Lower remittances from Gulf nations, which have been hit hard by the slump in oil prices, will cut the benefits of cheaper oil imports for several Asia Pacific countries including India, Moody’s Investors Service said on Wednesday.
“Generally, weaker remittances will immediately impact the recipient countries’ credit profiles via their balance of payment positions. A prolonged fall would also hurt economic growth, given the importance of remittances to household incomes,” it said in a report.
Moody’s in a report titled ‘Sovereigns — Asia Pacific: Falling Remittances from the Gulf Dampen Benefits of Lower Oil Prices’ analyzes the potential credit implications of weaker remittances from their citizens working abroad for six Asian countries — Bangladesh, India, Pakistan, the Philippines, Sri Lanka and Vietnam.
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For these six economies, remittances are equivalent to 3 to 10 per cent of GDP, and between 22 and 188 per cent of foreign reserves.
India gets 52.1 per cent of its remittances from the Gulf nations while the exposure of Pakistan to the region is the highest at 61.2 per cent of remittances. Bangladesh gets 54.8 per cent of its remittances from Gulf while Sri Lanka gets 50.9 per cent.
“As a percentage of GDP, remittance receipts are larger than net oil imports in all countries barring India, so changes in remittances will have a greater effect on the current account balance,” it said.
Moody’s said the 25 per cent drop in oil prices since the start of 2015 is large, and it expected that future declines in remittances will be much lower than that in percentage terms.
“So, unless remittances decrease significantly more in percentage terms than we anticipate, their decline will dampen, but not completely offset, the benefits of lower oil prices on the current account,” it said.
It estimated that it would take a 10 to 30 per cent fall in remittances to outweigh a 50 per cent drop in net oil imports for most countries.
“Given its larger net oil import bill, India is an exception, and can thus withstand a much greater fall in remittances,” it said.
While the beneficial effects of a lower oil bill on current accounts have already fed through, most of the negative impact from remittance inflows may be yet to come, it said.
The report finds that while previous oil price shocks had limited and short-lived effects on remittances to Asian countries, the current more pronounced and prolonged decline — coupled with fiscal tightening in many oil-exporting countries — is likely to hurt migrant worker earnings and consequently remittances.
“For India, the Philippines and Vietnam, the diversified locations and vocations of their overseas workers could help reduce the fall in remittances overall,” Moody’s said.
For most of the countries in Moody’s study, remittances inflows are greater than net oil import payments as a percentage to GDP.
However, the 25 per cent decline in oil prices since the start of 2015 is large, and Moody’s expects “the declines in remittances to be much lower than that in percentage terms.”
“Unless remittances fall significantly more than it expects, their decline will dampen, but not completely offset, the benefits of lower oil prices for the current account,” Moody’s said.
Moody’s said a decline in remittances is unlikely to be a primary credit driver, although a prolonged fall would impact economic growth, given the importance of transfers to household incomes.
“However, in sovereigns that are already facing external pressures, or where growth is weakening or anaemic, a slowdown in remittances will exacerbate such challenges,” it said.
Sri Lanka stands out in this regard, due to its large financing needs and thin foreign reserve cushion, while Bangladesh and Pakistan face similar challenges to a lesser degree.
Moody’s said growth in remittances moved roughly in line with oil prices. During periods of rising oil prices, worker remittances increased significantly.
For instance, between 1999 and 2008, when oil prices increased by over 24 per cent annually, remittance outflows from the GCC rose by close to 10 per cent, outpacing outflows from the US, the second-largest remittance source country.
Conversely, the oil price shocks of 1986, 1998 and 2009 saw lower growth in remittances. In 1986 and 1998, remittances rebounded within a year or two, and grew strongly as oil price increases accelerated.
However, although oil prices rebounded following the 2009 oil price shock, remittance growth did not resume the upward trajectory it enjoyed in the early nineties and between 2005 and 2008.
“Looking ahead, we do not expect to see a bounce back in oil prices similar to those that occurred following the oil shocks described above.
“In addition, we expect employment growth in the Gulf to remain relatively subdued. Therefore, our forecast is that remittances will likely either decline or grow much more slowly over the next few years,” it said.