By IPS Correspondents
NEW YORK, Jul 8 2005 (IPS)

Migrant workers and their families are not the only ones gaining from lower costs and better data collection in the growing industry of transferring money across borders.

Banks in developing countries that receive money transfers – commonly referred to as “remittances” – have also benefited by being able to borrow money more cheaply as a result, though the process demands unusually high reserve requirements.

The trend has evolved to the point that the first banks to use remittances for this purpose – mostly Mexican – have graduated to less cumbersome ways of borrowing money, leaving the market to smaller countries with fewer options for raising money.

In its most recent report, Fitch Ratings Agency, a leading credit specialist, noted that while Latin America’s outlook is positive, international borrowing “will be challenged to grow,” adding that Brazil’s strongest banks have already reached their borrowing capacity and that further growth in the region lies in Central America and the Caribbean.

“We see a drop in Mexican cross-border deals in general,” Fitch analyst Jennifer Conner told IPS. She added that Mexico’s investment grade status and its burgeoning domestic financial markets have now exempted it from this form of last-ditch financing.

In two illustrative examples from recent years – the 2000-2001 Peruvian political crisis and the run-up to Brazil’s 2002 presidential election – plummeting investor confidence in political and economic stability prompted experts across the financial world to slash each country’s credit rating, thereby shutting off access to international capital markets.

Shortly after Banco do Brasil, four other Brazilian banks followed suit, and together raised more than two billion dollars that year, followed by 1.78 billion dollars in 2003 and more than one billion dollars in 2004.

“Securitising remittances,” as the process is called, was first executed by Mexican banks during the 1994-95 peso crisis, and has since become an increasingly attractive way for financial institutions in Latin America to remain operable, particularly in times of economic and political uncertainty.

Globally, between 1994 and 2000, El Salvador, Mexico and Turkey raised a total of 2.3 billion dollars through remittance-backed bonds. Since 2000, Brazil, El Salvador, Kazakhstan, Mexico, Peru and Turkey raised more than 10 billion dollars, largely backed by future remittances.

The strengthening of Mexico’s domestic markets has evolved in large part from the regulatory, tax and legal changes required by issuing remittance-backed debt during the 1990s – approximately the same point at which many Asian countries now find themselves. “Basically the problem is the regulatory framework for securitisation in most of these countries,” said William Willms, principal investment officer at the Asian Development Bank in Manila.

“For instance, here in the Philippines, the law has been passed, but the so-called implementation for regulations on securitisation has not been issued yet, point one,” he said. “Point two, the law does not foresee future revenue. In China, you have a trust law in place which has been in the past used for something you might want to call securitisation, but is not really securitisation.”

Willms added that India, Malaysia and Thailand face similar obstacles.

In the past two years, domestic market debt in Latin America has been equal to or even slightly more than international debt. This removes one of the leading factors that many believe has led to so many financial crises in the region during the past decade, a phenomenon that economists refer to as “original sin.”

Briefly, the theory argues that excessive borrowing in a foreign currency (U.S. dollars, for example) makes banks disproportionately vulnerable to movements in foreign exchange and interest rates to the point that financial instability becomes inevitable.

Nathaniel Jackson, a structured finance analyst at the Inter-American Development Bank, said that third-party credit guarantors that provide a form of insurance against default, such as the IDB’s Multilateral Investment Fund, are acutely aware of the implications of helping Latin American banks borrow in dollars.

“Part of the reason why emerging markets have gotten in trouble is because they have borrowed so heavily in a currency which they have no control over,” he told IPS.

One of the IDB’s primary considerations in assessing which banks it will guarantee is how the banks will use the money raised.

“We’re extremely cognizant of the end borrower and their source of where they’re going to repay the cash in dollars. So that’s why we grill the financial institutions that we’re lending to, and say, ‘Where are you going to place this money? Who’s your client base? Tell us, we want to see where they’re getting their money.’ We don’t want it going to Juan the campesino who’s earning in Soles and have him exposed to a devaluation,” Jackson said.

As much as data collection on remittances has improved, estimating the potential market in remittance-backed bonds is a complicated task for a number of reasons. Varying levels of remittances channeled through banks and the remittance reserves demanded by foreign investors make it nearly impossible to generalise this market across the developing world.

“It really depends on the country,” said Manuel Orozco, director of remittances and rural development at the Inter-American Dialogue in Washington. “In some places, 50 percent of remittances are received by banks, but that doesn’t mean that people who receive remittances have a banking relationship, it only means that the bank is a payer of remittances.”

“In the case of Mexico, 70 percent or more of remittances are handled by banks, as is the case in El Salvador. In Guatemala it’s 40 percent, in Jamaica it’s less than 30 percent.”

What several experts do agree on however, is that unlike oil and agricultural commodities, whose prices fluctuate at the whims of the world economy, or credit card receivables and airline ticket sales (subject to the ebb and flow of the tourism industry), remittances have demonstrated a level of stability thus far immune to other macroeconomic forces.

As remittances become an increasingly frequent component in the broader discourses of third world development and globalisation, several issues have arisen. How to best harness the potential of remittances is an obvious one, but from a more market-oriented perspective, how migration and development trends influence the future direction of remittances as a business remains an open question.

“You got an explosion of remittances coming out of the United States, Europe and Japan,” said Sergio Bendixen, president of Bendixen and Associates, a Florida-based public opinion polling firm specialising in Latin American issues.

“The challenge for the countries where senders live is how to make sure that flow continues uninterrupted because it is helping to develop the economies of third world countries,” he said.

“The challenge to governments in the recipient countries is how to begin to channel that money away from consumption and into economic development.”

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