Remittances to be costlier in three years

The expected weakening of the US dollar against currencies of most countries in the next three years will impact the capacity of foreign workers in the UAE to remit money back home, say bankers and analysts.

The volume of remittances in the six GCC countries is about $20 billion (Dh73.4bn) a year, around 12.5 per cent of the total financial flows associated with immigration.

Workers from Asian countries such as India, the Philippines, Sri Lanka and Pakistan, are hit by double whammy in the Gulf states, since their earnings here have fallen due to higher inflation in terms of house rents and cost of living. Meanwhile, their home currencies have appreciated against the US dollar, making remittances difficult.

Currency appreciation and rising costs of living have eroded the purchasing power of recipients in the major remittance-receiving countries. The US dollar depreciation has a major impact on remittance flows to developing countries, specially for the Philippines, Mexico and India, which are among the largest remittance-recipients, said a recent World Bank report.

In the Gulf, there is a massive pressure on the regional states to depeg their currencies versus the dollar, but so far they have managed to hold on the pegged values. (All the Gulf states except Kuwait have their currencies pegged to the US greenback. Kuwait has its dinar tied to a basket of currencies). The value of the US dollar has dropped about 20 per cent against a basket of major currencies in the last five years

Already, the high inflation in the UAE and other Gulf countries has impacted the capacity of the foreign workers to remit money since a majority of their earnings go in paying house rents and other expenses.

In its latest report on 'Stagflation and currencies, BNP Paribas says: "The long-term structural bearish factors for the US dollar are set to remain in place with the large current account deficit, though the US dollar performance in 2008 is to be more mixed."

The report says euro/dollar rate will be down to 1.33 in the second quarter of 2010 from 1.55 at present, while the dollar/yen rate will hover at 98 in the second quarter of 2010 as compared to 105 at present. Against the UK pound, the dollar will be 1.77 in the second quarter of 2010 from 1.99 at present

The report says the Indian rupee will also strengthen versus the dollar. It is forecasted to reach Rs36 against the dollar in the second quarter of 2010 from Rs41 at present. Similarly, the Phillipines peso will gain ground versus the dollar. At present peso hovers around 42.00, while in the next two years, it will reach 37.

The report said the long-term structural US dollar bearish factors will remain since the US continues to have a large current account deficit. But it maintains the US dollar's performance in 2008 will be mixed since the slowdown in the US economy is showing signs of spilling over into global economy.

Sudhir Kumar Shetty, general manager of the UAE Exchange, told Emirates Business: "The remittances by majority of expats especially to Asian countries, to a large extent, does not have much impact on the remittance volume since all those sending money back home have to send on a regular basis."

The variation in exchange rates (depreciation and appreciation of the currency) will only impact four to five per cent of the total remittances, he said, adding it has only a marginal impact. The Dh/Indian rupee rates have weakened up to about Dh85-90 (per Rs1,000) level compared to Dh94 (per Rs1,000). Experts see the rates firming up in the long-term.

FACTS

Remittances to developing countries reached $240bn in 2007, while the worldwide flows of remittances reached $318bn in the same year. In 2007, India, Mexico and China were the top three recipients of remittances, accounting for nearly one-third of remittances received by the developing countries.

Of this, remittances sent home by migrants from developing countries exceeded $240bn in 2007, up from $221bn in 2006 and more than double the level reached in 2002, said World Bank in a report.

An estimated 5.7m Indian workers abroad sent home $27bn in 2007 to make India the world's top receiver of migrant remittances, according to the report. A large chunk of the money comes from expatriate workers in the Gulf.

According to the World Bank study, in the Philippines, more than 90 per cent of the increase in remittances between 2004 and 2007 went towards preserving the purchasing power of recipients, while in Mexico and India, the increase in remittances after accounting for currency appreciation and domestic inflation, was less than half the increase in US dollar terms.

Remittance flows to the Philippines increased by nearly 50 per cent between 2004 and 2007. However, a large part of this increase has been simply to preserve the purchasing power of recipients, since the Philippine peso appreciated by 33 percent against the US dollar. Similarly, while remittances to India increased by 44 per cent, the Indian rupee appreciated by 15 per cent.

Rising costs of living are further eroding the purchasing power of remittances received by these countries. The international prices of oil and food grains, measured in current US dollars have been rising at alarming rates – the price of crude oil nearly tripled from $31 per barrel in January 2004 to $90 per barrel by the end of 2007 and crossed the $140 mark in 2008. Meanwhile, the international price of maize and rice increased by 56 and 70 per cent respectively during this period.

In the Philippines, while remittances increased by nearly 50 per cent in nominal dollar terms between 2004 and 2007, they increased by 22 per cent after accounting for the appreciation of the Philippine peso. After adjusting domestic inflation, they rose by only three per cent in this period.

In India, which had a similar increase in prices during this three-year period, but a relatively smaller appreciation against the dollar compared to the Philippines, remittances rose by 44 per cent in nominal dollars, by 32 per cent after accounting for the appreciation of the rupee, and by 13 per cent after accounting for inflation.



Changing modes of channels

As money transfers are being subjected to more intense scrutiny by regulators, the remittance industry has experienced a shift in mode from informal to formal channels. But the same regulations have also increased the documentation requirements for opening bank accounts. Large money transfer operators (MTOs) have therefore benefited from the shifting flows.

More recently, the remittance industry has also seen the introduction of cell phone-based remittances and several pilots involving remittance-linked financial products. These changes may imply a shift from cash-based remittances to account-based remittances in future.

Mobile banking and partnerships with cell phone companies can potentially extend remittance services to millions of people in remote, rural areas. In the Philippines, G-Cash and SMART provide deposit, credit and money transfers through mobile phones. In Kenya, Vodafone through its subsidiary Safaricom, has launched a mobile banking service M-PESA. Vodafone has also launched a pilot with Citigroup to explore international remittances from the UK to Kenya by mobile phone. In India, Visa has tied up with some of the major commercial banks to extend its domestic card-to-card transfer service to mobile phones. Western Union and the GSM Association have also announced a pilot project for mobile phone remittances.

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