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Leveraging Remittances for International Capital Market Access in Poor Countries
Dilip Ratha(with Prabal De and Sanket Mohapatra)
Migration Thematic GroupWorld BankOctober 19, 2006
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
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
Should poor countries borrow from international capital markets?
Sanskrit saying by sage Charbak:"Yavat jivet sukham jivetRunam krutva ghrutam pivet"
"Live luxuriously as long as you liveBorrow if need be, but enjoy your ghee"
Borrowing cost rises exponentially as credit rating deteriorates
0
100
200
300
400
500
600
700
800
900
A+ A A-
BB
B+
BB
B
BB
B-
BB
+
BB
BB
-
B+ B B-
CC
C+
Investment grade
Below inv. grade
Interest spread, basis points
2005
2003
Launch spreads and S&P ratings for sovereign issues of size $100 million and 7 years tenor. Source: Bondware, S&P, and authors’ calculations
Borrowing cost rises exponentially as credit rating deteriorates
0
100
200
300
400
500
600
700
800
900
A+ A A-
BB
B+
BB
B
BB
B-
BB
+
BB
BB
-
B+ B B-
CC
C+
Investment grade
Below inv. grade
Interest spread, basis points
2005
2003
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
Au
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Fin
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No
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Sp
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love
nia
Tai
wan
Ho
ng
Ko
ng
Ku
wai
tIs
rael
Bah
rain
Moodys S&P Fitch
Sovereign ratings in high-income countries
AAA
AA
A+
A-
AA+
AA-
A
BBB+
Cze
ch R
epH
un
gar
yC
hin
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Sau
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Afr
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Th
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Ru
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El S
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Kaz
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Ro
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Rep
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Arg
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Ecu
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Moodys S&P Fitch
Sovereign ratings in low-income countries
AA-
BBB+
BB
B-
CC
Cze
ch R
epH
un
gar
yC
hin
aP
ola
nd
Ko
rea
Sau
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So
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Afr
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Th
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El S
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Kaz
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Ro
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Ph
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Uru
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Rep
Bo
livia
Arg
enti
na
Ecu
ado
r
Moodys S&P Fitch
Sovereign ratings in low-income countries
AA-
BBB+
BB
B-
CC
Most poor countries are not rated
24 23 22
13 13
India China Mexico France Phili-ppines
Top recipients of remittances, 2005
32
27 2624
22
Moldova Tonga Lebanon Lesotho Haiti
$ billion % of GDP
Remittances tend to be large in poor countries
Remittances tend to rise following crisis, natural disaster, or conflict
Remittances as % of private consumption
0.5
1.2
1.7
1.4
2.0 2.0
1.0
2.0
1.8
Indonesia Mexico Thailand
year before
year of crisis
year after
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
Remittances improve a countries’ ability to service external debt
0
100
200
300
400
500
600
700
800
Excluding remittancesIncluding remittances
Present value of external debt as % of exports of goods, services, and remittances
Predicting ratings
