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 America Paris 13 th February 2007

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

3 3 3 Remittances and Financial developmentIIRemittances and transaction costsI Remittances and ratingsIII

4 4 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 5 5 Competition is the key to reducing costs

6 6 6 Remittances and transaction costsIRemittances and Financial developmentIIRemittances and ratingsIII

7 7 7 There is room in Latin America’s financial system for further developments Source: OECD Development Centre, Based on: Betancour, C. De Gregorio, J. Jara A. “Improving the Banking System: The Chilean Experience”. BIS Papers. No. 28, Financial Development by region 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. LAC

8 8 8 Latin America has persistently indented to boost internal savings rates with minor success... Source: OECD Development Centre, Based on Global Development Finance, The World Bank, FIAP, Pension Assets under management Evolution of Regional Saving Rates Net national savings (% of GDP) East Asia & PacificLatin America & Caribbean South AsiaWorld ChileBoliviaBrasilSalvadorUruguayArgentinaPeru % of GDP

9 9 9 …making the region dependent on foreign capital Regional average Source: OECD Development Centre, Based on Global Development Finance, The World Bank, Net National savings by country ( average ) VenezuelaChileMexicoPeruBrazilArgentinaColombia Net national savings (% of GNI) SingaporeChinaMalaysiaThailandIndonesiaIndia Net national savings (% of GNI).

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 Remittances and Financial developmentI Remittances and transaction costsII Remittances and ratingsIII

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

14 …which could have a positive effect on sovereign credit ratings Source: OECD Development Centre, 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, Determinants of Sovereign Credit Ratings Potential improvement of Sovereign Ratings on selected countries

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