Emerging markets — Weaker remittances hit vulnerable households

The World Bank expects remittances to contract by a record 20% to US$445 billion in 2020, due to the economic crisis induced by the COVID-19 pandemic and shutdown. Remittances fell just 5% during the GFC, but the COVID-19 shock has affected more countries simultaneously. In particular, remittance flows to the East Asia and Pacific region are expected to decline by 13% amid economic contractions in the US and Middle East. Migrant workers tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country. In addition to lost work for migrants, many money transfer agencies have been shuttered amid lockdowns.

Remittances are a crucial source of external financing for many vulnerable households in emerging markets. In 2019, remittances to low- and middle-income countries reached a record US$554 billion and became as important as non-resident foreign direct investment (FDI), according to the Institute for International Finance. Traditionally, remittance flows are counter-cyclical, with migrant workers sending more money home during times of hardship. They have also been a relatively stable financing source in the past. The sudden stop in non-resident portfolio investment to emerging markets during COVID-19 remains the most severe in recent history. Furthermore, the World Bank expects FDI to fall by over 35% this year.

A moderate recovery for remittances is forecast in 2021, but the outlook remains highly uncertain. As such, household finances could be at risk in remittance-dependent countries like the Philippines (10% of GDP), Vietnam (6.5%) and many Pacific Island countries (Chart). This could stymie the recovery of consumption in several of Australia’s major export markets and raises the risk of social instability.