1.Fit a regression model to explain ratings
2.Predict shadow ratings
3.Calculate effect of remittances on shadow ratings
Conversion from Letter to Numeric scale
Sub-Investment GradesS&P and Fttch MoodysLetter Grade
Numeric Grade
Letter Grade
Numeric Grade
BB+ 11 Ba1 11BB 12 Ba2 12BB- 13 Ba3 13B+ 14 B1 14B 15 B2 15B- 16 B3 16
CCC+ 17 Caa1 17CCC 18 Caa2 18CCC- 19 Caa3 19CC 20 Caa 20C 21
Investment GradesS&P and Fitch MoodysLetter Grade
Numeric Grade
Letter Grade
Numeric Grade
AAA 1 Aaa 1AA+ 2 Aa1 2AA 3 Aa2 3AA- 4 Aa3 4A+ 5 A1 5A 6 A2 6A- 7 A3 7
BBB+ 8 Baa1 8BBB 9 Baa2 9BBB- 10 Baa3 10
Regression Results (work-in-progress)
Rating as a function of– macro variables– rule of law– debt and international reserves– volatility
R2 is high
Regression Results (work-in-progress)Dependent variable: Rating
S&P Moody’s FitchGDP 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 exports 0.54** 1.07** 1.11***
Inflation 0.07** 0.14*** 0.18***
GDP Volatility (5 years) 0.32*
Observations 47 23 30
R2 0.85 0.89 0.92
* significant at 10%; ** significant at 5%; *** significant at 1%
Regression Results – using dated control variables (work-in-progress)
Dependent variable: Rating
S&P FitchGDP 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 exports 0.76*** 1.09***
GDP Volatility (5 years) 0.24** 0.38***
Observations 43 53
R2 0.85 0.81
•significant at 10%; ** significant at 5%; *** significant at 1%
Predicted ratings for unrated countries (work-in-progress)
S&P Model '05
Fitch Model '05
S&P Model '05
Fitch Model '05
Maldives BBB BBB Bangladesh B- BSt. Vincent & Grenadines
BBB BBB- Kyrgyz Republic
B- B-
St. Lucia BBB- BBB- Lao PDR CCC+ B-Dominica BB BB Solomon
IslandsCCC+ CCC+
Albania BB- BB Comoros CCC+ CCCYemen, Rep. BB- BB- Nepal CCC+ CCC+Belarus BB- BB Togo CCC CCCGabon BB- BB Cote d'Ivoire CCC- CCC+Swaziland B+ BB Congo, Rep. CCC- CCCChad B+ B- Madagascar CCC- CCC-Tajikistan B+ BB- Zambia CC CAngola B B+ Sudan CC CTanzania B B Niger CC CCCambodia B B+ Sierra Leone CC O*Guyana B- B Ethiopia C C
* Indicates out of range
Shadow-rated vs. rated countries (work-in-
progress) (Shadow ratings underlined and italicized)
Country S&P rating Moody's ratingFitch rating
Country S&P rating
Moody's rating
Fitch rating
Botswana A Aa3 India BB+ Baa2 BBB-Barbados BBB+ Baa2 Macedonia BB+ BB+Oman A- A2 Morocco BB+ Ba1Poland BBB+ A2 BBB+ Cape Verde BB+ B+South Africa
BBB+ Baa1 BBB+ Sri Lanka BB-
Thailand BBB+ Baa1 BBB+ Brazil BB Ba2 BBArmenia Baa3 Bb- Colombia BB Ba2 BBBulgaria BBB Baa3 BBB Costa Rica BB Ba1 BBCroatia BBB Baa3 BBB- Jordan BB Baa3Mexico BBB Baa1 BBB Panama BB Ba1 BB+
Maldives BBB Peru BB Ba3 BB+
Russia BBB+ Baa2 BBB+ Gabon BB-Tunisia BBB A3 BBB Guatemala BB Ba2 BB+Mauritius Baa1 Philippines BB- B1 BBKazakhstan
BBB- Baa2 BBB Serb.& Mont. BB- BB-
Romania BBB- Ba1 BBB Turkey BB- Ba3 BB-Seychelles B Ukraine BB- B1 BB-
Albania BB- Venezuela BB- B2 BB-
Egypt BB+ Ba1 BB+ Georgia B+El SalvadorBB+ Baa3 BB+ Cambodia BThese 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.
Shadow-rated vs. rated countries (work-in-progress) (Shadow ratings underlined and italicized)
Country S&P ratingMoody's rating
Fitch rating
Country S&P rating
Moody's rating
Fitch rating
Senegal B+ Mongolia B B1 B+
Belarus BB- Mozambique B B
Swaziland B+ PNG B Ba2 B
Moldova Caa1 B- Bangladesh B-Congo, Rep.CCC- Argentina B+ B3 B
Tanzania B Bolivia B- B3 B-
Benin B B Cameroon B- BGhana B+ B+ Lebanon B- B3 B-Indonesia BB- B1 BB- Paraguay B- B3Pakistan B+ B2 Suriname B- Ba2 B
Guyana B- Nigeria BB- BB-
Yemen BB- Nicaragua B- B3
Kyrgyz Rep B- Uganda CCC+ B
Honduras Ba3 Kenya B+Burkina Faso B Ecuador CCC+ Caa1 B-Dom. Rep B B3 B Togo CCCJamaica B B1 Cote d'Ivoire CCC-Madagascar B Niger CCMali B B- Ethiopia C
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.
