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Leveraging Remittances for International Capital Market Access in Poor Countries Dilip Ratha (with Prabal De and Sanket Mohapatra) M igration Thematic.

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Presentation on theme: "Leveraging Remittances for International Capital Market Access in Poor Countries Dilip Ratha (with Prabal De and Sanket Mohapatra) M igration Thematic."— Presentation transcript:

1 Leveraging Remittances for International Capital Market Access in Poor Countries Dilip Ratha (with Prabal De and Sanket Mohapatra) M igration Thematic Group World Bank October 19, 2006

2 Outline 1. Should poor countries borrow from international capital markets? 2. Remittances improve sovereign rating 3. Improving rating through securitization of future flows of remittances

3 Outline 1. Should poor countries borrow from international capital markets? 2. Remittances improve sovereign rating 3. Improving rating through securitization of future flows of remittances

4 Should poor countries borrow from international capital markets? Sanskrit saying by sage Charbak: "Yavat jivet sukham jivet Runam krutva ghrutam pivet" "Live luxuriously as long as you live Borrow if need be, but enjoy your ghee"

5 Borrowing cost rises exponentially as credit rating deteriorates Launch spreads and S&P ratings for sovereign issues of size $100 million and 7 years tenor. Source: Bondware, S&P, and authors’ calculations

6 Borrowing cost rises exponentially as credit rating deteriorates Launch spreads and S&P ratings for sovereign issues of size $100 million and 7 years tenor. Source: Bondware Absence of sovereign rating constrains private sector access to international capital

7 Sovereign ratings in high-income countries AAA AA A+ A- AA+ AA- A BBB+

8 Sovereign ratings in low-income countries AA- BBB+ BB B- CC

9 Sovereign ratings in low-income countries AA- BBB+ BB B- CC Most poor countries are not rated

10 Top recipients of remittances, 2005 $ billion% of GDP Remittances tend to be large in poor countries

11 Remittances tend to rise following crisis, natural disaster, or conflict Remittances as % of private consumption

12 Outline 1. Should poor countries borrow from international capital markets? 2. Remittances improve sovereign rating 3. Improving rating through securitization of future flows of remittances

13 Remittances improve a countries’ ability to service external debt Present value of external debt as % of exports of goods, services, and remittances

14 Predicting ratings  Fit a regression model to explain ratings  Predict shadow ratings  Calculate effect of remittances on shadow ratings

15 Conversion from Letter to Numeric scale Sub-Investment Grades S&P and FttchMoodys Letter Grade Numeri c Grade Letter Grade Numeric Grade BB+11Ba111 BB12Ba212 BB-13Ba313 B+14B114 B15B215 B-16B316 CCC+17Caa117 CCC18Caa218 CCC-19Caa319 CC20Caa20 C21 Investment Grades S&P and FitchMoodys Letter Grade Numeric Grade Letter Grade Numeric Grade AAA1Aaa1 AA+2Aa12 AA3Aa23 AA-4Aa34 A+5A15 A6A26 A-7A37 BBB+8Baa18 BBB9Baa29 BBB-10Baa310

16 Regression Results (work-in-progress)  Rating as a function of –macro variables –rule of law –debt and international reserves –volatility  R 2 is high

17 Regression Results (work-in-progress) Dependent variable: Rating S&PMoody’sFitch GDP growth (5-yr MA %)-0.45***-0.10-0.26*** Log of GNI per capita-1.33***-0.87**-2.7*** Rule of law-1.69***-1.58-0.76* Ratio of external reserves to import and ST debt -2.51**-3.90***-3.87*** Ratio of ext. debt to exports0.54**1.07**1.11*** Inflation0.07**0.14***0.18*** GDP Volatility (5 years)0.32* Observations472330 R2R2 0.850.890.92 * significant at 10%; ** significant at 5%; *** significant at 1%

18 Regression Results – using dated control variables (work-in-progress) Dependent variable: Rating S&PFitch GDP growth (3-yr MA %)-0.44***-0.30*** Log of GNI per capita-1.38***-0.97*** Rule of law-2.65***-2.29** Ratio of external reserves to imports and ST debt -2.57***-2.19** Ratio of ext. debt to exports0.76***1.09*** GDP Volatility (5 years)0.24**0.38*** Observations4353 R2R2 0.850.81 significant at 10%; ** significant at 5%; *** significant at 1%

