Remittances and Development: Contributions to the future agenda

1. Remittances and Development:Contributions to the future agenda Javier Santiso Chief Economist / Deputy Director OECD Development Centre Latin American Economic Outlook Conference Close to Home: The Development Impact of Remittances in Latin AmericaParis  13thFebruary 2007

2. Remittances have are not only been steadily increasing in most countries, but are less volatile than other flows Remittances, ODA and FDI flows, selected countries Source:International Financial Statistics (IMF), Datastream and OECD. 2007.

3. II Remittances and Financial development I Remittances and transaction costs III Remittances and ratings

4. Transaction costs for remittances have been steadily declining at varying pace • Early 1990s, the cost of sending remittances was about 15% of the amount sent • In 2004, the average cost to send US$200 was down to 7.6% Source: Orozco (2004)

5. Competition is the key to reducing costs

6. II Remittances and Financial development I Remittances and transaction costs III Remittances and ratings

7. There is room in Latin America’s financial system for further developments Financial Development by region LAC LAC Financial Strength Index based on Moody’s index of financial system strength, based on a numerical scale assigned to weighted average bank ratings by country. Source: OECD Development Centre, 2007. Based on: Betancour, C. De Gregorio, J. Jara A. “Improving the Banking System: The Chilean Experience”. BIS Papers. No. 28, 2006.

8. East Asia & Pacific Latin America & Caribbean 80 40 South Asia World 70 35 60 30 50 Net national savings (% of GDP) 25 % of GDP 40 20 30 15 20 10 10 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Chile Bolivia Brasil Salvador Uruguay Argentina Peru Latin America has persistently indented to boost internal savings rates with minor success... Evolution of Regional Saving Rates Pension Assets under management Source: OECD Development Centre, 2007. Based on Global Development Finance, The World Bank, 2005. FIAP, 2005.

9. 40 40 35 35 . 30 30 . 25 25 Net national savings (% of GNI) Net national savings (% of GNI) 20 20 15 15 10 10 5 5 0 0 Venezuela Chile Mexico Peru Brazil Argentina Colombia Singapore China Malaysia Thailand Indonesia India …making the region dependent on foreign capital Net National savings by country ( average 1996-2006) Regional average Source: OECD Development Centre, 2006. Based on Global Development Finance, The World Bank, 2005.

10. Remittances in Latin America are more formalised than elsewhere but remain mostly cash-to-cash Source: Freund and Spatafora (2005) Source: Orozco (2004)

11. Can banks go beyond the frontier and increase intermediation? • Banks are new entrants in this field: In 2003 the largest 4 banks in the US-Mexico corridor had 3% of the market • But financial inclusion is a challenge in both sides of the frontier.

12. I Remittances and Financial development II Remittances and transaction costs III Remittances and ratings

13. Credit worthiness and higher access to capital can be reached through remittances… Source: OECD Development Centre, 2006. Based on: “Economic Implications of Remittances and Migration”. World Bank, 2006.

14. …which could have a positive effect on sovereign credit ratings Determinants of Sovereign Credit Ratings Potential improvement of Sovereign Ratings on selected countries Source: OECD Development Centre, 2007. Based on: Rowland, P. “Determinants of Spread, Credit Ratings and Creditworthiness for Emerging Market Sovereign Debt: A Follow-Up Study Using Pooled Data Analysis”. 2005, and Ratha, D. Leveraging Remittances for International Capital Market Access, World Bank WP, 2006.

15. Key challenges • The key to reducing transaction costs is competitive and contestable markets • Intermediating remittances to bolster their positive effect on financial development • Taking remittances into account for sovereign ratings to reduce capital costs for Latin American countries and companies