to a report by the International Fund for Agricultural Development.

According to the ADB, about 14 per cent of households in Bangladesh receive remittance income, eight per cent in the Philippines, four per cent in Pakistan and two per cent in India.

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.