19 Predicted ratings for unrated countries (work-in- progress) S&P Model '05 Fitch Model '05 S&P Model '05 Fitch Model '05 MaldivesBBB BangladeshB-B St. Vincent & Grenadines BBBBBB- Kyrgyz Republic B- St. LuciaBBB- Lao PDRCCC+B- DominicaBB Solomon Islands CCC+ AlbaniaBB-BBComorosCCC+CCC Yemen, Rep.BB- NepalCCC+ BelarusBB-BBTogoCCC GabonBB-BBCote d'IvoireCCC-CCC+ SwazilandB+BBCongo, Rep.CCC-CCC ChadB+B-MadagascarCCC- TajikistanB+BB-ZambiaCCC AngolaBB+SudanCCC TanzaniaBBNigerCC CambodiaBB+Sierra LeoneCCO* GuyanaB-BEthiopiaCC * Indicates out of range

20 Shadow-rated vs. rated countries (work-in- progress) (Shadow ratings underlined and italicized) CountryS&P ratingMoody's rating Fitch rating Country S&P rating Moody's rating Fitch rating BotswanaAAa3IndiaBB+Baa2BBB- BarbadosBBB+Baa2MacedoniaBB+ OmanA-A2MoroccoBB+Ba1 PolandBBB+A2BBB+Cape VerdeBB+B+ South Africa BBB+Baa1BBB+Sri LankaBB- ThailandBBB+Baa1BBB+BrazilBBBa2BB ArmeniaBaa3Bb-ColombiaBBBa2BB BulgariaBBBBaa3BBBCosta RicaBBBa1BB CroatiaBBBBaa3BBB-JordanBBBaa3 MexicoBBBBaa1BBBPanamaBBBa1BB+ MaldivesBBB PeruBBBa3BB+ RussiaBBB+Baa2BBB+ GabonBB- TunisiaBBBA3BBBGuatemalaBBBa2BB+ MauritiusBaa1PhilippinesBB-B1BB Kazakhsta n BBB-Baa2BBBSerb.& Mont.BB- RomaniaBBB-Ba1BBBTurkeyBB-Ba3BB- SeychellesBUkraineBB-B1BB- AlbaniaBB- VenezuelaBB-B2BB- EgyptBB+Ba1BB+GeorgiaB+ El SalvadorBB+Baa3BB+ CambodiaB These model-based ratings should be treated as indicative; they are clearly not a substitute for the broader and deeper analysis, and qualitative judgment, employed by experienced rating analysts.

21 Shadow-rated vs. rated countries (work-in-progress) (Shadow ratings underlined and italicized) CountryS&P rating Moody's rating Fitch rating Country S&P rating Moody's rating Fitch rating SenegalB+MongoliaBB1B+ BelarusBB- MozambiqueBB SwazilandB+ PNGBBa2B Moldova Caa1B- BangladeshB- Congo, Rep.CCC- ArgentinaB+B3B TanzaniaB BoliviaB-B3B- BeninBBCameroonB-B GhanaB+ LebanonB-B3B- IndonesiaBB-B1BB-ParaguayB-B3 PakistanB+B2SurinameB-Ba2B GuyanaB- NigeriaBB- YemenBB-NicaraguaB- B3 Kyrgyz RepB- UgandaCCC+B HondurasBa3KenyaB+ Burkina FasoBEcuadorCCC+Caa1B- Dom. RepBB3B TogoCCC JamaicaBB1 Cote d'IvoireCCC- MadagascarB NigerCC MaliBB- EthiopiaC These model-based ratings should be treated as indicative; they are clearly not a substitute for the broader and deeper analysis, and qualitative judgment, employed by experienced rating analysts.

