What Is Driving Remittances to the Region (Latam)?

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On November 15th, the Financial Services Advisor, a Newsletter published by The Interamerican Dialogue, a Washington, DC think tank where well-known remittance expert Manuel Orozco is the Director of the Migration, Remittances and Development Program, has published a Q&A entitled What Is Driving Remittances to the Region? where Manuel and several colleagues – including myself, most obliged, gave their views to questions such as What are the most important factors driving remittances to the region? How likely is it that the United States will impose a new tax on remittances?

These are a summary of the answers published:

THE QUESTIONS ASKED

Remittances to Latin America and the Caribbean are expected to rise by 6.9 percent this year to $79 billion, the World Bank said Oct. 3. Remittances to the region will likely still grow, but moderately in 2018, to $82 billion. What are the most important factors driving remittances to the region? How likely is it that the United States will impose a new tax on remittances to pay for President Donald Trump’s proposed wall along the Mexican border? Which countries in the region are most dependent on remittances, and which industries’ fortunes are most tied to the transfers?

You can see the Nov 2-15 edition of the Newsletter here to read all the answers by the expert’s panel. You can subscribe to the newsletter here

MANUEL OROZCO RESPONDS

Growth in remittances to Latin America and the Caribbean this year will be comparable to or higher than last year, up 8 percent from 2016. This increase represents a rate that is beyond moderate and far greater than the IMF’s forecasted 1.2 percent economic growth for the region. The key drivers of growth come from Haiti, the Dominican Republic, Central America and Colombia, which together represent 45 percent of flows. In fact, for Central America and the Caribbean, the projected economic growth for these countries is due largely to the 15 percent increase in remittances.

And then, referring to the potential taxing of remittances he adds: “Within that context, a tax on remittances would hurt these economies”. “In practical terms, migrants would decelerate the current growth pattern of the past five years. However, under the current political environment, a tax on remittances is unlikely to occur within the budget request, as the building of the wall is not under negotiation. Moreover, a proposed law, the Border Wall Funding Act of 2017, provisioning a 2 per-cent tax on remittances, has not been welcomed or supported in Congress.”

Read his whole answer in the Newsletter

MY RESPONSE

The most important factor driving remittances in Latin America and the Caribbean is the US labor demand which will continue to grow despite efforts to tighten restrictions on immigration, border measures and deportations. Shortage of hand labor in the US might drive payments to illegal workers upwards, which will consequentially increase remittances. Internal Migration in the Region is also contributing to an increase in remittances from Argentina, Chile & Brasil to other countries in the region.

At the same time, unrecorded flows of remittances will continue to increase, data that won’t be reflected in the World Bank’s charts and these volumes are anyone’s guess. With more ways to send money home, alternative settlement systems -like the ones operating for Venezuelan remittances, bill payments, value transfers like airtime top-ups, sending packages instead of money, the whole market is diversifying at rapid pace.

While taxing remittances in sending countries is a continuing concern for migrants and the industry, it is less and less likely to happen; maybe another US State might join Oklahoma and do it, but in this political climate it seems unfeasible. For receiving countries, remittances are resilient, and volumes are not likely to change drastically at any moment.

Online money transfer companies continue to grow, not entirely driven by offline client adoption but from bank costumers switching to cheaper and better channels; cash channels are also growing. If the MoneyGram-Ant Financial deal is not stopped by the US, many more M&As will likely come forward, increasing competition and lowering prices.

EXCERPTS OF ANSWERS FROM THE REST OF THE EXPERT’S PANEL

Kai Schmitz, leader of FinTech Investment for Latin America at the IFC Global FinTech Investment Group contributed with the following remarks: “The growth of remittances to the region seems to be unstoppable. Except for a short dip as a result of the 2008 financial crisis, they have grown irrespective of the political landscape in the main sending country, the United States.’

I was very sympathetic with Kai’s comments on Remittance Data, cause is an issue I always bring up anytime I speak about data: “However, remittance data is also hard to obtain and notoriously unreliable, as I experienced when trying to collect this data for the World Bank. Different approaches generate very different results, and it is likely that the official statistics still under-represent the flows, in spite of marked improvements on data collection and methodology. Some of the increase reported over the past 10 years is likely due to better and broader collection of data.”

Alberto Laureano, CEO of Barri Financial Services and the Chairman of the Money Services Business Association, MSBA, an industry effort to organize the industry in a well-run representative trade group remarked: “A mid-to-high single-digit increase in remittances from the United States to Latin America is reasonable and likely sustainable, as the main factors driving these flows remain fundamentally unchanged.” Noting the drivers of migration, Alberto stated: “All in all, it seems like the market forces should prevail, and the fact that the U.S. economy is healthy, growing and close to full employment should result in continued opportunities for immigrants.”

David Landsman of the NMTA stated in the newsletter: “The most important factors driving the growth of remittances to the region are economic growth in the United States and improvement in the U.S. labor market.  What makes that performance all the more impressive is that it took place despite so many countervailing factors that should have depressed the official numbers: the derisking of money transmitters and correspondent banking in general, reverse migration, an inhospitable legal environment for immigrants in the United States and the (so-called) high cost of remittances.

Full answers in the Financial Services Advisor Newsletter. Subscribe here.