Fitch Ratings: APAC Remittances to Decline Amid the Coronavirus Shock

(The following statement was released by the rating agency)
Related Fitch Ratings Content: APAC Remittances and the Coronavirus Shock
(https://www.fitchratings.com/site/re/10134649)

Fitch Ratings-Hong Kong-08 September 2020: The coronavirus pandemic and
subsequent impact on the oil market are having a considerable effect on
migrant workers and are likely to supress remittance flows in the APAC region,
Fitch Ratings says in a special report. 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. Demand for migrant labour has provided
an important and stable source of foreign-currency remittance flows for a
number of APAC sovereigns, including Bangladesh (6.0% of GDP), Pakistan
(7.9%), Sri Lanka (8.0%) and the Philippines (8.4%). India is the largest
recipient of remittances globally but they account for a small share of GDP at
2.9%. Remittance flows 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 7%-10% of GDP. Remittances in APAC also provide economic
benefits to recipient countries. First, they support domestic consumption by
providing an additional income source to households. According to the Asian
Development Bank, about 14% of households in Bangladesh receive remittance
income, 8% in the Philippines, 4% in Pakistan and 2% in India. Second, job
opportunities for migrant workers relieve slack in domestic job markets.
Remittance flows in APAC were surprisingly mixed in the second quarter of
2020. Monthly data show a considerable and broad decline in remittances during
April and May, as Fitch expected, but a recovery in June and July. The rebound
in flows was particularly robust in Pakistan and Bangladesh, where flows broke
records in both June and July. Sri Lanka and the Philippines also saw an
improvement in remittance flows in June, but much more modest. Anecdotal
evidence points to temporary factors for the increase in recorded remittances
in the recent period. These include migrant workers transferring their savings
in preparation to return home, the impact of lockdown restrictions on
transferring funds and a shift to formal remittance channels, which are picked
up in the official data. Fitch forecasts a 12% decline across the region in
the second half of the year as the temporary support factors fade. The
deterioration in remittance inflows is likely to widen current account
deficits, contributing to higher external financing needs. For countries with
fragile external finances, such as Pakistan and Sri Lanka, the shock to
remittances could exacerbate existing challenges. Lower oil prices and subdued
import demand, however, are likely to soften the aggregate impact on external
balances. Remittances typically provide a countercyclical buffer for economic
activity and vulnerable households. In domestic economic shocks, family
members working abroad can increase remittances to help mitigate the impact of
sluggish domestic activity. The pandemic, however, represents a much more
synchronised global economic shock than previous downturns. This limits the
potential support of the remittance channel. Lower remittance flows could
affect public finances through two channels: lower revenue collection from
weaker consumption and higher social spending to support remittance-dependent
households as well as returning migrant workers. Many countries in the region
already have limited fiscal space to address the current coronavirus shock and
the decline in remittances could exacerbate current challenges. For the
special report, "APAC Remittances and the Coronavirus Shock", please click on
the link above or go to www.fitchratings.com. For related research, please see
the following: - APAC Sovereign Credit Overview 3Q20 (September 2020)
(https://www.fitchratings.com/site/re/10134373); - Global Economic Outlook
(September 2020 (https://www.fitchratings.com/site/re/10135033); - Current
Accounts Under Coronavirus (August 2020)
(https://www.fitchratings.com/site/re/10133301); and - Remittances:
Transmission of US Economic Shock to Central America and the Caribbean (July
2020) (https://www.fitchratings.com/site/re/10128187). Contact: Jeremy Zook
Director +852 2263 9944 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68
Des Vouex Road Central Hong Kong Sagarika Chandra Associate Director +852 2263
9921

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email:
alanis.ko@thefitchgroup.com
Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email:
wailun.wan@thefitchgroup.com

Additional information is available on www.fitchratings.com


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