22 Shadow-rated vs. rated countries (work-in- progress) (Shadow ratings underlined and italicized) CountryS&P rating Moody's rating Fitch rating Country S&P rating Moody's rating Fitch rating SenegalB+MongoliaBB1B+ BelarusBB- MozambiqueBB SwazilandB+ PNGBBa2B Moldova Caa1B- BangladeshB- Congo, Rep.CCC- ArgentinaB+B3B TanzaniaB BoliviaB-B3B- BeninBBCameroonB-B GhanaB+ LebanonB-B3B- IndonesiaBB-B1BB-ParaguayB-B3 PakistanB+B2SurinameB-Ba2B GuyanaB- NigeriaBB- YemenBB-NicaraguaB- B3 Kyrgyz RepB- UgandaCCC+B HondurasBa3KenyaB+ Burkina FasoBEcuadorCCC+Caa1B- Dom. RepBB3B TogoCCC JamaicaBB1 Cote d'IvoireCCC- MadagascarB NigerCC MaliBB- EthiopiaC These model-based ratings should be treated as indicative; they are clearly not a substitute for the broader and deeper analysis, and qualitative judgment, employed by experienced rating analysts. Many unrated countries likely have better market access than currently believed

23 Remittances can help obtain and improve credit rating Remittances (% of GDP, 2004) Rating excluding remittances Rating including remittances Spread reduction (basis pts) Lebanon14B+BB-150 Haiti*28CCCB-334 Nicaragua*11CCC+B-209 Uganda*5B-B161 * Calculated using a model similar to Cantor and Packer (1995)

24 Including remittances may improve potential ratings for Bangladesh by two notches Rating model Shadow rating w/o remittances Shadow rating with remittances MoodysB3 (16)B1 (14) S&PB- (16)B+ (14) FitchB (15)BB- (13)

25 Countries in similar rating category as Bangladesh  Argentina, Dominican Republic, Indonesia, Pakistan, Paraguay, Uruguay, Venezuela  Benin, Bolivia, Burkina Faso, Ghana, Jamaica, Mali, Surinam

26 Outline 1. Should poor countries borrow from international capital markets? 2. Remittances improve sovereign rating 3. Improving rating through securitization of future flows of remittances

27 Securitization of future remittances can improve credit rating above investment grade YearIssuer Amount (US$ mn) Flow type Transa- ction rating Sover- eign rating 1998 Banco Cuscatlan 50Remit.BBBBB 2004 Banco Salvadoreño 25DPRsBBBBB+ 2002Banco do Brasil 250Remit.BBB+BB-

28 Remittance payments (foreign currency) Remittance senders Remittance securitization structure Correspondent banks Issuing bank credits beneficiary’s account in domestic currency Beneficiary’s account DomesticOffshore Issuing bank

29 International investors Remittance payments (foreign currency) Remittance senders Excess cash (foreign currency) Debt service payment Remittance securitization structure Trustee collateral account Correspondent banks Issuing bank credits beneficiary’s account in domestic currency Beneficiary’s account Message DomesticOffshore Issuing bank

30 Securitization of remittances has increased in recent years - $ million

31 - Led by Brazil, Mexico and Turkey

32 Potential - $ 10-12 billion a year? Remittances by region, 2005 ($ billion) East Asia and the Pacific44 Europe and Central Asia25 Latin America & Caribbean46 Middle East & North Africa25 South Asia35 Sub-Saharan Africa 7 Low-income countries45 All developing countries181

33 Constraints  Paucity of highly rated entities  Long lead times  High fixed costs (legal and others)  Non-transparent legal structure

34 Policies: to improve ratings  Improve rating methodology  Develop local currency rating agencies  Improve data, macroeconomic management, and investment climate

35 Policies: to facilitate securitization  Master Trust arrangements, and receivable pooling, may alleviate the constraint of high fixed costs  Beware of negative pledge in the case of public sector borrowers  IFIs can help –Provide seed money –Improve legal framework –Assume counter-party risk as in Unibanco –Educate policy makers –Improve remittance data

36 Summary  Poor countries need to access to international capital markets  Absence of sovereign rating constrains their (especially sub-sovereign and private entities) access to international capital markets  Remittances, properly accounted, can contribute to establish/improve sovereign rating  Future remittance flows can further improve the rating of external financing transactions  Master Trust arrangements, and receivable pooling, may alleviate the constraint of high fixed costs


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