Shadow-rated vs. rated countries (work-in-
progress) (Shadow ratings underlined and italicized)
Country S&P ratingMoody's rating
Fitch rating
Country S&P rating
Moody's rating
Fitch rating
Senegal B+ Mongolia B B1 B+
Belarus BB- Mozambique B B
Swaziland B+ PNG B Ba2 B
Moldova Caa1 B- Bangladesh B-Congo, Rep.CCC- Argentina B+ B3 B
Tanzania B Bolivia B- B3 B-
Benin B B Cameroon B- BGhana B+ B+ Lebanon B- B3 B-Indonesia BB- B1 BB- Paraguay B- B3Pakistan B+ B2 Suriname B- Ba2 B
Guyana B- Nigeria BB- BB-
Yemen BB- Nicaragua B- B3
Kyrgyz Rep B- Uganda CCC+ B
Honduras Ba3 Kenya B+Burkina Faso B Ecuador CCC+ Caa1 B-Dom. Rep B B3 B Togo CCCJamaica B B1 Cote d'Ivoire CCC-Madagascar B Niger CCMali B B- Ethiopia C
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
Remittances can help obtain and improve credit rating
Remittances (% of GDP,
2004)
Rating excluding
remittances
Rating including
remittances
Spread reduction
(basis pts)
Lebanon 14 B+ BB- 150
Haiti* 28 CCC B- 334
Nicaragua* 11 CCC+ B- 209
Uganda* 5 B- B 161
* Calculated using a model similar to Cantor and Packer (1995)
Including remittances may improve potential ratings for Bangladesh by two notches
Rating model
Shadow rating w/o remittances
Shadow rating with remittances
Moodys B3 (16) B1 (14)
S&P B- (16) B+ (14)
Fitch B (15) BB- (13)
Countries in similar rating category as Bangladesh
Argentina, Dominican Republic, Indonesia, Pakistan, Paraguay, Uruguay, Venezuela
Benin, Bolivia, Burkina Faso, Ghana, Jamaica, Mali, Surinam
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
Securitization of future remittances can improve credit rating above investment grade
Year Issuer Amount(US$ mn)
Flow type Transa-ction rating
Sover-eign
rating1998 Banco
Cuscatlan50 Remit. BBB BB
2004 Banco Salvadoreño
25 DPRs BBB BB+
2002 Banco do Brasil
250 Remit. BBB+ BB-
Remittance payments (foreign currency)
Remittance senders
Remittance securitization structure
Correspondent banks
Issuing bank credits beneficiary’s account in
domestic currency
Beneficiary’saccount
DomesticOffshore
Issuing bank
International investors
Remittance payments (foreign currency)
Remittance senders
Excess cash
(foreign currency)
Debt service payment
Remittance securitization structure
Trustee collateralaccount
Correspondent banks
Issuing bank credits beneficiary’s account in
domestic currency
Beneficiary’saccount
Message
DomesticOffshore
Issuing bank
Securitization of remittances has increased in recent years -
65206
350115
540
1,175 1,170
1,600 1,690
2,837
1,055
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004to
July
$ million
- Led by Brazil, Mexico and Turkey
Panama1%
El Salvador6%
Kazakhstan1%
Mexico24%
Turkey35%
Peru2%
Brazil31%
Potential - $ 10-12 billion a year?
Remittances by region, 2005 ($ billion)
East Asia and the Pacific 44
Europe and Central Asia 25
Latin America & Caribbean 46
Middle East & North Africa 25
South Asia 35
Sub-Saharan Africa 7
Low-income countries 45
All developing countries 181
Constraints
Paucity of highly rated entities
Long lead times
High fixed costs (legal and others)
Non-transparent legal structure
Policies: to improve ratings
Improve rating methodology
Develop local currency rating agencies
Improve data, macroeconomic management, and investment climate
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
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