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Leveraging Remittances for International Capital
Market Access in Poor CountriesDilip
Ratha(with Prabal De and Sanket
Mohapatra)Migration Thematic GroupWorld
BankOctober 19, 2006
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Outline

• Should poor countries borrow from international
  capital markets?
  
• Remittances improve sovereign rating
• Improving rating through securitization of future
  flows of remittances

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Outline

• Should poor countries borrow from international
  capital markets?
  
• Remittances improve sovereign rating
• Improving rating through securitization of future
  flows of remittances

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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"

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Borrowing cost rises exponentially as credit
rating deteriorates
Launch spreads and SP ratings for
sovereign issues of size 100 million and 7 years
tenor. Source Bondware, SP, and authors
calculations
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Borrowing cost rises exponentially as credit
rating deteriorates
Absence of sovereign rating constrains private
sector access to international capital
Launch spreads and SP ratings for
sovereign issues of size 100 million and 7 years
tenor. Source Bondware
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Sovereign ratings in high-income countries
BBB
A-
A
A
AA-
AA
AA
AAA
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Sovereign ratings in low-income countries
CC
B-
BB
BBB
AA-
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Sovereign ratings in low-income countries
CC
B-
BB
BBB
AA-
Most poor countries are not rated
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Top recipients of remittances, 2005
billion
of GDP
Remittances tend to be large in poor countries
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Remittances tend to rise following crisis,
natural disaster, or conflictRemittances as
of private consumption
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Outline

• Should poor countries borrow from international
  capital markets?
  
• Remittances improve sovereign rating
• Improving rating through securitization of future
  flows of remittances

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Remittances improve a countries ability to
service external debt
Present value of external debt as of exports of
goods, services, and remittances
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Predicting ratings

• Fit a regression model to explain ratings
• Predict shadow ratings
• Calculate effect of remittances on shadow ratings

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Conversion from Letter to Numeric scale
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Regression Results (work-in-progress)

• Rating as a function of
• macro variables
• rule of law
• debt and international reserves
• volatility
• R2 is high

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Regression Results (work-in-progress)
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Regression Results using dated control
variables (work-in-progress)
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Predicted ratings for unrated countries
(work-in-progress)
Indicates out of range
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Shadow-rated vs. rated countries
(work-in-progress) (Shadow ratings underlined
and italicized)
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Shadow-rated vs. rated countries
(work-in-progress) (Shadow ratings underlined and
italicized)
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Shadow-rated vs. rated countries
(work-in-progress) (Shadow ratings underlined
and italicized)
Many unrated countries likely have better market
access than currently believed
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Remittances can help obtain and improve credit
rating
Calculated using a model similar to Cantor and
Packer (1995)
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Including remittances may improve potential
ratings for Bangladesh by two notches
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Countries in similar rating category as Bangladesh

• Argentina, Dominican Republic, Indonesia,
  Pakistan, Paraguay, Uruguay, Venezuela
  
• Benin, Bolivia, Burkina Faso, Ghana, Jamaica,
  Mali, Surinam
  

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Outline

• Should poor countries borrow from international
  capital markets?
  
• Remittances improve sovereign rating
• Improving rating through securitization of future
  flows of remittances

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Securitization of future remittances can improve
credit rating above investment grade
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Remittance securitization structure
Remittance senders
Beneficiarys account
Remittance payments (foreign currency)
Issuing bank credits beneficiarys account in
domestic currency
Correspondent banks
Issuing bank
Domestic
Offshore
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Remittance securitization structure
Remittance senders
Beneficiarys account
Remittance payments (foreign currency)
Issuing bank credits beneficiarys account in
domestic currency
Correspondent banks
Message
Issuing bank
Excess cash (foreign currency)
Trustee collateral account
Debt service payment
International investors
Domestic
Offshore
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Securitization of remittances has increased in
recent years -
million
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- Led by Brazil, Mexico and Turkey
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Potential - 10-12 billion a year?
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Constraints

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

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Policies to improve ratings

• Improve rating methodology
• Develop local currency rating agencies
• Improve data, macroeconomic management, and
  investment climate

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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

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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